Economics, Science, and Policy
Climate Change Policy: A Primer
1. The Science of Climate Change
The term climate change refers to a global change in the Earth’s climate patterns that can manifest as cooling or warming trends, as well as other meteorological changes. Climate change is an inherent feature of the Earth’s history, as shown by evidence of past significant warming and cooling episodes. Since the Industrial Revolution, human activities such as fossil fuel combustion and deforestation have begun to influence the global climate; the concern being that this influence will significantly increase in the future. The problem with these activities is that they contribute to higher concentrations of greenhouse gases (GHGs) in the atmosphere. A very likely consequence of increased atmospheric concentrations of GHGs is an increase in the Earth’s average temperature, which may in turn produce more frequent and extreme climatic events and sea level rise. The behavior and response of the Earth system defines the links between human activities influencing the climate system, and climatic influences on society. An understanding of human induced (or anthropogenic) climate change and the policy response to it therefore begins with the greenhouse effect.
The Earth’s climate system is driven by the Earth’s energy balance, which depends on the difference between the amount of incoming and outgoing radiation (the radiation budget or radiative balance). Incoming radiation is in the form of short-wave solar radiation. Approximately 46 percent of the incoming radiation reaching the atmosphere is either absorbed (20 percent) or reflected back into space by clouds, air molecules, and airborne particles (26 percent). The remaining solar radiation that reaches the Earth’s surface (this energy is called solar insolation) is either reflected (4 percent) or absorbed by surface objects, and, in the latter case, as these objects warm the radiation is reemitted to the atmosphere in the form of long-wave infrared radiation (terrestrial radiation).
About 90 percent of the terrestrial radiation in the atmosphere is partially absorbed and reemitted by natural and synthetic chemicals termed greenhouse gases (GHGs). The most abundant GHGs in the atmosphere are: the natural gases comprising water vapor (H2O), carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), and ozone (O3); and the synthetic gases of chlorofluorocarbons (CFCs), hydrofluorocarbons (HFCs), perfluorocarbons (PFCs) and sulfur hexafluoride (SF6). The first three synthetic gases are collectively termed halocarbons. The energy reemitted from GHGs warms both the Earth’s atmosphere and surface until the p. xxviiioutgoing and incoming energy flows are balanced. This process is called the greenhouse effect and produces a mean global surface temperature that is 33°C higher than if most of the infrared radiation was lost into space. Temperature is the controlling factor that ensures the radiation budget is balanced.
Radiative forcing measures the imbalance in the radiation budget at the boundary of the troposphere and the stratosphere, and is expressed in units of Watts per square meter (Wm-2) of the Earth’s surface. The contribution of each GHG to overall radiative forcing is measured in relation to a baseline year (often 1750, the start of the Industrial Revolution). For example, the change in the radiative forcing of carbon dioxide and methane from the year 1750 to 2005 is 1.66 [+/− 0.17] Wm-2 and 0.48 [+/− 0.05] Wm-2, respectively. In addition to GHGs, radiative forcing may also be affected by: the release of aerosol particles from natural causes, such as volcanic eruptions, or human activities; alteration of surface albedo from changes in land use; linear contrails (persistent trails of condensation) from aircraft; and changes in solar output (solar irradiance).
Each GHG has a different atmospheric lifetime, which is measured as the length of time taken for chemical reactions to remove a kilogram of the gas from the atmosphere. The long-lived GHGs comprise CO2, CH4, N2O, SF6 and halocarbons. Both the radiative forcing and the atmospheric lifetime of each gas are significant factors in determining its global warming potential (GWP). GWP measures the radiative effect of a given mass of a GHG over a specific time period relative to that of the same mass of carbon dioxide. It therefore provides an index of the amount of energy trapped over specific time periods for each gas. For example, CO2 always has a GWP of 1, whereas the GWP for methane is 72 times larger over 25 years and 25 times larger over 100 years.
Climate change metrics are most commonly expressed as carbon dioxide equivalent (CO2-e) or CO2 concentrations in units of parts per million (ppm), or total forcing in Wm-2. GHG concentrations expressed in terms of CO2-e represent the concentration of CO2 that would produce the same effect on the Earth’s radiative budget as the combined concentration of all the GHGs being accounted for. For any given effect on the Earth’s radiative budget, CO2 concentrations are always relatively lower than CO2-e concentrations because the latter is composed of more constituent gases. Total forcing is the net effect on the Earth’s radiative budget from GHGs and other direct and indirect off-setting factors that include surface and cloud albedo change, and radiatively active aerosols such as sulfate, nitrate, black carbon, organic carbon and dust.
Carbon dioxide accounts for just over 75 percent of annual anthropogenic GHGs. Fossil fuel use is the largest contributor of CO2 at p. xxixapproximately 56 percent of annual GHG emissions, followed by land use change at just under 31 percent. Recent estimates of atmospheric concentrations of GHGs show that CO2 increased to approximately 384 ppm in 2008, from a ‘pre-industrial’ level of approximately 280 ppm. Recommendations for reducing the risk of dangerous climate change aim to stabilize global CO2 emissions to between 350 to 400 ppm (450 to 500 ppm CO2-e).
2. Human-Induced Climate Change As a Problem
Our awareness that human activities could influence the climate originated in the nineteenth and early twentieth centuries out of a growing scientific interest in climate change, particularly the causes of the ice ages. During this time research on climate change was divided into theories involving three main causes: astronomical, terrestrial, and molecular. The molecular theories focused on changes in the amounts of water vapor (H2O) or carbon dioxide (CO2) in the atmosphere and the associated greenhouse effect. It was not until the late nineteenth century that the effect of industrial emissions of CO2 on the carbon cycle was first considered by scientists.
This work gave rise to the hypothesis that changes to the atmospheric concentration of CO2 from industrial emissions could significantly impact on surface temperatures if they persisted over a very long time. The hypothesis fell out of favor in the early twentieth century due to: the overly simplistic model of the climate system that it was based on; contrary experimental findings that were later found to be flawed; and the widely held belief of a self-stabilizing climate system, in which plant fertilization and the ocean played key roles in the absorption of CO2. As a result, the dominant scientific view until the late 1950s was that anthropogenic emissions of CO2 did not present a problem to the global climate.
Post-war advancements in theoretical physics and technology (particularly digital computers and measuring equipment) provided improved insights into the carbon cycle and the absorption of infrared radiation in the atmosphere. Evidence started accumulating that CO2 in the upper atmosphere could significantly alter the Earth’s surface temperature, and that the ocean’s absorption of CO2 was slower than previously thought. These findings led a few scientists in both America and Russia to publicly warn that global warming may be experienced much sooner than expected and that the consequences may be severe. Doubts, however, continued being expressed by some prominent scientists due to the ongoing problem of obtaining reliable measurements of atmospheric concentrations of CO2. From the late 1950s, the research focus moved to resolving the p. xxxmeasurement problem, and gaining a better understanding of the carbon cycle through the use of computer modeling.
The increasing use of computer modeling to understand the climate system facilitated research on climate change and its possible effects in a wide range of interrelated fields. Adverse impacts experienced during major climatic events in the 1970s such as droughts, desertification and fisheries collapses saw an increased interest in the short-run fluctuations in climate. Scientific interest also focused on the role of synthetic chemicals such as chlorofluorocarbons (CFCs) as GHGs, as well as aerosols in mitigating any warming effect in the short term. By the early 1980s, the GHGs associated with anthropogenic emissions had expanded from carbon dioxide (CO2) to include: nitrous oxide (N2O), methane (CH4), sulfur hexafluoride (SF6), hydrofluorocarbons (HFCs), perfluorocarbons (PFCs), and chlorofluorocarbons (CFCs).
The accumulating evidence that humans were influencing the climate, and that the associated impacts could be severe, led to increasing demands by scientists for governments to take action to avoid the possibility of dangerous climate change. Experts from 50 countries met in 1979 at the World Climate Conference held in Geneva where it was agreed that urgent action was needed to avoid human-induced climate change. This was followed by the Villach Conference in 1985 where scientists from 26 countries concluded that there was evidence of a causal link between increasing concentrations of GHGs in the atmosphere and global warming. In 1986 the first cooperative framework to identify key policy issues informed by science was established in the form of the Advisory Group on Greenhouse Gases.
Science continues to play a key role in the political recognition of climate change as a serious problem, and informing the policy process on the level and timing of the GHG emissions reductions required. The Intergovernmental Panel on Climate change (IPCC), a cooperative scientific institution formed by the United Nations Environment Programme (UNEP) and the World Meteorological Organization (WMO), released four assessment reports (1990, 1995, 2001 and 2007) summarizing the scientific knowledge, likely impacts, and policy aspects of climate change.
3. The Evolution of Climate Change Policy
Human-induced climate change has been described as a “wicked policy problem”. The form in which it will manifest, and its extent and timing are all uncertain. Furthermore, an effective policy response needs comprehensive international cooperation that imposes different relative costs among p. xxxicountries, which are incurred in the near future to obtain benefits that are not realized until the more distant future. International cooperation is problematic as there is an incentive for each country to be a free-rider and benefit from the actions taken by other countries while avoiding their share of the cost burden. This gives rise to the difficult task of resolving a prisoner’s dilemma style problem, whereby countries have an incentive to engage in uncooperative behavior even though cooperation may result in a better outcome. The global nature of the problem has meant that international meetings and conferences are critical for the development and agreement of policy settings and measures, and these have allowed the articulation of fundamental ideas on key issues such as mitigation, adaptability, and cooperation.
The 1979 World Climate Conference was the first in a series of conferences to determine the state of scientific knowledge on climate change, its implications for humanity and, eventually, the appropriate policy response. In 1983 the General Assembly of the United Nations established the World Commission on Environment and Development. The 1987 report by the Commission drew attention to the potential threat to humans from climate change. In response, the Canadian Government organized the World Conference on the Changing Atmosphere (the Toronto Conference) in June 1988. It produced two significant outcomes: climate change was recognized as a serious problem, requiring developed countries to lower their CO2 emissions by 20 percent of 1988 levels by 2005; and the establishment of the Intergovernmental Panel on Climate Change (IPCC).
By 1990 the precautionary principle was used to guide policy actions on climate change. Most OECD countries proposed to either stabilize CO2 emissions at 1990 levels by 2000, or to set targets for reducing them from 1990 levels by 2005. The policies to achieve these outcomes focused mostly on adaptation to climate change (primarily with respect to impacts on coastal management and resource use and management), international action and cooperation (in the areas of information, development and transfer of technology, economic and financial mechanisms, and legal and institutional mechanisms) and mitigation (the options available in the energy, industry, agriculture, and forestry sectors).
An international environmental treaty – the United Nations Framework Convention on Climate change (UNFCCC) – was adopted at the United Nations Conference on Environment and Development (UNCED) held in Rio de Janerio in 1992, which later came into force in March 1994. The objective of the UNFCCC (stated in Article 2) is: to stabilize GHG concentrations in the atmosphere at a level, and in a time frame, that would prevent dangerous anthropogenic interference with the climate system; and allow ecosystems to adapt, food systems to be maintained, and p. xxxiisustainable development to proceed. Parties to the UNFCCC are divided into developed countries (Annex I countries) and developing countries (non-Annex I countries). The UNFCCC is a non-binding treaty that calls on Annex I countries to aspire to stabilizing their 2000 emissions at 1990 levels. No obligation is placed on non-Annex I countries to reduce their GHG emissions. A third classification of Parties is the Annex II countries, which are a sub-group of the Annex I countries, and comprise members of the OECD that were not economies in transition (EIT) in 1992. The Annex II countries may assist non-Annex I countries to reduce their emissions and adapt to climate change by providing financial and technological assistance.
Five principles are used to guide the actions of Parties to the UNFCCC: (1) while all countries share responsibilities for addressing climate change, they should be differentiated with respect to their contribution to the problem and capabilities to address the problem (often referred to as common but differentiated responsibilities); (2) the needs of developing countries that are particularly vulnerable should be considered; (3) the precautionary principle should be adopted subject to measures taken being cost-effective; (4) the right of all countries to pursue sustainable development should be recognized; and, (5) an open international economic system should be supported.
The “supreme body” of the UNFCCC is the Conference of the Parties (COP). It is the highest decision-making authority and meets annually to assess progress on addressing climate change. A move to legally binding commitments for GHG reductions was adopted at COP-1 in Berlin. Key policy debates during this period involved: defining equity, the appropriateness of applying cost–benefit analysis to policy measures, and determining the social costs of climate change. In 1997 the United States adopted the Byrd–Hagel Resolution, which prevented it from agreeing to any future binding GHG emissions targets until the large emitting developing countries also committed to participating meaningfully in GHG reductions.
The Kyoto Protocol, the most recent international agreement linked to the UNFCCC, was adopted by the third Conference of the Parties (COP-3) in December 1997 and entered into force in February 2005. The Protocol presently commits 37 industrialized countries together with the European Union to binding targets for GHG emissions reductions for the period 2008 to 2012. To date, 194 Parties have ratified the UNFCCC and of these 193 have ratified the Kyoto Protocol. The United States withdrew from the Protocol in 2001. The Protocol does not include any new long-term objectives or principles, but rather develops those of the UNFCCC. Key developments include an increasing emphasis on: the interaction between climate change and economic development, net reductions of p. xxxiiiGHG emissions, use of market-based instruments to reduce emissions, and opportunities for adaptation.
Where the UNFCCC encourages developed countries to stabilize GHG emissions, the Kyoto Protocol sets binding targets for countries that have committed to them. Developed countries that become signatories (Annex B countries) are committed to jointly reducing aggregate emissions of GHGs by 5.2 percent of 1990 levels over the 2008–2012 commitment period. It should be noted that while some countries with high per capita emissions did not immediately ratify the Protocol, such as Australia and Canada, or refused to as with the United States, many climate change initiatives were undertaken in these countries at a sub-national level. Bargaining between Annex B countries during negotiations on the Kyoto Protocol established different targets for each country on the level of allowed GHG emissions over the commitment period (Quantified Emission Limitation and Reduction Commitments). This level is expressed as a quantity of assigned amount units (AAUs) for each country, where each unit represents one metric tonne of CO2-e emissions.
The Protocol departs from previous approaches on determining a country’s target by allowing for CO2 sequestered by afforestation, reforestation and deforestation activities since 1990 to be offset against its GHG emissions. The term CO2-e emissions accounts for GHGs regulated under the Kyoto Protocol, which comprise four specific gases (carbon dioxide (CO2), nitrous oxide (N2O), methane (CH4) and sulfur hexafluoride (SF6)) and two groups of gases (hydrofluorocarbons (HFCs) and perfluorocarbons (PFCs)).
These gases are often referred to as the Kyoto gases and do not include the long-lived GHGs regulated under the Montreal Protocol (primarily chlorofluorocarbons (CFCs) and hydrochlorofluorocarbons (HCFCs) that are due to be mostly phased out by 2010 and 2040, respectively) or aerosol emissions. The effect of the Kyoto gases on the Earth’s radiative budget is called Kyoto forcing, which is the concentration of CO2 that would produce the same effect on the radiative budget as the combined concentrations of the Kyoto gases.
The Protocol specifies a range of domestic policies and measures that Annex B countries can use to achieve their emissions target. These policies and measures are aimed at: enhancing energy efficiency; bringing about changes to land use, transportation, waste management, and other GHG-intensive sectors such as stationary energy; promoting technological change; and, removing market imperfections and economic distortions. There are also five Protocol mechanisms in addition to the domestic initiatives. They comprise: joint fulfillment (Article 4), which allows individual countries to have different targets while adopting a joint overall target for emissions reductions; a financial mechanism to assist with implementation
p. xxxiv(Article 11); and three flexibility mechanisms (Kyoto mechanisms), namely, joint implementation (JI) (Article 6), the clean development mechanism (CDM) (Article 12), and emissions trading (ET) (Article 17). The Kyoto mechanisms are also termed market-based mechanisms because they facilitate the creation of an international carbon market.
Joint implementation allows an Annex B country to earn emissions reduction units (ERUs) from undertaking emissions reduction projects in other Annex B countries. The clean development mechanism allows an Annex B country to earn tradable certified emissions reduction (CERs) credits from undertaking emissions reduction projects in developing countries. Both JI and the CDM create tradable rights to emissions that count towards a country’s Kyoto target. The Protocol also allows for the creation of tradable removal units (RMUs) from projects that reduce emissions through land use, land-use change and forestry (LULUCF) activities. Emissions trading (ET) allows countries that have a surplus of emissions units (AAUs in excess of the amount needed to satisfy both the target and a commitment period reserve) to sell them to countries that are unable to reach their target with domestic action alone. Each emissions reduction credit (ERC) created from ERUs, CERs or RMUs (collectively termed other trading units) is also specified as a tonne of CO2-e emissions and is additional to the AAUs. Details regarding the actual working of the Protocol’s mechanisms and compliance processes were left to subsequent negotiations.
A Conference of the Parties to the Kyoto Protocol (known as the CMP) meets parallel to the UNFCCC COP. The CMP serves a similar function as the COP, however decisions relate specifically to the Protocol. In 2001 at COP-7, the framework for implementing the Protocol – the Marrakesh accords – were adopted. Other important COP/CMP meetings include the following. The COP-11 at Montreal in 2005 decided that Annex B Parties would begin negotiations on a second period of commitments. At COP-13 in Bali in 2007, the Bali Action Plan was adopted. It called for a decision on the amount of GHG emissions that would need to be reduced to avoid unsafe climate change, and began a two year process for a post-Kyoto agreement that was to be adopted at Copenhagen in 2009. A key element was that developing countries were to adopt nationally appropriate mitigation actions (NAMAs). Many of these countries, however, continued to apply the principle of common but differentiated responsibilities in articulating these actions.
The COP-15 meeting in Copenhagen failed to adopt, but rather noted, the Copenhagen Accord, which accepted that average global temperatures should not be allowed to exceed a 2°C rise above preindustrial levels, and that deep cuts in global emissions were required to achieve p. xxxvthis. Instead of setting medium or short-term targets for emissions reductions, countries were asked to make voluntary offers on targets and actions for reducing emissions by 2020. This bottom-up approach, which allows countries to use different metrics and baselines to define their Copenhagen targets, and different ways to account for emissions, departs from the top-down approach previously applied in negotiations under the Kyoto Protocol.
A country’s ambition for emissions reduction is often expressed as a change in a metric such as absolute emissions, emissions intensity, business-as-usual emissions, or per capita emissions. All except the last of these metrics are used in country submissions on Copenhagen targets. For example, the United States’ target is an absolute reduction in emissions of 17 percent from 2005 levels by 2020, the European Union propose an absolute reduction of 20 to 30 percent from 1990 levels, China’s target is a reduction in emissions intensity of 40 to 45 percent from 2005 levels, and Brazil’s target is a 36 to 39 percent reduction in emissions from business-as-usual levels by 2020.
The COP-16 held in Cancun, Mexico, in late 2010 agreed to both the aspirational emissions reduction targets submitted by countries under the Copenhagen Accord, and not to exceed a 2°C rise in global average temperature above preindustrial levels (equivalent to a 450 ppm CO2-e concentration). For the first time, the world’s largest GHG emitters in both developed and developing countries (including United States, China, India, European Union, and Brazil) have pledged reduction targets by 2020. When differences between each country’s metric and baseline are adjusted for, comparative results show that while reductions in absolute emissions between 2005 and 2020 are substantially different between countries, these differences are significantly reduced when expressed in terms of per capita emissions, and demonstrate broadly similar levels of ambition when expressed as reductions in emissions intensity or business-as-usual emissions. A major criticism of the Copenhagen targets is that they are not stringent enough to prevent the global average temperature rising above 2°C. Subsequent analysis shows the targets are consistent with a long-term CO2-e concentration of 550 ppm (or a 3°C warming scenario).
The Cancun Agreements did, however, deliver progress towards international action on climate change. These Agreements include: a move to better mechanisms for monitoring, verification, and reporting that also apply to developing countries; a Green Climate Fund for the delivery of US$100 billion per year by 2020 to help with mitigation and adaptation efforts in developing countries (which includes pledges by developed countries of close to US$30 billion of “fast-start” finance up to 2012); the p. xxxvidevelopment of a program to reduce deforestation and forest degradation (REDD); and, an initiative to identify how to transfer both clean energy and adaptation technologies to developing countries.
While the United States withdrawal from Kyoto negotiations in 2001 undermined the notion that developed countries should take the lead in reducing emissions, the principle of common but differentiated responsibilities remained a strong influence on policy development. The longheld distinction between developed and developing countries, based on a country’s historical contribution to GHG emissions and per capita wealth, is now becoming less relevant. The Cancun Agreements recognize that the common but differentiated responsibilities relate to not only historic emissions but also future emissions. The Agreements also recognize that GHG reduction initiatives outside the UNFCCC will make a necessary contribution to effective climate change policy. Many countries have been, and continue to be involved in bilateral and multilateral activities on addressing climate change. For example, although the United States has remained outside the Kyoto Protocol, it has been engaged in agreements on Methane-to-Markets, the International Partnership on the Hydrogen Economy, and the Asia-Pacific Partnership on Clean Development and Climate.
4. The Role of Market-Based Instruments
The policy architecture provided by the UNFCCC requires that actions taken by governments to reduce GHG emissions must be based on cost-effective policies. Policies implemented to date include an array of approaches consisting of regulations and standards, taxes and charges, tradable permits, voluntary agreements, subsidies and incentives, and research and development. Although it is acknowledged by the IPCC that national policies to reduce emissions will depend on each country’s circumstance, those providing an effective price signal for carbon dioxide are seen to have greater potential to significantly reduce emissions in all sectors of the economy.
Economics has contributed significantly to the development of pollution control policy in general by showing that pollution taxes and tradable pollution permits, which use price signals to encourage changes in behavior, in principle provide governments with methods to achieve their objectives at least cost. In the case of pollutants such as GHGs that are uniformly mixed in the atmosphere, emissions reductions may be achieved by implementing cost-effective policies, which equalize the marginal cost of reducing emissions across emitters. The burden of reducing emissions then falls p. xxxviion emitters for which it is relatively less costly, thereby minimizing the total cost of achieving the desired reduction.
A carbon tax was initially proposed by economists as the instrument of choice for countries to reduce their GHGs. However, countries seeking cost-effective policies have tended to show preference for GHG emissions trading schemes (ETSs). An advantage of emissions trading is that it provides greater certainty about the quantity of GHG reductions achieved compared to an emissions tax; whereas a tax provides greater certainty about the cost of reducing emissions, but not the quantity of emissions abated. The Kyoto Protocol reflects the least-cost approach by using a market-based mechanism, the international trade in emission reduction credits, to facilitate international cooperation on reducing emissions, and requiring the reduction or phasing out of national policies that may impede a county’s adoption of market-based instruments as part of its climate change policy. The Cancun Agreements continue to endorse this approach.
There are two basic approaches underpinning the design of a national ETS. The first is a cap-and-trade scheme where a target (cap) is set on the total amount of GHG emissions from specific sources (usually firms in emissions-intensive industries) allowed over a particular period, and a quantity of permits is supplied to the market that in total ensures this target is strictly met. Emission permits may be allocated to participants in the scheme through a pricing mechanism (such as an auction or at a fixed charge), for free, or a combination of both. Compliance with the target is achieved by requiring specified emitters to surrender (acquit) to a prescribed authority an emission permit for each unit of GHG they produce at the end of each acquittal period.
The second approach is a baseline-and-credit scheme, which is theoretically equivalent to a cap-and-trade scheme. It allocates free permits on the basis of a participant’s historical emissions (grandfathering). A baseline-and-credit scheme assigns each participant a baseline for their allowable GHG emissions in each of the scheme’s acquittal periods. The sum of all participants’ baselines for each period equals the target set for the total amount of GHG emissions allowed for the period. Rather than requiring participants to acquit an amount of permits equal to their total emissions in a period, a baseline-and-credit scheme uses the difference between actual emissions and the baseline emissions to determine the amount of permits allocated and acquitted. If a participant’s actual emissions are under the baseline it earns free credits (tradable permits) equal to the emissions saving, which may then be sold in the market. If a participant’s emissions are over the baseline they are required to purchase an amount of credits from the market equal to the excess and surrender these to the prescribed authority.
p. xxxviiiUnder both approaches it is the operation of the permit market and the method used to allocate permits that provide the necessary price signals for participants to efficiently make their short-run operating and long-run investment decisions. These decisions affect levels of both GHG emissions and economic output, and, therefore, the effectiveness and efficiency of the scheme, respectively.
A comprehensive international trading scheme that links national emissions trading schemes is still a long way off. The European Union and New Zealand are the only countries presently with schemes capable of linking. While international emissions trading is yet to play the significant role in reducing global emissions envisaged earlier, there are encouraging signs that emissions trading may still be a key policy measure in GHG mitigation at the national level. Several major emitters in developed and developing countries (including India and China) are planning or proposing the implementation of national or regional schemes.
Climate change policy is now at a very important juncture with respect to whether an international approach to GHG mitigation can be achieved, and the role of market-based instruments in domestic mitigation efforts. The limited use of market-based instruments may be due to a general unwillingness among countries to accept that stringent action on climate change is required. Instead, no-regrets policy options are being considered or pursued such as: reducing deforestation and forest degradation, increasing energy efficiency, increasing the use of biofuels, developing carbon capture and storage (CCS) technologies, preparing adaptation strategies, and researching opportunities for geo-engineering. Other approaches that involve potentially more costly measures focus on sector-specific technological solutions to mitigate GHGs, including: mandating levels of renewable energy use or emissions-intensity in the electricity sector; investing in or funding the development and production of low emissions technologies, such as electric and hybrid vehicles and solar generating facilities; and, providing subsidies to incentivize emission reducing practices in industry, agriculture, and forestry.
Experience gained from using market-based instruments to address environmental problems has shown that they are often a necessary but not sufficient measure when more than one market failure exists. This is especially applicable to climate change policy, and a point that is often lost in debates over which particular measures should be implemented. For example, while carbon pricing cost-effectively addresses the externality arising from emissions, government support for private research and development (R&D) that may lead to innovation in lower emission technologies addresses the market failure arising from the public good nature of the information acquired. In this case, carbon pricing alone may not provide p. xxxixadequate incentives for firms to undertake an efficient level of R&D. The lesson for climate change policy is that while market-based instruments are necessary for achieving efficient mitigation, depending on the market failures that exist other measures may also be required to achieve an efficient and effective reduction in GHG emissions.