Behavioural and Evolutionary Approach to the Law and Economics of Cap-and-Trade

Abstract

Initially a science issue, climate change gradually enlarged its frontiers to become a political and normative question, forcing an interdisciplinary approach to apprehend its veracity, sources, impacts and possible and adequate solutions to an intergenerational and uncertainty problem that raises assessment and management questions on risk and abatement costs and benefits. Economics (with the precious help of neo-classical constructions, environmental Economics and cost-benefit analysis) has been serving as a bridge between science and the design of a sound climate policy and regulation. With the Kyoto Protocol and its flexible mechanisms, mainly its article 17, Annex-I Parties, beginning with the European Union, tended to open their policies to the implementation of economic instruments, with a preference for cap-and-trade systems, to comply with their obligations at the lowest cost. In the debate involving the best policy instrument several criteria have been accounted for such as efficiency, environmental effectiveness, equity, political feasibility and social acceptability. However, in a context of risk and uncertainty prone to bounded rationality, an evolutionary and behavioural note must be added in order: to help understand how cap-and-trade became a mainstream solution; to give a more accurate insight on the feasibility of climate policies and on the aptness of the major environmental instruments, especially emissions trading; and to envision the future of cap-and-trade.