Climate Policy Instruments Research Articles

Energy caps: Alternative climate policy instruments for China?

Decoupling fossil energy demand from economic growth is crucial for China's sustainable development, especially for addressing severe local air pollution and global climate change. An absolute cap on coal or fossil fuel consumption has been proposed as a means to support the country's energy and climate policy objectives. We evaluate potential energy cap designs that differ in terms of target fuel, point of control, and national versus regional allowance trading using a global numerical general equilibrium model that separately represents 30 provinces in China. First, we simulate a coal cap and find that relative to a cap on all fossil fuels, it is significantly more costly and results in high localized welfare losses. Second, we compare fossil energy cap designs and find that a national cap on downstream fossil energy use with allowance trading across provinces is the most cost effective. Third, we find that a national fossil energy cap with trading is nearly as cost effective as a national CO2 emissions trading system that penalizes energy use based on carbon content. As a fossil energy cap builds on existing institutions in China, it offers a viable intermediate step toward a full-fledged CO2 emissions trading system.

The Economic and Budgetary Impact of Climate Policy in Portugal: Carbon Taxation in a Dynamic General Equilibrium Model with Endogenous Public Sector Behavior

The objective of this paper is to study $$\hbox {CO}_{2}$$ taxation in its dual role as a climate and fiscal policy instrument using a dynamic general equilibrium model of the Portuguese economy which highlights the mechanisms of endogenous growth and incorporates a detailed modeling of public sector behavior and accounts. In addition to the conventional marginal abatement cost curve, we present a pair of complementary marginal abatement cost curves which highlight the impact $$\hbox {CO}_{2}$$ taxation has on economic performance and public debt and are therefore directly relevant to the terms of the policy debate. These marginal abatement cost curves provide an effective tool for understanding the rate at which the environmental effectiveness, economic costs, and budgetary effects change with the tax level. Our results indicate that $$\hbox {CO}_{2}$$ taxes can be an important policy instrument for reducing emissions and promoting fiscal consolidation, although this will come at a cost in terms of economic performance. Simulation results suggest that a tax of 17.00 Euros per $$\hbox {tCO}_{2}$$ can satisfy existing climate policy targets. The tax revenue effects, together with reductions in public spending, yield a 4.8 % reduction in public debt. These desirable outcomes come at the cost of a 1.3 % reduction in GDP over the long term. Our analysis highlights that limiting public consumption expenditures can contribute to larger reductions in public debt, albeit at a marginally greater cost to economic activity. In turn, reducing public investment, although effective in reducing public debt, produces a much larger negative economic impact. This evokes an important trade-off, particularly pronounced in the present debates regarding austerity measures in the EU, between fiscal consolidation efforts and efforts to promote convergence to EU standards of living. These results further highlight that modeling assumptions with respect to public spending decision are not innocuous. An exogenous trajectory for public spending suggests substantially smaller GDP effects and substantially larger public debt effects for any given emissions target.

The Effectiveness of Taxing Carbon Content of Energy Consumption

We estimate the long-run effect of a uniform carbon tax on energy consumption by using a new and unique dataset in which effective tax rates of OECD countries are calculated in terms of carbon dioxide emissions. The effective tax rates account for the widely discussed tax deductions for specific energy tax bases leading to a careful calculation of net tax rates faced by agents. We argue that taxation might be endogenous to energy consumption in the long run. In order to identify a causal effect, we document a positive correlation between the tax rates of neighboring countries which we then exploit in our instrumental variables estimations. Validity of our identification strategy is consistent with the strategic inter-governmental interaction theo-ries that lead to a spatial pattern in local government policies in the presence of immobile tax bases. Our instrumental variables estimations indicate that taxing carbon content of energy use can be an effective instrument for climate policy.

Instrumentation Strategies and Instrument Mixes for Long Term Climate Policy

The good intentions of COP21 are to be reached by novel climate policy instrumentation, beyond what has been developed till now. For the long term two fundamentally different strategies emerge, each leading to a set of instruments fit for the challenging task in principle. The first has a command and control orientation, developing and specifying the technologies required and bringing them in the market. Prime instruments are subsidies like feed-in tariffs and capital subsidies and standards and regulations, as to force coal fired power stations out of the market and efficient cars into the market. These technology specific instruments override the current strict EU cap-and-trade system. This governance orientation is on optimization from a broad and integrative perspective, including distributional issues, energy policy and transport policy. The second strategy has its focus on incentive creation and option creation, transforming and strengthening EU ETS into a price stabilized emission pricing system, ultimately as an emission tax. A core institutional element is the creation of a European open real time electricity market, with equal but quite variable prices for all primary and secondary producers and for all users. Two sets of instruments are substantially mutually exclusive; feed-in tariffs and user differentiated surcharges to fund them are not compatible with open electricity markets. The two sets of instruments are substantially mutually exclusive; for example feed-in tariffs and user differentiated surcharges to fund them are not compatible with open electricity markets and not compatible with pure cap-and-trade systems. Discussion and choices are due.

The elephant in the room – A comparative study of uncertainties in carbon offsets

The clean development mechanism (CDM) is a flexible mechanism under the Kyoto Protocol, which makes it possible for developed countries to offset their emissions of greenhouse gases through investing in climate change mitigation projects in developing countries. When the mitigation benefit of a CDM project is quantified, measurable uncertainties arise that can be minimised using established statistical methods. In addition, some unmeasurable uncertainties arise, such as the rebound effect of demand-side energy efficiency projects. Many project types related to land use, land-use change and forestry (LULUCF) have been excluded from the CDM in part because of the high degree of statistical uncertainty in measurements of the carbon sink and risk of non-permanence. However, recent discussions within the United Nations Framework Convention on Climate Change (UNFCCC) have opened up for the possibility of including more LULUCF activities in the future. In the light of this discussion, we highlight different aspects of uncertainties in LULUCF projects (e.g. the risk of non-permanence and the size of the carbon sink) in relation to other CDM project categories such as renewables and demand-side energy efficiency. We quantify the uncertainties, compare the magnitudes of the uncertainties in different project categories and conclude that uncertainties could be just as significant in CDM project categories such as renewables as in LULUCF projects. The CDM is a useful way of including and engaging developing countries in climate change mitigation and could be a good source of financial support for LULUCF mitigation activities. Given their enormous mitigation potential, we argue that additional LULUCF activities should be included in the CDM and other future climate policy instruments. Furthermore, we note that Nationally Appropriate Mitigation Actions (NAMAs) are currently being submitted to the UNFCCC by developing countries. Unfortunately, the under-representation of LULUCF in comparison to its potential is evident in the NAMAs submitted so far, just as it has been in the CDM. Capacity building under the CDM may influence NAMAs and there is a risk of transferring the view on uncertainties to NAMAs.

Behavioral Public Choice and the Carbon Tax

In response to the historic Paris Agreement on climate change and to the Environmental Protection Agency’s recently finalized Clean Power Plan, economists and other climate policy experts have renewed the call for the United States to adopt a carbon tax. Opposition among the public presents a major obstacle. While a majority of the public supports government action on climate change, most people favor the use of “green” subsidies and command-and-control regulations—a fact that frustrates economists of all political stripes who contend that a carbon tax would be much cheaper and more effective. This Article argues that a cognitive bias known as opportunity cost neglect pervades the public’s thinking about climate policy instruments, causing people to ignore the hidden costs of subsidies and command-and-control and, for that reason, to support these less efficient alternatives to the carbon tax. The Article will help proponents of the carbon tax better tailor their advocacy efforts. The Article also contributes to the burgeoning literature on behavioral public choice, which shows how the cognitive biases of political actors (including voters) influence the law. In addition, the Article points to the possibility of a Pyrrhic victory for conservative policymakers who oppose the carbon tax. Rather than averting major government action on global warming, defeating the carbon tax will very likely facilitate adoption of more costly substitutes that the public strongly favors as a result of cognitive bias. In that respect, the Article lends support to recent proposals by a small but growing group of conservative scholars who argue for a policy swap in which conservatives agree to a revenue-neutral carbon tax in exchange for support from environmentalists for abandoning the government’s current regulatory approach. The Article also suggests that conservative policymakers rethink their position on the carbon tax given that the states are currently considering which policy options to pursue in satisfying their respective obligations to reduce carbon emissions under the Clean Power Plan.

The Limits of Administrative Law as Regulatory Oversight in Linked Carbon Markets

Many commentators have celebrated the link between carbonmarkets in California and Quebec as an example of effective coordination of sub-national climate policy instruments. Here, Iargue that this enthusiasm is misplaced. California recentlyamended its carbon market regulations to enable significantleakage of emissions to neighboring states. These reforms reducethe environmental effectiveness of the market, contradict clearstatutory guidelines, and dilute the integrity of the state’s compliance instruments. Moreover, the reforms took place in an administrative process that never recognized the leakage implications, raising questions as to whether California alerted itsCanadian counterparts of the consequences of its internal reforms.I review this transition from three perspectives: the relevantadministrative proceedings in California, the mutual obligationsboth governments accepted under a bilateral agreement,and the standards California law imposes on prospective linkedmarkets. Each perspective reveals major shortcomings. Ratherthan demonstrating a successful model for harmonizing carbonmarket systems across different legal jurisdictions, the link between California and Quebec exemplifies a major institutionalweakness: in a linked carbon market, participating governmentsmust continuously monitor the administrative processes of eachjurisdiction in order to maintain market integrity. But as theCalifornia experience demonstrates, administrative law may notbe up to the task of ensuring that practical market operation follows the rule of law.

How to Mobilize Private Investment for Climate Friendly Products: The New Swiss Technology Fund

type=graphical xml:id=gpol12261-abs-0001 xml:lang=en> The Technology Fund is a new climate policy instrument of the Swiss federal government. The Fund targets the promotion of innovative technologies that reduce greenhouse gas emissions and natural resource consumption or support energy efficiency and the use of renewable energy. Since January 2015, companies developing and commercializing such novel products can apply for loan guarantees covered by the Swiss Technology Fund.

Public preferences for carbon tax attributes

The impacts of climate change are already visible throughout the world. Recognizing the threats posed by climate change, the Durban Platform, the 17th Session of the Conference of Parties (COP 17), underscores that the global nature of climate change calls for the widest possible cooperation and ambitious action by all countries. A crucial starting point for the design of effective and publicly acceptable policies is to explore public preferences for climate policy instruments. Using a choice experiment, this study investigates public preferences for carbon tax attributes in a developing country context. The results account for heterogeneity in preferences and show that Turkish people prefer a carbon tax with a progressive cost distribution rather than one with a regressive cost distribution. The private cost has a negative effect on the probability of choosing the tax. Earmarking carbon tax revenues increases the public acceptability of the tax. Moreover, there is a preference for a carbon tax that promotes public awareness of climate change.

Product-oriented climate policy: learning from the past to shape the future

Product-oriented climate policies such as labels, financial incentives, and emission standards for vehicles and buildings have achieved considerable reductions in emissions and triggered innovations that offer very low emissions during the use phase. In contrast to other climate-policy instruments, these policies are successfully applied in an increasing number of regions. However, a major proportion of global emissions—namely, those from industry—remain outside the scope of most current forms of product-oriented climate policies. All economic activities could be included by extending product-oriented policies to embodied emissions (i.e. emissions resulting from manufacturing products). To guide such a development, we need a better understanding of the current state and potential future development of this policy approach. Therefore, in this paper, we review and evaluate policy evolution over the past decade in terms of both measures implemented and emissions addressed. On this basis, we synthesize a framework for developing policy towards greater stringency and broader scope. The framework describes a step-wise process to achieve increasingly stringent standards. Once established, standards can extend their scope to include additional, similar products, and related embodied emissions. Our framework and policy review informs the reinforcement and extensions of current product-oriented climate policies. A relevant implication for international climate policy is that the regional adoption of such policies incentivizes the global diffusion of low-GHG products. International climate policy can foster this development by supporting the harmonization of carbon-footprint norms for products in order to enhance conformity with international trade, and facilitate the extension of product-oriented climate policy to embodied emissions.

The endogeneity of OECD gasoline taxes: Evidence from pair-wise, heterogeneous panel long-run causality tests

Despite the current interest in using fuel taxes as an instrument for climate policy, there has been little study of current automotive fuel tax regimes. We expand on two earlier cross-sectional studies on why fuel taxes differ across countries by using OECD panel data and employing heterogeneous panel cointegration and long-run panel Granger-causality techniques. We confirm some of those earlier studies’ conclusions. Further, we find that governments that rely on consumption-based taxes for revenues will have higher gasoline tax rates (than governments that rely on income and wealth/property-based taxes). But more significantly, we determine that higher gasoline demand among consumers “causes” democratic governments to set lower gasoline taxes—a finding with important implications for today’s climate/energy policy debate.

Toward a Comparative Measure of Climate Policy Output

Comparative policy studies face a number of methodological challenges where conceptualization of the object of comparison—policy output—is the most fundamental. On the basis of three common approaches of the study of policy output, we reconsider this widely applied concept and propose a refined measure as a function of both density (number of policy instruments) and intensity (content of policy instruments). We theoretically derive six policy‐intensity measures (objectives, scope, integration, budget, implementation, and monitoring), which are used for weighting national policy instruments on an Index of Climate Policy Activity. The article presents an empirical application of this measurement approach. Focusing on national climate policy instruments in the energy production sector in Austria, Germany, and the United Kingdom, we investigate changes in the countries' policy portfolios from 1998 to 2010. The article demonstrates that our Index of Climate Policy Activity provides a reliable and valid measurement for national policy output that can be applied for comparative analyses of policy output.

Seven Reasons to Use Carbon Pricing in Climate Policy

The idea of a global carbon price has been a recurrent theme in debates on international climate policy. Discarded at the Conference of Parties (COP) of Copenhagen in 2009, it remained part of deliberations for a climate agreement in subsequent years. Unfortunately, there is still much misunderstanding about the reasons for implementing a global carbon price. As a result, ideological and political resistance against it prospers. Here we present the main arguments in favor of a carbon price to stimulate a fair and well-informed discussion about climate policy instruments. This includes arguments that have received surprisingly little attention so far. It is stressed that a main reason to use carbon pricing is environmental effectiveness, so not only economic efficiency (including the special case of cost-effectiveness). In addition, we provide ideas on how to implement a uniform global carbon price, whether using a carbon tax or emissions trading.

The (ir)relevance of transaction costs in climate policy instrument choice: an analysis of the EU and the US

This article assesses the relevance of ex post transaction costs in the choice of climate policy instruments in the EU (focusing mainly on the example of Germany) and the US. It reviews all publicly available empirical ex post transaction cost studies of climate policy instruments broken down by the main private and public sector cost factors and offers hypotheses on how these factors may scale depending on instrument design and other contextual factors. The key finding from the evaluated schemes is that it is possible to reject the hypothesis that asymmetries in ex post transaction costs across instruments are large and, thus, play a pivotal role in climate policy instrument choice. Both total and relative ex post transaction costs can be considered low. This conjecture differs from the experience in other areas of environmental policy instruments where high total transaction costs are considered to be important factors in the overall assessment of optimal environmental policy choice. Against this background, the main claim of this article is that in climate policy instrument choice, ex post transaction cost considerations play a minor role in large countries that feature similar institutional characteristics as the EU and the US. Rather, the focus should be on the efficiency properties of instruments for incentivizing abatement, as well as equity and political economy considerations (and other societally relevant objectives). In order to inform transaction cost considerations in climate policy instrument choice in countries that adopt new climate policies, more data would be desirable in order to enable more robust estimates of design- and context-specific transaction-cost scaling factors.Policy relevanceThe findings of this study can help inform policy makers who plan to set up novel climate policy instruments. The results indicate that ex post transaction costs play a minor role for large countries that feature similar institutional characteristics as the EU and the US. For instrument design the focus should rather be on efficiency properties of instruments in incentivizing abatement, as well as equity and political economy considerations (and other societally relevant objectives).

Tax and trade: a hybrid climate policy instrument to control carbon prices and emissions

This article describes a ‘tax and trade' emission regulations system that controls both emission costs and emission quantities. Emitters are taxed at a fixed price on carbon emissions and the government uses the tax revenue to buy carbon offsets on existing emissions markets. Unlike a traditional carbon tax, regulated firms may also produce carbon credits which may be sold to the government. Thus, the government bears the compliance cost risk rather than an individual firm and has control over the number of offsets purchased and the effective emission reduction. This unusual form of hybrid has potential political advantages of creating an economic incentive on corporate choices (at the margin) substantially greater than the actual trading price, and with lower financial transfers than in most schemes.Policy relevanceThe article presents a hybrid carbon emissions system that adds to the growing discussion of hybrid policy instruments which could be implemented by policy makers, particularly in nations without current cap and trade policies.

Case Study Report: REDD+ Pilot Project in Community Forests in Three Watersheds of Nepal

Reducing emissions from deforestation and forest degradation (REDD+) is an international climate policy instrument that is expected to tap into the large mitigation potential for conservation and better management of the world’s forests through financial flows from developed to developing countries. This paper describes the results and lessons learned from a pioneering REDD+ pilot project in Nepal, which is based on a community forest management approach and which was implemented from 2009–2013 with support from NORAD’s Climate and Forest Initiative. The major focus of the project was to develop and demonstrate an innovative benefit-sharing mechanism for REDD+ incentives, as well as institutionally and socially inclusive approaches to local forest governance. The paper illustrates how community-based monitoring, reporting, and verification (MRV) and performance-based payments for forest management can be implemented. The lessons on REDD+ benefit sharing from this demonstration project could provide insights to other countries which are starting to engage in REDD+, in particular in South Asia.

Linking the emissions trading schemes of Europe and China - Combining climate and energy policy instruments

Both Europe and China have announced targets for greenhouse gas emissions reduction and renewable energy development. To achieve their emissions targets, Europe has introduced emissions trading scheme (ETS) since 2005 and China has planned to establish a national ETS in 2015. We assess the impact of a joint Europe-China ETS when both climate and energy policy instruments are simulated in a multiregional general equilibrium model. Our results show that a joint ETS markedly increases total carbon emissions from fossil fuels even though global mitigation costs are reduced. Moreover, a joint ETS helps China achieve its renewable energy target, but for Europe, it works opposite. While the renewable energy target does not help Europe achieve additional abatement, the renewable energy target in China reduces mitigation costs and emissions, and increases renewable energy consumption and sales of carbon allowances. Financial transfer through a joint ETS remains marginal compared to China’s demand for renewable energy subsidies. We conclude that as long as an absolute emissions cap is missing in China, a joint ETS is not attractive for mitigation and China’s renewable energy target can reduce emissions.

The dynamics of technology diffusion and the impacts of climate policy instruments in the decarbonisation of the global electricity sector

This paper presents an analysis of climate policy instruments for the decarbonisation of the global electricity sector in a non-equilibrium economic and technology diffusion perspective. Energy markets are driven by innovation, path-dependent technology choices and diffusion. However, conventional optimisation models lack detail on these aspects and have limited ability to address the effectiveness of policy interventions because they do not represent decision-making. As a result, known effects of technology lock-ins are liable to be underestimated. In contrast, our approach places investor decision-making at the core of the analysis and investigates how it drives the diffusion of low-carbon technology in a highly disaggregated, hybrid, global macroeconometric model, FTT:Power-E3MG. Ten scenarios to 2050 of the electricity sector in 21 regions exploring combinations of electricity policy instruments are analysed, including their climate impacts. We show that in a diffusion and path-dependent perspective, the impact of combinations of policies does not correspond to the sum of impacts of individual instruments: synergies exist between policy tools. We argue that the carbon price required to break the current fossil technology lock-in can be much lower when combined with other policies, and that a 90% decarbonisation of the electricity sector by 2050 is affordable without early scrapping.

Analysing the interaction between emission trading and renewable electricity support in TIMES

As the number of instruments applied in the area of energy and climate policy is rising, the issue of policy interaction needs to be explored further. This article analyses the interdependencies between the EU Emissions Trading Scheme (EU ETS) and the German feed-in tariffs (FITs) for renewable electricity in a quantitative manner using a bottom-up energy system model. Flexible modelling approaches are presented for both instruments, with which all impacts on the energy system can be evaluated endogenously. It is shown that national climate policy measures can have an effect on the supranational emissions trading system by increasing emission reduction in the German electricity sector by up to 79 MtCO2 in 2030. As a result, emission certificate prices decline by between 1.9 €/tCO2 and 6.1 €/tCO2 and the burden sharing between participating countries changes, but no additional emission reduction is achieved at the European level. This also implies, however, that the cost efficiency of such a cap-and-trade system is distorted, with additional costs of the FIT system of up to €320 billion compared with lower costs for ETS emission certificates of between €44 billion and €57 billion (cumulated over the period 2013–2020).Policy relevanceIn order to fulfil ambitious emission reduction targets a large variety of climate policy instruments are being implemented in Europe. While some, like the EU ETS, directly address CO2 emissions, others aim to promote specific low-carbon technologies. The quantitative analysis of the interactions between the EU ETS and the German FIT scheme for renewable sources in electricity generation presented in this article helps to understand the importance of such interaction effects. Even though justifications can be found for the implementation of both types of instrument, the impact of the widespread use of support mechanisms for renewable electricity in Europe needs to be taken into account when fixing the reduction targets for the EU ETS in order to ensure a credible long-term investment signal.

Emissions Trading in the Climate Policy Mix — Understanding and Managing Interactions with other Policy Instruments

Emissions trading promises the achievement of a pre-defined environmental outcome at least cost. If the system works and key assumptions hold, it would seem to be an “optimal” climate policy instrument. On closer inspection, however, it is less clear what constitutes an “optimal” climate policy. This paper argues that optimality involves a range of criteria beyond short-term economic efficiency, but also has to consider the longer-term dynamic efficiency, as well as the political, administrative and legal feasibility of policy instruments. The assessment of optimality is confounded by the fact that climate policy relies on a number of policy instruments. This paper argues that a policy analysis should look at the performance of the entire instrument mix, and not analyse individual instruments in isolation. Such a mix will differ from country to country – depending on political preferences, administrative capacities, or regulatory traditions. The mix is also evolving: As climate policy aims to transform entire economies, the impact of individual policy instruments in the climate policy mix grows – measured by the share of the relevant markets that they affect, the incentives they provide, or the costs they impose. As this impact grows, there is increasing interaction between policy instruments. Understanding and managing these interactions therefore becomes key for successful climate policy. Emissions trading has a particular position in this instrument mix: it directly targets the end result, i.e. emissions from the regulated sectors, inputs to the process, technologies used, or the infrastructure, where other instruments target the interim stages in the process. At the same time, emissions trading also builds on other policies, for instance through administrative and regulatory infrastructures. This paper discusses how the other policy instruments affect the functioning of an emissions trading scheme (ETS), and how this will reflect on the performance of an ETS in terms of optimality.