Climate Change 2001: Mitigation

6.1 Introduction

6.1.1 Introduction and Key Questions

The main purpose of this chapter is to discuss the various policies and measures in relation to the different criteria that can be used to assess them, on the basis of the most recent literature. There is obviously a relatively heavy focus on the Kyoto instruments, because they focus on climate policy, have been agreed since the IPCC Second Assessment Report (SAR; IPCC, 1996, Section 11.5), and the extent of their envisaged international application is unprecedented. Wherever feasible, political economic, legal, and institutional elements are discussed insofar as they are relevant to the implementation of policies and measures. To make both theoretical and practical points the chapter offers occasional examples of policy instrument application, but the effort in this regard is limited by the existing literature, which is weighted towards the experience of industrialized countries.⁴

The chapter does not systematically discuss policies and measures typically used to encourage sector-specific technologies; such policies and measures are described in Chapters 3, 4, and 5. The emphasis is on the general description and assessment of policies and measures.

6.1.2 Types of Policies, Measures, and Instruments

A country can choose from a large set of policies, measures, and instruments to limit domestic greenhouse gas (GHG) emissions or enhance sequestration by sinks. These include (in arbitrary order): (1) taxes on emissions, carbon, and/or energy, (2) tradable permits⁵ , (3) subsidies⁶ , (4) deposit–refund systems, (5) voluntary agreements (VAs), (6) non-tradable permits, (7) technology and performance standards, (8) product bans, and (9) direct government spending and investment. Definitions of these instruments are provided in Box 6.1. The first four are often called market-based instruments, although some VAs also fall into this category.

Box 6.1. Definitions of Selected National Greenhouse Gas Abatement Policy Instruments

An emissions tax is a levy imposed by a government on each unit of emissions by a source subject to the tax. Since virtually all of the carbon in fossil fuels ultimately is emitted as CO₂, a levy on the carbon content of fossil fuels–a carbon tax–is equivalent to an emissions tax for emissions caused by fossil fuel combustion. An energy tax–a levy on the energy content of fuels–reduces the demand for energy and so reduces CO₂ emissions through fossil fuel use.
A tradable permit (cap-and-trade) system establishes a limit on aggregate emissions by specified sources, requires each source to hold permits equal to its actual emissions, and allows permits to be traded among sources. This is different from a credit system, in which credits are created when a source reduces its emissions below a baseline equal to an estimate of what they would have been in the absence of the emissions reduction action. A source subject to an emissions-limitation commitment can use credits to meet its obligation.
A subsidy is a direct payment from the government to an entity, or a tax reduction to that entity, for implementing a practice the government wishes to encourage. GHG emissions can be reduced by lowering existing subsidies that in effect raise emissions, such as subsidies to fossil fuel use, or by providing subsidies for practices that reduce emissions or enhance sinks (e.g., for insulation of buildings or planting trees).
A deposit–refund system combines a deposit or fee (tax) on a commodity with a refund or rebate (subsidy) for implementation of a specified action.
A VA is an agreement between a government authority and one or more private parties, as well as a unilateral commitment that is recognized by the public authority, to achieve environmental objectives or to improve environmental performance beyond compliance.
A non-tradable permit system establishes a limit on the GHG emissions of each regulated source. Each source must keep its actual emissions below its own limit; trading among sources is not permitted.
A technology or performance standard establishes minimum requirements for products or processes to reduce GHG emissions associated with the manufacture or use of the products or processes.
A product ban prohibits the use of a specified product in a particular application, such as hydrofluorocarbons (HFCs) in refrigeration systems, that gives rise to GHG emissions.
Direct government spending and investment involves government expenditures on research and development (R&D) measures to lower GHG emissions or enhance GHG sinks.

A group of countries that want to limit their collective GHG emissions could agree to implement one, or a mix, of instruments. These are (in arbitrary order):

tradable quotas;
Joint Implementation (JI);
the Clean Development Mechanism (CDM);
harmonized taxes on emissions, carbon, and/or energy;
an international tax on emissions, carbon, and/or energy;
non-tradable quotas;
international technology and product standards;
international VAs; and
direct international transfers of financial resources and technology.

Box 6.2 defines some of the instruments most prominently discussed in the literature. The first five are often called market-based instruments, although VAs can fall into this category also.

Box 6.2. Definitions of Selected International Greenhouse Gas Abatement Policy Instruments

A tradable quota system establishes national emissions limits for each participating country and requires each country to hold quota equal to its actual emissions. Governments, and possibly legal entities, of participating countries are allowed to trade quotas. Emissions trading under Article 17 of the Kyoto Protocol is a tradable quota system based on the assigned amounts (AAs) calculated from the emissions reduction and limitation commitments listed in Annex B of the Protocol.
JI allows the government of, or entities from, a country with a GHG emissions limit to contribute to the implementation of a project to reduce emissions, or enhance sinks, in another country with a national commitment and to receive emission reduction units (ERUs) equal to part, or all, of the emissions reduction achieved. The ERUs can be used by the investor country or another Annex I party to help meet its national emissions limitation commitment. Article 6 of the Kyoto Protocol establishes JI among Parties with emissions reduction and limitation commitments listed in Annex B of the Protocol.
The CDM allows the government of, or entities from, a country with a GHG emissions limit to contribute to the implementation of a project to reduce emissions, or possibly enhance sinks, in a country with no national commitment and to receive CERs equal to part, or all, of the emissions reductions achieved. Article 12 of the Kyoto Protocol establishes the CDM to contribute to sustainable development of the host country and to help Annex I Parties meet their emissions reduction and limitation commitments.
A harmonized tax on emissions, carbon, and/or energy commits participating countries to impose a tax at a common rate on the same sources.⁷ Each country can retain the tax revenue it collects.
An international tax on emissions, carbon, and/or energy is a tax imposed on specified sources in participating countries by an international agency. The revenue is distributed or used as specified by participant countries or the international agency.
Non-tradable quotas impose a limit on the national GHG emissions of each participating country to be attained exclusively through domestic actions.
International product and/or technology standards establish minimum requirements for the affected products and/or technologies in countries in which they are adopted. The standards reduce GHG emissions associated with the manufacture or use of the products and/or application of the technology.
An international VA is an agreement between two or more governments and one or more entities to limit GHG emissions or to implement measures that will have this effect.
Direct international transfers of financial resources and technology involve transfers of financial resources from a national government to the government or legal entity in another country, directly or via an international agency, with the objective of stimulating GHG emissions reduction or sink enhancement actions in the recipient country.

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