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15
National and Sub-national
Policies and Institutions
Coordinating Lead Authors:
Eswaran Somanathan (India), Thomas Sterner (Sweden), Taishi Sugiyama (Japan)
Lead Authors:
Donald Chimanikire (Zimbabwe), Navroz K. Dubash (India), Joseph Kow Essandoh-Yeddu (Ghana),
Solomone Fifita (Tonga / Fiji), Lawrence Goulder (USA), Adam Jaffe (USA / New Zealand), Xavier
Labandeira (Spain), Shunsuke Managi (Japan), Catherine Mitchell (UK), Juan Pablo Montero
(Chile), Fei Teng (China), Tomasz Zylicz (Poland)
Contributing Authors:
Arild Angelsen (Norway), Kazumasu Aoki (Japan), Kenji Asano (Japan), Michele Betsill (USA),
Rishikesh Ram Bhandary (Nepal / USA), Nils-Axel Braathen (France / Norway), Harriet Bulkeley (UK),
Dallas Burtraw (USA), Ann Carlson (USA), Luis Gomez-Echeverri (Austria / Colombia), Erik Haites
(Canada), Frank Jotzo (Germany / Australia), Milind Kandlikar (India / Canada), Osamu Kimura
(Japan), Gunnar Kohlin (Sweden), Hidenori Komatsu (Japan), Andrew Marquard (South Africa),
Michael Mehling (Germany / USA), Duane Muller (USA), Luis Mundaca (Chile / Sweden), Michael
Pahle (Germany), Matthew Paterson (Canada), Charles Roger (UK / Canada), Kristin Seyboth (USA),
Elisheba Spiller (USA), Christoph von Stechow (Germany), Paul Watkiss (UK), Harald Winkler
(South Africa), Bridget Woodman (UK)
Review Editors:
Martin Jänicke (Germany), Ronaldo Seroa da Motta (Brazil), Nadir Mohamed Awad Suliman
(Sudan)
Chapter Science Assistant:
Rishikesh Ram Bhandary (Nepal / USA)
11421142
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Chapter 15
This chapter should be cited as:
Somanathan E., T. Sterner, T. Sugiyama, D. Chimanikire, N. K. Dubash, J. Essandoh-Yeddu, S. Fifita, L. Goulder, A. Jaffe, X.
Labandeira, S. Managi, C. Mitchell, J. P. Montero, F. Teng, and T. Zylicz, 2014: National and Sub-national Policies and Institu-
tions. In: Climate Change 2014: Mitigation of Climate Change. Contribution of Working Group III to the Fifth Assessment
Report of the Intergovernmental Panel on Climate Change [Edenhofer, O., R. Pichs-Madruga, Y. Sokona, E. Farahani, S.
Kadner, K. Seyboth, A. Adler, I. Baum, S. Brunner, P. Eickemeier, B. Kriemann, J. Savolainen, S. Schlömer, C. von Stechow, T.
Zwickel and J.C. Minx (eds.)]. Cambridge University Press, Cambridge, United Kingdom and New York, NY, USA.
11431143
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Contents
Executive Summary � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 1147
15�1 Introduction � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 1149
15�2 Institutions and governance � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 1149
15�2�1 Why institutions and governance matter
� � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 1149
15�2�2 Increase in government institutionalization of climate mitigation actions
� � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 1150
15�2�3 Climate change mitigation through sectoral action
� � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 1151
15�2�4 Co-Benefits as a driver of mitigation action
� � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 1152
15�2�5 Sub-national climate action and interaction across levels of governance
� � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 1152
15�2�6 Drivers of national and sub-national climate action
� � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 1154
15�2�7 Summary of institutions and governance
� � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 1154
15�3 Characteristics and classification of policy instruments and packages � � � � � � � � � � � � � � � � � � � � � � � � � � � � 1155
15�3�1 Economic instruments
� � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 1155
15�3�2 Regulatory approaches
� � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 1155
15�3�3 Information policies
� � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 1156
15�3�4 Government provision of public goods and services and procurement
� � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 1156
15�3�5 Voluntary actions
� � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 1156
15�4 Approaches and tools used to evaluate policies and institutions � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 1156
15�4�1 Evaluation criteria
� � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 1156
15�4�2 Approaches to evaluation
� � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 1156
15�5 Assessment of the performance of policies and measures, including their policy design, in
developed and developing countries taking into account development level and capacity
� 1157
15�5�1 Overview of policy implementation
� � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 1157
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15�5�2 Taxes, charges, and subsidy removal � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 1159
15.5.2.1 Overview
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1159
15.5.2.2 Environmental effectiveness and efficiency
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1160
15.5.2.3 Distributional incidence and feasibility
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1161
15.5.2.4 Design issues: exemptions, revenue recycling, border adjustments
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1162
15�5�3 Emissions trading
� � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 1163
15.5.3.1 Overview of emissions trading schemes
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1163
15.5.3.2 Has emissions trading worked?
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1163
15.5.3.3 Sector coverage and scope of the cap
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1165
15.5.3.4 Setting the level of the cap
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1165
15.5.3.5 Allocations
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1166
15.5.3.6 Linking of schemes
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1166
15.5.3.7 Other design issues: banking, offsets, leakage, price volatility and market power
. . . . . . . . . . . . . . . . . . 1166
15.5.3.8 Choice between taxes and emissions trading
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1167
15�5�4 Regulatory approaches
� � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 1168
15.5.4.1 Overview of the implementation of regulatory approaches
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1168
15.5.4.2 Environmental effectiveness of energy efficiency regulations
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1168
15.5.4.3 Cost effectiveness of energy efficiency regulations
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1169
15�5�5 Information measures
� � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 1170
15�5�6 Government provision of public goods or services, and procurement
� � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 1170
15�5�7 Voluntary actions
� � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 1171
15.5.7.1 Government-sponsored voluntary programmes for firms
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1171
15.5.7.2 Voluntary agreements as a major complement to mandatory regulations
. . . . . . . . . . . . . . . . . . . . . . . . . . 1172
15.5.7.3 Voluntary agreements as a policy instrument in governmental mitigation plan
. . . . . . . . . . . . . . . . . . . . 1172
15.5.7.4 Synthesis
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1173
15�5�8 Summary
� � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 1174
15�6 Technology policy and R&D policy � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 1174
15�6�1 Overview of the role of technology policy and R&D policy
� � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 1174
15�6�2 Experience with technology policy
� � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 1175
15.6.2.1 Intellectual property
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1175
15.6.2.2 Public funding of research and development
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1175
15.6.2.3 Policies to foster or accelerate deployment and diffusion of new technologies
. . . . . . . . . . . . . . . . . . . . . 1176
15�6�3 The impact of environmental policy instruments on technological change
� � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 1177
15�6�4 The social context of technological transitions and its interaction with policy
� � � � � � � � � � � � � � � � � � � � � � � � � � 1178
15�6�5 Building programme evaluation into government technology programmes
� � � � � � � � � � � � � � � � � � � � � � � � � � � � � 1178
15�6�6 Summary of technology policy and R&D policy
� � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 1178
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15�7 Synergies and tradeoffs among policies � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 1179
15�7�1 Relationship between policies with different objectives
� � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 1179
15�7�2 Interactions between climate policies conducted at different jurisdictional levels
� � � � � � � � � � � � � � � � � � � � � � 1180
15.7.2.1 Beneficial interactions
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1180
15.7.2.2 Problematic interactions
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1180
15�7�3 Interactions between policies conducted at the same jurisdictional level
� � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 1181
15.7.3.1 Beneficial interactions
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1181
15.7.3.2 Problematic interactions
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1181
15�8 National, state and local linkages � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 1182
15�8�1 Overview of linkages across jurisdictions
� � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 1182
15�8�2 Collective action problem of sub-national actions
� � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 1182
15�8�3 Benefits of sub-national actions
� � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 1183
15�8�4 Summary
� � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 1183
15�9 The role of stakeholders including NGOs � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 1183
15�9�1 Advocacy and accountability
� � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 1184
15�9�2 Policy design and implementation
� � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 1184
15�9�3 Summary of the role of stakeholders
� � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 1184
15�10 Capacity building � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 1184
15�10�1 Capacity to analyze the implications of climate change
� � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 1185
15�10�2 Capacity to design, implement and evaluate policies
� � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 1185
15�10�3 Capacity to take advantage of external funding and flexible mechanisms
� � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 1185
15�10�4 Capacity building modalities
� � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 1185
15�11 Links to adaptation � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 1186
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Chapter 15
15�12 Investment and finance � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 1187
15�12�1 National and sub-national institutions and policies
� � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 1187
15�12�2 Policy change direction for finance and investments in developing countries
� � � � � � � � � � � � � � � � � � � � � � � � � � � 1188
15�13 Gaps in knowledge and data � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 1189
15�14 Frequently Asked Questions � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 1189
References � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 1191
11471147
National and Sub-national Policies and Institutions
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Chapter 15
Executive Summary
Since the Intergovernmental Panel on Climate Change (IPCC) Fourth
Assessment Report (AR4), there has been a marked increase in national
policies and legislation on climate change, however, these policies,
taken together, have not yet achieved a substantial deviation in emis-
sions from the past trend. Many baseline scenarios (those without
additional policies to reduce emissions) show GHG concentrations that
exceed 1000 ppm CO
2
eq by 2100, which is far from a concentration
with a likely probability of maintaining temperature increases below
2 °C this century. Mitigation scenarios suggest that a wide range of
environmentally effective policies could be enacted that would be
consistent with such goals. This chapter assesses national and sub-
national policies and institutions to mitigate climate change in this
context. It assesses the strengths and weaknesses of various mitiga-
tion policy instruments and policy packages and how they may interact
either positively or negatively. Sector-specific policies are assessed in
greater detail in the individual sector chapters (7 – 12). Major findings
are summarized as follows. [Section 15.1]
The design of institutions affects the choice and feasibility of
policy options as well as the sustainable financing of climate
change mitigation measures (limited evidence, medium agreement).
By shaping appropriate incentives, creating space for
new stakeholders
in decision making, and by transforming the understanding of policy
choices, institutions designed to encourage participation by represen-
tatives of new industries and technologies can facilitate transitions to
low-emission pathways, while institutions inherited unchanged from
the past can perpetuate lock-in to high-carbon development paths.
[15.2, 15.6]
There has been a considerable increase in national and sub-
national mitigation plans and strategies since AR4 (medium evi-
dence, high agreement). These plans and strategies are in their early
stages of development and implementation in many countries, mak-
ing it difficult to assess whether and how they will result in appropri-
ate institutional and policy change, and thus, their impact on future
emissions. However, to date these policies, taken together, have not
yet achieved a substantial deviation in emissions from the past trend.
Theories of institutional change suggest they might play a role in shap-
ing incentives, political contexts, and policy paradigms in a way that
encourages emissions reductions in the future. [15.1, 15.2]
Sector-specific policies have been more widely used than
economy-wide, market-based policies (medium evidence, high
agreement). Although economic theory suggests that economy-wide
market-based policies for the singular objective of mitigation would
generally be more cost-effective than sector-specific policies, political
economy considerations often make economy-wide policies harder
to design and implement than sector-specific policies. Sector-specific
policies may also be needed to overcome sectoral market failures that
price policies do not address. For example, building codes can require
publicly funded energy efficient investments where private investments
would otherwise not exist. Sector approaches also allow for packages
of complementary policies, as, for example, in transport, where pricing
policies that raise the cost of carbon-intensive forms of private trans-
port are more effective when backed by public investment in viable
alternatives. [15.1, 15.2, 15.5, 15.8, 15.9]
Direct regulatory approaches and information measures are
widely used, and are often environmentally effective, though
debate remains on the extent of their environmental impacts
and cost effectiveness (medium evidence, medium agreement).
Examples of regulatory approaches include energy efficiency standards;
examples of information programmes include labelling programmes
that can help consumers make better-informed decisions. While such
approaches often work at a net social benefit, the scientific literature
is divided on whether such policies are implemented with negative pri-
vate costs to firms and individuals. Since AR4 there has been continued
investigation into ‘rebound’ effects that arise when higher efficiency
leads to lower energy prices and greater consumption. There is general
agreement that such rebound effects exist, but there is low agreement
in the literature on the magnitude. [3.9.5, 8.3, 9.7.2.4, 15.5.4, 15.5.5]
Fuel taxes are an example of a sector-specific policy and
are often originally put in place for objectives such as rev-
enue — they are not necessarily designed for the purpose of
climate change mitigation (high confidence). In Europe, where fuel
taxes are highest, they have contributed to reductions in carbon emis-
sions from the transport sector of roughly 50 % for this group of coun-
tries. The short-run response to higher fuel prices is often small, but
long-run price elasticities are quite high, or roughly – 0.6 to – 0.8. This
means that in the long run, 10 % higher fuel prices correlate with 7 %
reduction in fuel use and emissions. In the transport sector, taxes have
the advantage of being progressive or neutral in most countries and
strongly progressive in low-income countries. [15.5.2]
Reduction of subsidies to fossil energy can result in significant
emission reductions at negative social cost (high confidence).
[15.5.2] Although political economy barriers are substantial, many
countries have reformed their tax and budget systems to reduce fuel
subsidies that actually accrue to the relatively wealthy, and utilized
lump-sum cash transfers or other mechanisms that are more targeted
to the poor. [15.5.3]
Cap and trade systems for greenhouse gases are being estab-
lished in a growing number of countries and regions (limited evi-
dence, medium agreement). Their environmental effect has so far been
limited because caps have either been loose or have not yet been bind-
ing. There appears to have been a tradeoff between the political feasi-
bility and environmental effectiveness of these programmes, as well as
between political feasibility and distributional equity in the allocation
of permits. Greater environmental effectiveness through a tighter cap
may be combined with a price ceiling that makes for political feasibil-
ity. [15.5.3]
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National and Sub-national Policies and Institutions
15
Chapter 15
Carbon taxes have been implemented in some countries
and — alongside technology and other policies — have contrib-
uted to decoupling of emissions from gross domestic product
(GDP) (high confidence). Differentiation by sector, which is quite com-
mon, reduces cost-effectiveness that arises from the changes in pro-
duction methods, consumption patterns, lifestyle shifts, and technology
development, but it may increase political feasibility, or be preferred
for reasons of competitiveness or distributional equity. In some coun-
tries, high carbon and fuel taxes have been made politically feasible
by refunding revenues or by lowering other taxes in an environmental
fiscal reform. [15.2, 15.5.2, 15.5.3]
Adding a mitigation policy to another may not necessarily
enhance mitigation (high confidence). For instance, if a cap and
trade system has a sufficiently stringent cap, then other policies such
as renewable subsidies have no further impact on total emissions
(although they may affect costs and possibly the viability of more
stringent future targets). If the cap is loose relative to other policies,
it becomes ineffective. This is an example of a negative interaction
between policy instruments. Since other policies cannot be ‘added on’
to a cap-and-trade system, if it is to meet any particular target, a suf-
ficiently low cap is necessary. A carbon tax, on the other hand, can
have an additive environmental effect to policies such as subsidies to
renewables. [15.7]
There is a distinct role for technology policy as a complement to
other mitigation policies (high confidence). Properly implemented
technology policies reduce the cost of achieving a given environmental
target. Technology policy will be most effective when technology-push
policies (e. g., publicly funded research and development (R&D)) and
demand-pull policies (e. g., governmental procurement programmes or
performance regulations) are used in a complementary fashion (robust
evidence, high agreement). [15.6] While technology-push and demand-
pull policies are necessary, they are unlikely to be sufficient without
complementary framework conditions. Managing social challenges of
technology policy change may require innovations in policy and insti-
tutional design, including building integrated policies that make com-
plementary use of market incentives, authority and norms (medium
evidence, medium agreement). [15.6.5].
Since AR4, a large number of countries and sub-national jurisdictions
have introduced support policies for renewable energy such as feed-
in tariffs (FIT) and renewable portfolio standards (RPS). These have
promoted substantial diffusion and innovation of new energy tech-
nologies such as wind turbines and photovoltaic (PV) panels, but have
raised questions about their economic efficiency, and introduced chal-
lenges for grid and market integration (7.12, 15.6).
Worldwide investment in research in support of climate change
mitigation is small relative to overall public research spending
(medium evidence, medium agreement). The effectiveness of research
support will be greatest if it is increased slowly and steadily rather
than dramatically or erratically. It is important that data collection for
programme evaluation be built into technology policy programmes,
because there is very little empirical evidence on the relative effective-
ness of different mechanisms for supporting the creation and diffusion
of new technologies. [15.6.2, 15.6.5]
Public finance mechanisms reduce risks that deter climate
investments (high confidence). The future value of carbon permits
created by an economic instrument such as cap and trade may, for
example, not be accepted as sufficiently secure by banks. Government
public finance mechanisms to reduce risks include debt and equity
mechanisms, carbon finance, and innovative grants. [15.12]
Government planning and provision can facilitate shifts to less
energy and GHG-intensive infrastructure and lifestyles (high con-
fidence). This applies particularly when there are indivisibilities in the
provision of infrastructure as in the energy sector (e. g., for electric-
ity transmission and distribution or district heating networks); in the
transport sector (e. g., for non-motorized or public transport), and in
urban planning. The provision of adequate infrastructure is important
for behavioural change (medium evidence, high agreement) [15.5.6].
Successful voluntary agreements on mitigation between gov-
ernments and industries are characterized by a strong institu-
tional framework with capable industrial associations (medium
evidence, medium agreement). The strengths of voluntary agreements
are speed and flexibility in phasing measures, and facilitation of barrier
removal activities for energy efficiency and low emission technologies.
Regulatory threats, even though the threats are not always explicit, are
also an important factor for firms to be motivated. There are few envi-
ronmental impacts without a proper institutional framework (medium
evidence, medium agreement). [15.5.5]
Synergies and tradeoffs between mitigation and adaptation
policies may exist in the land-use sector (medium evidence,
medium agreement). For other sectors such as industry and power, the
connections are not obvious. [15.11]
The ability to undertake policy action requires information,
knowledge, tools, and skills, and therefore capacity building
is central both for mitigation and to the sustainable develop-
ment agenda (medium evidence, high agreement). The needs for
capacity building include capacity to analyze the implications of cli-
mate change; capacity to formulate, implement, and evaluate policies;
capacity to take advantage of external funding and flexible mecha-
nisms; and capacity to make informed choices of the various capacity
building modalities. [15.10]
Mainstreaming climate change into development planning has
helped yield financing for various climate policy initiatives
(medium evidence, medium agreement). Among developing and some
least developed countries, an emerging trend is the establishment of
national funding entities dedicated to climate change. While diverse in
design and objectives, they tap and blend international and national
11491149
National and Sub-national Policies and Institutions
15
Chapter 15
sources of finance, thereby helping to improve policy coherence and
address aid fragmentation. Financing adaptation and mitigation in
developing countries is crucial from the viewpoint of welfare and
equity (medium evidence, high agreement). [15.12]
Gaps in knowledge: The fact that various jurisdictions produce vari-
ous policy instruments influenced by co-benefits and political economy
and that they interact in complex manners makes it difficult to evalu-
ate the economic and environmental effectiveness of individual policy
instrument as well as policy package of a nation. Most importantly, it
is not known with certainty how much an emission reduction target
may cost to the economy in the real world in comparison to the ‘first
best’ optimal solution estimated by economic models in other chapters
in this report. Costs may be under-stated or over-stated.
15.1 Introduction
This chapter assesses national and sub-national mitigation policies
and their institutional settings. There has been a marked increase
in national policies and legislation on climate change since the AR4
with a diversity of approaches and a multiplicity of objectives (see
Section 15.2). However, Figure 1.9 of Chapter 1 suggests that these
policies, taken together, have not yet achieved a substantial devia-
tion in emissions from the past trend. Limiting concentrations to lev-
els that would be consistent with a likely probability of maintaining
temperature increases below 2 °C this century (scenarios generally
in the range of 430 – 480 ppmv CO
2
eq) would require that emissions
break from these trends and be decreased substantially. In contrast,
concentrations exceed 1000 ppmv CO
2
eq by 2100 in many baseline
scenarios (that is, scenarios without additional efforts to reduce emis-
sions).
The literature on mitigation scenarios provides a wide range of CO
2
shadow price levels consistent with these goals, with estimates of
less than USD 50 / tCO
2
in 2020 in many studies and exceeding USD
100 / tCO
2
in others, assuming a globally-efficient and immediate effort
to reduce emissions. These shadow prices exhibit a strongly increasing
trend thereafter. Policies and instruments are assessed in this light.
Section 15.2 assesses the role of institutions and governance. Section
15.3 lays out the classification of policy instruments and packages,
while 15.4 discusses the methodologies used to evaluate policies and
institutions. The performance of various policy instruments and mea-
sures are individually assessed in Sections 15.5 and 15.6.
The two main types of economic instruments are price instruments,
that is, taxes and subsidies (including removal of subsidies on fossil
fuels), and quantity instruments — emission-trading systems. These are
assessed in Sections 15.5.2 and 15.5.3 respectively. An important fea-
ture of both these instruments is that they can be applied at a very
broad, economy-wide scale. This is in contrast to the regulation and
information policies and voluntary agreements which are usually sec-
tor-specific. These policies are assessed in Sections 15.5.4, 15.5.5, and
15.5.7. Government provision and planning is discussed in 15.5.6. The
next section, 15.6, provides a focused discussion on technology policy
including research and development and the deployment and diffusion
of clean energy technologies. In addition to technology policy, longer-
term effects of the policies assessed in Section 15.5 are addressed in
Section 15.6.
Both these sections, 15.5 and 15.6, bring together lessons from poli-
cies and policy packages used at the sectoral level from Chapters 7
(Energy), 8 (Transport), 9 (Buildings), 10 (Industry), 11 (Agriculture, For-
estry and Land Use) and Chapter 12 (Human Settlements, Infrastruc-
ture, and Spatial Planning).
The following sections further assess the interaction among policy
instruments, as they are not usually used in isolation, and the impacts
of particular instruments depend on the entire package of policies and
the institutional context. Section 15.7 reviews interactions, both ben-
eficial and harmful, that may not have been planned. The presence of
such interactions is in part a consequence of the multi-jurisdictional
nature of climate governance as well as the use of multiple policy
instruments within a jurisdiction. Section 15.8 examines the deliberate
linkage of policies across national and sub-national jurisdictions.
Other key issues are further discussed in dedicated sections. They are:
the role of stakeholders including non-governmental organizations
(NGOs) (15.9), capacity building (15.10), links between adaptation and
mitigation policies (15.11), and investment and finance (15.12). Gaps
in knowledge are collected in 15.13.
15.2 Institutions and
governance
15�2�1 Why institutions and governance matter
Institutions and processes of governance (see Annex 1: Glossary for
definitions) shape and constrain policy-making and policy implementa-
tion in multiple ways relevant for a shift to a low carbon economy. First,
institutions — understood as formal rules and informal norms — set the
incentive structure for economic decision making (North, 1991), influ-
encing, for example, decisions about transportation investments, and
behavioural decisions relevant to efficient energy use. Second, insti-
tutions shape the political context for decision making, empowering
some interests and reducing the influence of others (Steinmo etal.,
1992; Hall, 1993). Harrison (2012) illustrates this with respect to envi-
ronmental tax reform in Canada. Third, institutions can also shape pat-
terns of thinking and understanding of policy choices — through both
11501150
National and Sub-national Policies and Institutions
15
Chapter 15
normative and cognitive effects (Powell and DiMaggio, 1991). These
effects can result in dominant policy paradigms — ideas, policy goals,
and instruments — that favour some actions and exclude others from
consideration (Radaelli and Schmidt, 2004). For example, existing
energy systems are likely to remain in place without appropriate insti-
tutional change (Hughes, 1987) and changes in discourse, which would
perpetuate existing technologies and policies and lock out new ones
(Unruh, 2000; Walker, 2000). More generally, a mismatch between
social-ecological context and institutional arrangements can lead to
a lack of fit and exert a drag on policy and technological response
(Young, 2002).
15�2�2 Increase in government
institutionalization of climate mitigation
actions
There has been a definite increase since AR4 in formal governmental
efforts to promote climate change mitigation. These efforts are diverse
in their approach, scale, and emphasis, and take the form of legisla-
tion, strategies, policies, and coordination mechanisms. Many of these
are relatively recent, and often in the design or early implementa-
tion stage. As a result, it is premature to evaluate their effectiveness
and there is insufficient literature as yet that attempts to do so. Since
global greenhouse gas emissions have continued to increase in recent
years (Chapter 5 and Section 15.1), it will be important to closely
monitor this trend to evaluate if policies and institutions created are
sufficiently strong and effective to lead to the reductions required to
stabilize global temperature, for instance, at the 2 °C target. This sec-
tion reviews national centralized governmental actions, while 15.2.3
discusses sectoral actions and 15.2.5 examines the roles of other
stakeholders including non-state actors.
A review of climate legislation and strategy in almost all United Nation
(UN) Member States shows that there has been a substantial increase
in these categories between 2007 and 2012 (Dubash etal., 2013) (See
Figure 15.1). Dubash et al. (2013) define climate legislation as mitiga-
tion-focused legislation that goes beyond sectoral action alone, while
climate strategy is defined as a non-legislative plan or framework
aimed at mitigation that encompasses more than a small number of
sectors, and that includes a coordinating body charged with implemen-
tation. International pledges are not included. By these definitions,
39 % of countries, accounting for 73 % of population and 67 % of
greenhouse gas emissions, were covered by climate law or strategies
in 2012, an increase from 23 % of countries, 36 % of population, and
45 % of emissions in 2007. There are also strong regional differences,
Figure 15�1 | National climate legislation and strategies in 2007 and 2012.* Reproduced from Dubash et al., (2013). In this figure, climate legislation is defined as mitigation-
focused legislation that goes beyond sectoral action alone. Climate strategy is defined as a non-legislative plan or framework aimed at mitigation that encompasses more than a
small number of sectors, and that includes a coordinating body charged with implementation. International pledges are not included, nor are sub-national plans and strategies. The
panel shows proportion of GHG emissions covered.
*
Number of countries and GHG emissions covered (NAI: Non AnnexI countries (developing countries), AI: AnnexI countries (developed countries), LAM: Latin America, MAF:
Middle East and Africa, ASIA: Asia, EIT: Economies in Transition, OECD-1990: OECD of 1990)
4
3
2
4
3
2
4
3
2
1 11
3 (16%)
9 (46%)
0 (1%)
15 (50%)
14 (46%)
1 (4%)
0 (0%)
12 (61%)
0 (1%)
8 (28%)
6 (19%)
1 (4%)
7 (38%)0 (0%) 7 (38%)14 (49%)
11 (23%)
15 (30%)
1 (3%)
22 (44%)
15 (30%)
25 (52%)
1 (3%)
7 (15%)
0 (3%)
7 (53%)
0 (0%)
1 (28%)
3 (70%)
0 (0%)
1 (13%)
1 (23%)
0 (0%)
1 (8%)
5 (76%)
1 (16%)
1 (19%)
4 (65%)
1 (16%)
13 (69%)
6 (30%)
0 (1%)
6 (34%)
1 (3%)
0 (1%)
0 (0%)
4 (76%)
0 (3%)
3 (50%)
1 (26%)
0 (3%)
0 (0%)
8 (55%)
0 (0%)
6 (44%)0 (2%) 2 (63%) 0 (0%) 0 (0%) 0 (0%) 12 (62%) 1 (20%) 1 (20%) 6 (44%)
2007 2012
2007 20122007 20122007 20122007 20122007 20122007 20122007 2012
0
00
5
10
15
20
4: Analysis Incomplete
3: No Climate Legislation
or Strategy/Coordinating Body
2: Climate Strategy and
Coordinating Body
1: Climate Legislation
5
10
15
20
25
30
20
40
60
80
100
GHG Emissions Covered [%]
GHG Emissions [GtCO
2
eq]
GHG Emissions [GtCO
2
eq]
OECD-1990EITASIAMAFAIGLOBAL NAI LAM
11511151
National and Sub-national Policies and Institutions
15
Chapter 15
with Asia and Latin America recording the fastest rate of increase.
Taken as a block, in 2012, 49 % of current emissions from the develop-
ing world regions of Asia, Africa, and Latin America were under climate
law and 77 % of emissions were under either law or strategy, while for
the developed world regions of Organisation for Economic Co-opera-
tion and Development 1990 Countries OECD-1990 and Economies in
Transition (EIT) the equivalent numbers are 38 % and 56 %. Finally,
while the number of countries with climate legislation increased mar-
ginally from 18 % to 22 % over this period, the number of countries
with climate strategies increased from 5 % to 18 %, suggesting many
more countries are adopting a strategy-led approach. (For regional
aggregations see AnnexII.2)
Climate legislation and strategies follow a wide diversity of approaches
to operationalization and implementation. The imposition of carbon
prices is one approach widely discussed in the literature (See Section
15.5) but less frequently implemented in practice. Examples include
the European Union’s Emissions Trading Scheme (ETS) (See Section
14.4.2) or setting of carbon taxes (see Section 15.5.2). One study of
the 19 highest emitting countries finds that six have put in place some
form of carbon price, while 14 have put in place both regulation and
other economic incentives for greenhouse gas mitigation (Lachapelle
and Paterson, 2013). Common explanations for this variation are in
terms of the novelty of emissions trading (although emissions trad-
ing has been in practice implemented much more widely than carbon
taxation), the legitimacy problems faced by emissions trading (Pater-
son, 2010), or political contestation over increased taxation (see for
example Laurent (2010), on the French case, Jotzo (2012) for Austra-
lia or Jagers and Hammar (2009), for evidence that popular support
for carbon taxes in Sweden depend on how it is framed in popular
debate), and lobbying by fossil-fuel or energy-intense industry lobbies
(Bailey etal., 2012; Sarasini, 2013).
More generally speaking, policy instruments have often been sec-
tor-specific. Economy-wide instruments, even when implemented,
have had exemptions for some sectors, most commonly those most
exposed to international trade. The exemptions have arisen because
national policies have been developed under the strong influence of
sectoral policy networks (Compston, 2009) and many stakeholders
therein — including firms and NGOs — influence the policy to promote
their interests (Helm, 2010). This phenomenon undermines the overall
cost-effectiveness of climate policy (Anthoff and Hahn, 2010) although
it may help further other objectives such as equity and energy security
(see Section 15.7).
Another approach follows a model of national-level target backed by
explicit creation of institutions to manage performance to that target.
In China, for example, a ‘National Leading Group on Climate Change’
in June 2007, housed in the apex National Development and Reform
Commission and chaired by the premier (Tsang and Kolk, 2010a) coor-
dinates the achievement of targets set in the subsequent National Cli-
mate Change Programme. The Chinese examples illustrate a broader
point emerging from a cross-country study that implementation of cli-
mate legislation and plans are, in at least some cases, drawing power-
ful finance and planning departments into engagement with climate
change (Held etal., 2013).
Another approach is to establish dedicated new climate change bodies
that are substantially independent of the executive and that seek to
coordinate existing government agencies through a variety of levers.
The leading example of this approach is in the UK, where a dedicated
Climate Change Committee analyzes departmental plans and monitors
compliance with five-year carbon budgets (U. K., 2008; Stallworthy,
2009). Instead of direct executive action, as in the Chinese case, this
approach relies on analysis, public reporting, and advice to govern-
ment. Following the UK example, Australia has established an inde-
pendent Climate Change Authority to advise the government on emis-
sion targets and review effectiveness of its Carbon Pricing Mechanism
(Keenan etal., 2012).
15�2�3 Climate change mitigation through
sectoral action
While there is no systematic study of implementation of climate plans,
case study evidence suggests that these plans are frequently opera-
tionalized through sectoral actions. There are a variety of ways through
which national plans interface with sectoral approaches to mainstream
climate change. In some cases, there is a formal allocation of emis-
sions across sectors. For example, in Germany, mitigation efforts were
broken down by sectors for the period between 2008 and 2012, with
the national ‘Allocation Act 2012’ specifying emissions budgets for
sectors participating in the EU ETS as well as the remaining sectors
(Dienes, 2007; Frenz, 2007). More typically, climate mainstreaming
occurs through a sector by sector process led by relevant government
departments, as in France (Mathy, 2007), India (Dubash, 2011; Atter-
idge etal., 2012), and Brazil (da Motta, 2011a; La Rovere etal., 2011).
In some cases, the sectoral process involves a role for stakehold-
ers in engagement with government departments. In France, sectoral
approaches are devised at the central level through negotiation and
consultation between multiple ministries, experts, business, and NGOs.
According to at least one analysis, this approach risks a dilution of
measures through the influence of lobbies that may lose from miti-
gation actions (Mathy, 2007). In Brazil, sector specific approaches are
developed by sectoral ministries complemented by a multi-stakeholder
forum to solicit views and forge consensus (Hochstetler and Viola,
2012; Viola and Franchini, 2012; Held etal., 2013a).
In some cases, climate change considerations bring about changes in
long-standing patterns of sector governance. In South Africa, for exam-
ple, the Copenhagen pledge led to a process of reconsidering South
Africa’s integrated resource plan for electricity to include carbon reduc-
tion as one among multiple criteria (Republic of South Africa, 2011). In
India, the establishment of national sectoral ‘missions’ had the effect
of creating new institutional mechanisms in the case of the National
11521152
National and Sub-national Policies and Institutions
15
Chapter 15
Solar Mission, or of raising the profile and importance of particular
ministries or departments as in the example of the Bureau of Energy
Efficiency (Dubash, 2011). In other cases, climate mainstreaming was
facilitated by prior political shifts in governance of a sector. Brazil’s
climate approach particularly emphasizes the forest sector (da Motta,
2011b; La Rovere, 2011). Progress on the Brazilian plan was enabled
by prior domestic political consensus around a far-reaching Forest
Code (Hochstetler and Viola, 2012).
15�2�4 Co-Benefits as a driver of mitigation
action
The importance of co-benefits — both development gains from climate
policy and climate gains from development policy — emerge as a par-
ticularly strong rationale and basis for sectoral action. As Table 6.7
shows, an inventory of sectoral action on climate change (drawn from
Chapter 7 – 12) is linked to a wide range of co-benefits and adverse
side-effects, encompassing economic, social, and environmental
effects. Table 15.1 provides a roadmap for the co-benefits and adverse
side-effects from sectoral mitigation measures most prominently dis-
cussed across Chapters 7 to 12. They are listed in three columns: eco-
nomic, social, and environmental. Each column shows the range of
effects on objectives or concerns beyond mitigation discussed in Chap-
ters 7.12 for that category. For example, energy security is categorized
in the column of ‘economic’ and addressed in Section 7.9, 8.7, 9.7,
10.8, 11.13.6, and 12.8.
This perception is reinforced by comparative case studies and specific
country studies. A comparative study finds that co-benefits is an impor-
tant driving force for mitigation policies across large, rapidly industrial-
izing countries (Bailey and Compston, 2012a), a finding that is sup-
ported by country level studies. India’s National Action Plan on Climate
Change (NAPCC), for example, is explicitly oriented to pursuit of co-
benefits, with mitigation understood to be the secondary benefit emerg-
ing from development policies. The linkage between energy security and
mitigation is particularly important to winning broader political support
for action on mitigation (Dubash, 2011; Fisher, 2012). A similar trend is
apparent in China (Oberheitmann, 2008), where provincial implementa-
tion of targets is enabled by linking action to local motivations, notably
for energy efficiency (Teng and Gu, 2007; Richerzhagen and Scholz,
2008a; Qi etal., 2008; Tsang and Kolk, 2010b; Kostka and Hobbs, 2012).
Tsang and Kolk (2010a) go so far as to say that Chinese leaders essen-
tially equate climate policy with energy conservation. Kostka and Hobbs
(2012) identify three ways in which this alignment of global and local
objectives happens: interest bundling, through which objectives of
political institutions are tied to local economic interests; policy bun-
dling, to link climate change with issues of local political concern; and
framing in ways that play to local constituencies.
The concept of ‘nationally appropriate mitigation actions’ (NAMAs)
has a conceptual connection to the idea of co-benefits. Nationally
appropriate mitigation actions are intended to be mitigation actions
that are ‘nationally appropriate’ in the sense that they contribute to
development outcomes. Therefore, NAMAs provide a possible mech-
anism for connection of national policies and projects to the global
climate regime, although the mechanisms through which this will be
accomplished are yet to be fully articulated (see Box 15.1). Another,
related mechanism is the explicit formulation in many countries of ‘low
emissions development strategies’ that seek to integrate climate and
development strategies (Clapp etal., 2010).
15�2�5 Sub-national climate action and
interaction across levels of governance
In many countries, the formulation and implementation of national
mitigation approaches are further delegated to sub-national levels,
with differing levels of central coordination, depending on national
contexts and institutions. Comparative analysis of cross-country cli-
mate action is insufficiently developed to allow generalization and
explanation of different approaches to climate policy.
Table 15�1 | Roadmap for the assessment of potential co-benefits and adverse side-effects from mitigation measures for additional objectives in the sector chapters (7 – 12). For
overview purposes, only those objectives and concerns are shown that are assessed in at least two sectors. For a broader synthesis of the literature assessed in this report, see Sec-
tion 6.6.
Effect of mitigation measures on additional objectives or concerns
Economic Social Environmental
Energy security (7.9, 8.7, 9.7, 10.8, 11.13.6, 12.8)
Employment impact (7.9, 8.7, 9.7, 10.8, 11.7, 11.13.6)
New business opportunity / economic activity (7.9, 11.7,
11.13.6)
Productivity / competitiveness (8.7, 9.7, 10.9, 11.13.6)
Technological spillover / innovation (7.9, 8.7, 10.8, 11.3,
11.13.6)
Health impact (e. g., via air quality and noise) (5.7, 7.9, 8.7, 9.7,
10.8, 11.7, 11.13.6, 12.8)
Energy / mobility access (7.9, 8.7, 9.7, 11.13.6, 12.4)
(Fuel) Poverty alleviation (7.9, 8.7, 9.7, 11.7, 11.13.6)
Food security (7.9, 11.7, 11.13.6 / 7)
Impact on local conflicts (7.9, 10.8, 11.7, 11.13.6)
Safety / disaster resilience (7.9, 8.7, 9.7, 10.8, 12.8)
Gender impact (7.9, 9.7, 11.7, 11.13.6)
Ecosystem impact (e. g., via air pollution) (7.9, 8.7, 9.7, 10.8,
11.7, 11.13.6 / 7, 12.8)
Land-use competition (7.9, 8.7, 10.8, 11.7, 11.13.6 / 7)
Water use / quality (7.9, 9.7, 10.8, 11.7, 11.13.6)
Biodiversity conservation (7.9, 9.7, 11.7, 11.13.6)
Urban heat island effect (9.7, 12.8)
Resource / material use impact (7.9, 8.7, 9.7, 10.8, 12.8)
Box 15�1 | Nationally Appropriate Mitigation Actions (NAMAs)
The Bali Action Plan (BAP), (1 / CP.13; UNFCCC, 2007) states that
developing countries are called on to take NAMAs supported and
enabled by technology and finance. For example, NAMAs could be
articulated in terms of national emissions intensity or trajectories,
sectoral emissions, or specific actions at sectoral or sub-sectoral
levels. As of June 2013, 57 parties had submitted NAMAs to
the United Nations Framework Convention on Climate Change
(UNFCCC) secretariat.
The design of mechanisms to link NAMAs to global support lead
to some complex tradeoffs. For example, large scale sectoral
NAMAs provide the least scope for leakage (decreased emissions
in one sector is undermined by increased emissions in another
part of the economy) and the lowest measurement costs (Jung
etal., 2010). However, designing NAMAs around transaction
costs might run counter to designing them for targeted focus
on national development priorities. Exploring the extent of this
tradeoff and managing it carefully will be an important part of
implementing NAMAs.
Much of the writing on NAMAs is focused on the challenges of
linking national actions to the international climate framework.
Conceptual challenges involved in linking NAMAs to the UNFCCC
process include the legal nature of NAMAs (van Asselt etal.,
2010), financing of NAMAs, and associated concerns of avoid-
ing double counting (Cheng, 2010; Jung etal., 2010; van Asselt
etal., 2010; Sovacool, 2011a) and measurement, reporting, and
verification of NAMAs (Jung etal., 2010; Sterk, 2010; van Asselt
etal., 2010).
While NAMAs pertain particularly to the developing world, co-
benefits based arguments are also used in developed countries. In
the United States, Gore and Robinson (2009) argue that expansion
of municipal scale action is articulated in the form of co-benefits,
and is driven by network-based communication and citizen
initiative. In Germany, several benefits in addition to climate
change have been attributed to the policy for energy transition or
‘Energiewende,’ including security of energy supply and industrial
policy (Lehmann and Gawel, 2013).
11531153
National and Sub-national Policies and Institutions
15
Chapter 15
In some federal systems, national target setting by the central govern-
ment is followed by further allocation of targets to provinces, often
through nationally specific formulae or processes. For example, in
the case of Belgium, Kyoto targets were re-allocated to the regional
level through a process of negotiation, followed by the preparation of
regional climate plans to implement regional targets (Happaerts etal.,
2011). Ultimately, since agreement could not be reached on regional
targets to meet the national Kyoto targets, the approach relied on off-
sets were explicitly internalized as part of the national approach to
meeting Kyoto targets. In China, national action is defined and moni-
tored by the central government in consultation with provinces, and
implementation is delegated to provinces. Targets set in the subse-
quent National Climate Change Programme as part of the 11th Five
Year Plan were implemented through a mechanism of provincial com-
muniqués to track compliance with the target, and provincial leading
groups to implement the target (Teng and Gu, 2007; Qi etal., 2008;
Tsang and Kolk, 2010b; Held etal., 2011a; Kostka and Hobbs, 2012). A
range of policy mechanisms were used to implement this target, such
as differential energy prices based on energy efficiency performance,
promotion of energy audits, and financial incentives for performance
(Held etal., 2011b). Subsequent revised targets have been set for the
12th Five Year Plan.
Other countries represent intermediate cases between central control
and decentralization. India has developed a mix of national policies
through its National Action Plan on Climate Change, responsibility
for which rests with central government ministries, and State Action
Plans on Climate Change to be developed and implemented by states
(Dubash etal., 2013). While they are predominantly focused on imple-
menting national level directives, there is also sufficient flexibility to
pursue state-level concerns, and some states have created new mecha-
nisms, such as the establishment of a Climate Change department in
the state of Gujarat, and the establishment of a green fund in Kerala
(Atteridge etal., 2012). In France, the EU objectives were adopted as
national goals, and through national legislation, all urban agglomera-
tions over 50,000 are required to prepare ‘Climate and Energy Territo-
rial Plans’ to meet these goals and, additionally, to address adaptation
needs (Assemblée Nationale, 2010).
Since all other planning processes
related to issues such as transport, building, urban planning, and energy
have to conform to and support these objectives, this approach pro-
vides a powerful mechanism to mainstream climate change into local
public planning. These plans also form a framework around which pri-
vate voluntary action can be organized. In Germany, while the federal
government initiates and leads climate action, the states or ‘Länder’
have a veto power against central initiatives through representation in
the upper house of parliament (Weidner and Mez, 2008). In addition,
however, the Länder may also take additional action in areas such as
energy efficiency measures, renewable energy development on state
property and even through state-wide targets (Biedermann, 2011).
In some cases, sub-national jurisdictions seem to be attempting to
compensate for the lack of political momentum at the national level
(Schreurs, 2008; Dubash, 2011). In the United States, for example,
although progress at the federal level has been slow and halting, there
have been multiple efforts at sub-national scales, through unilateral
and coordinated action by states, judicial intervention, and municipal-
mitigation is particularly important to winning broader political support
for action on mitigation (Dubash, 2011; Fisher, 2012). A similar trend is
apparent in China (Oberheitmann, 2008), where provincial implementa-
tion of targets is enabled by linking action to local motivations, notably
for energy efficiency (Teng and Gu, 2007; Richerzhagen and Scholz,
2008a; Qi etal., 2008; Tsang and Kolk, 2010b; Kostka and Hobbs, 2012).
Tsang and Kolk (2010a) go so far as to say that Chinese leaders essen-
tially equate climate policy with energy conservation. Kostka and Hobbs
(2012) identify three ways in which this alignment of global and local
objectives happens: interest bundling, through which objectives of
political institutions are tied to local economic interests; policy bun-
dling, to link climate change with issues of local political concern; and
framing in ways that play to local constituencies.
The concept of ‘nationally appropriate mitigation actions’ (NAMAs)
has a conceptual connection to the idea of co-benefits. Nationally
appropriate mitigation actions are intended to be mitigation actions
that are ‘nationally appropriate’ in the sense that they contribute to
development outcomes. Therefore, NAMAs provide a possible mech-
anism for connection of national policies and projects to the global
climate regime, although the mechanisms through which this will be
accomplished are yet to be fully articulated (see Box 15.1). Another,
related mechanism is the explicit formulation in many countries of ‘low
emissions development strategies’ that seek to integrate climate and
development strategies (Clapp etal., 2010).
15�2�5 Sub-national climate action and
interaction across levels of governance
In many countries, the formulation and implementation of national
mitigation approaches are further delegated to sub-national levels,
with differing levels of central coordination, depending on national
contexts and institutions. Comparative analysis of cross-country cli-
mate action is insufficiently developed to allow generalization and
explanation of different approaches to climate policy.
Box 15�1 | Nationally Appropriate Mitigation Actions (NAMAs)
The Bali Action Plan (BAP), (1 / CP.13; UNFCCC, 2007) states that
developing countries are called on to take NAMAs supported and
enabled by technology and finance. For example, NAMAs could be
articulated in terms of national emissions intensity or trajectories,
sectoral emissions, or specific actions at sectoral or sub-sectoral
levels. As of June 2013, 57 parties had submitted NAMAs to
the United Nations Framework Convention on Climate Change
(UNFCCC) secretariat.
The design of mechanisms to link NAMAs to global support lead
to some complex tradeoffs. For example, large scale sectoral
NAMAs provide the least scope for leakage (decreased emissions
in one sector is undermined by increased emissions in another
part of the economy) and the lowest measurement costs (Jung
etal., 2010). However, designing NAMAs around transaction
costs might run counter to designing them for targeted focus
on national development priorities. Exploring the extent of this
tradeoff and managing it carefully will be an important part of
implementing NAMAs.
Much of the writing on NAMAs is focused on the challenges of
linking national actions to the international climate framework.
Conceptual challenges involved in linking NAMAs to the UNFCCC
process include the legal nature of NAMAs (van Asselt etal.,
2010), financing of NAMAs, and associated concerns of avoid-
ing double counting (Cheng, 2010; Jung etal., 2010; van Asselt
etal., 2010; Sovacool, 2011a) and measurement, reporting, and
verification of NAMAs (Jung etal., 2010; Sterk, 2010; van Asselt
etal., 2010).
While NAMAs pertain particularly to the developing world, co-
benefits based arguments are also used in developed countries. In
the United States, Gore and Robinson (2009) argue that expansion
of municipal scale action is articulated in the form of co-benefits,
and is driven by network-based communication and citizen
initiative. In Germany, several benefits in addition to climate
change have been attributed to the policy for energy transition or
‘Energiewende,’ including security of energy supply and industrial
policy (Lehmann and Gawel, 2013).
11541154
National and Sub-national Policies and Institutions
15
Chapter 15
scale action (Carlarne, 2008; Rabe, 2009, 2010; Posner, 2010). There
are examples of states joining together in creating new institutional
mechanisms, such as the Regional Greenhouse Gas Initiative (RGGI)
among Northeastern states in the United States to institute an emis-
sions trading programme, and the Western Climate Initiative (WCI)
between California and several Canadian provinces, although both
these initiatives have also failed to live up to their original promise
(Mehling and Frenkil, 2013). Climate policy in the state of California,
with its new cap and trade programme, is particularly worth noting
both because of the size of its economy and because California has a
history as a pioneer of environmental innovation (Mazmanian etal.,
2008; Farrell and Hanemann, 2009).
As detailed further in Section 15.8, cities are particularly vibrant sites
of sub-national action in some countries, often operating in networks
and involving a range of actors at multiple scales (Betsill and Bulkeley,
2006; Gore and Robinson, 2009). For example, in the Netherlands, the
central government has established a programme that provides subsi-
dies to municipalities to undertake various measures such as improve-
ments in municipal buildings and housing, improved traffic flow, sus-
tainable energy, and so on (Gupta et al., 2007). In Brazil, important
cities such as Rio de Janeiro and São Paulo have taken specific mea-
sures that go beyond national policies. For example, a 2009 São Paulo
law (No. 13.798) commits the state to undertake mandatory economy-
wide GHG emission reduction targets of 20 % by 2020 from 2005 lev-
els (Lucon and Goldemberg, 2010). In the United States, over 1000 cit-
ies and municipalities have committed to reaching what would have
been the US Kyoto target as part of the Conference of Mayors’ Climate
Protection Agreement (Mehling and Frenkil, 2013).
Sub-national action on climate change is a mix of bottom-up experi-
mentation and the interaction of top-down guidance with local imple-
mentation action. In some cases, countries have set in place explicit
mechanisms for coordination of national and sub-national action, such
as in China and India, but there is insufficient evidence to assess the
effectiveness of these mechanisms. More typical is relatively uncoor-
dinated action and experimentation at sub-national level, particularly
focused on cities. These issues are discussed further in Section 15.8.
15�2�6 Drivers of national and sub-national
climate action
National and sub-national actions are related to domestic political
institutions, domestic politics, international influences, and ideational
factors. Based on data from industrialized countries, a comparative
political analysis suggests that proportional representation systems
such as those in many EU nations are more likely than first past the
post systems to give importance to minority interests on environmen-
tal outcomes; systems with multiple veto points, such as the US system,
afford more opportunities for opponents to block political action; and
in federal systems powerful provinces with high compliance costs can
block action, as seems to have occurred in Canada (Harrison and Sund-
strom, 2010). Lachapelle and Paterson (2013) use quantitative analysis
to substantiate the argument about proportional representation and
systems with multiple veto points. They also show that presidential-
congressional systems find it systematically more difficult to develop
climate policy than parliamentary systems.
These are, however, only general tendencies: the specific details of
country cases, as well as the possibility of multiple and interacting
causal factors, suggests the need for caution in predicting outcomes
based on these factors.
In particular, national domestic political factors are also salient. Elec-
toral politics, operating through pressure for action from domestic
constituents, is a determinant of action as is the cost of compliance
(Harrison and Sundstrom, 2010). The role of climate change in elec-
toral strategies developed by political parties may also play a role
in climate governance, although evidence for this effect is available
only for developed countries (Carter, 2008; Fielding etal., 2012; Bai-
ley and Compston, 2012a). For example, the compliance costs of car-
bon pricing were the subject of direct electoral competition between
Australia’s major political parties in the 2007 and 2010 general elec-
tions (Rootes, 2011; Bailey et al., 2012). The presence of substantial
co-benefits opportunities and re-framing policy around these oppor-
tunities can also influence domestic politics in favour of climate action
(Held etal., 2013b); (Bailey and Compston, 2012a). Finally, the ‘type’
of state — liberal market, corporatist or developmental — can shape
outcomes (Lachapelle and Paterson, 2013). For example, somewhat
counter-intuitively corporatist states (e. g., Germany, South Korea) are
more likely to have introduced carbon pricing than states with liberal
market policy traditions (e. g., the United States, Canada). Conversely,
liberal market economies are more likely, as are developmental states
(e. g., China), to focus on R&D as a principal policy tool (on the United
States, see notably Macneil (2012). These patterns reflect powerful
institutional path dependencies and incentives facing actors promot-
ing climate policy in particular countries (Macneil, 2012).
International pressures are also important in explaining state action.
Diplomatic pressure, changes in public and private finance that empha-
size mainstreaming climate change, and a general trend toward higher
fossil-fuel energy prices all are associated with increasing climate
action (Held etal., 2013b).
Finally, based on comparative case studies, various ideational factors
such as national norms around multilateralism, perceptions of equity
in the global climate regime (Harrison and Sundstrom, 2010), and
ideas put forward by scientists, international organizations and other
voices of authority can also shift domestic politics (Held etal., 2013b).
15�2�7 Summary of institutions and governance
The evidence on institutional change and new patterns of climate gov-
ernance is limited, as many countries are in the process of establishing
11551155
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new institutions and systems of governance. However, several trends
are visible. First, there is a considerable increase in government led
institutionalization of climate action through both legislation and pol-
icy since AR4. The factors driving these changes include international
pressures, scope for co-benefits, and changing norms and ideas. The
specifics of national political systems also affect country actions. Sec-
ond, evidence from national cases illustrates considerable diversity in
the forms of action. While there are only a few cases of nationally led
economy wide carbon price setting efforts, more common are sectoral
approaches to climate change mitigation or delegated action to sub-
national levels, often embedded within national climate policy frame-
works. Third, the promise of ‘co-benefits’ is often an important stated
reason for climate policies and their framing. Fourth, there is a profu-
sion of activity at sub-national levels, particularly urban areas, much
of which is only loosely coordinated with national actions. Finally, the
diversity of approaches appears to be strongly driven by local institu-
tional and political context, with legislative and policy measures tai-
lored to operate within the constraints of national political and insti-
tutional systems.
15.3 Characteristics and
classification of policy
instruments and packages
This section presents a brief and non-exhaustive description of the
main policy instruments and packages, using the common classifica-
tion set by Chapter 3.8. Most of these instruments will be assessed
with the common evaluation criteria set by Chapter 3 (see Section
15.5) in most of the remaining parts of this chapter. As indicated in
Section 15.2, these instruments are introduced within an institutional
context that obviously influences their design and implementation.
15�3�1 Economic instruments
Economic instruments are sometimes termed ‘market-based’ approaches
because prices are employed in environmental and climate policies. Eco-
nomic instruments for climate change mitigation include taxes (includ-
ing charges and border adjustments), subsidies and subsidy removal,
and emissions trading schemes. Taxes and subsidies are known as price
instruments since they do not directly target quantities, while emis-
sions trading schemes, especially cap-and-trade schemes (see below),
are known as quantity instruments. This distinction can be important, as
seen in Sections 15.5.3.8, 15.7.3.2, and 15.7.3.4.
Taxes and charges are ideally defined as a payment for each unit of
GHG released into the atmosphere. In the climate context, they are
usually unrelated to the provision of a service and are thus known as
taxes rather than charges. They can be levied on different tax bases,
whereas tax rates, given the global and uniform characteristics of the
taxed emissions, usually do not show spatial variation (OECD, 2001).
In the last years, many taxes on GHG or energy have devoted part of
their revenues to the reduction of other distortionary taxes (green tax
reforms), although other revenue uses are now playing an increasing
role (Ekins and Speck, 2011).
Border tax adjustments are related instruments that intend to solve the
dysfunctions of variable climate change regulations across the world.
Although some authors highlight that they could alleviate the problem
of leakage and a contribute to a wider application of mitigation policies
(Ismer and Neuhoff, 2007), others emphasize that they do not consti-
tute optimal policy instruments and could even increase leakage (Jakob
etal., 2013) or cause potential threats to fairness and to the function-
ing of the global trade system (e. g., Bhagwati and Mavroidis, 2007).
Subsidies to low GHG products or technologies have been applied by a
number of countries but, contrary to the previous revenue-raising / neu-
tral economic instruments, they demand public funds. In some coun-
tries there are ‘perverse’ subsidies lowering the prices of fossil fuels
or road transport, which bring about a higher use of energy and an
increase of GHG emissions. Therefore, subsidy reduction or removal
would have positive effects in climate change and public-revenue
terms and is therefore treated as an instrument in its own right (OECD,
2008).
In ‘cap-and-trade’ emissions trading systems regulators establish an
overall target of emissions and issue an equivalent number of emis-
sions permits. Permits are subsequently allocated among polluters and
trade leads to a market price. The allocation of emission permits can
be done through free distribution (e. g., grandfathering) or through
auctioning. In ‘baseline and credit’ emissions trading systems, polluters
may create emission reduction credits (often project-based) by emit-
ting below a baseline level of emissions (Stavins, 2003).
15�3�2 Regulatory approaches
Regulations and standards were the core of the first environmental
policies and are still very important in environmental and climate poli-
cies all around the world. They are conventional regulatory approaches
that establish a rule and / or objective that must be fulfilled by the pol-
luters who would face a penalty in case of non-compliance with the
norm. There are several categories of standards that are applicable to
climate policies, mainly:
• Emission standards, which are the maximum allowable discharges
of pollutants into the environment, and which can also be termed
as performance standards;
• Technology standards that mandate specific pollution abatement
technologies or production methods (IPCC, 2007); and
• Product standards that define the characteristics of potentially pol-
luting products (Gabel, 2000).
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15�3�3 Information policies
A typical market failure in the environmental domain is the lack, or
at least asymmetric nature, of relevant information among some
firms and consumers. Good quality information is essential for rais-
ing public awareness and concern about climate change, identify-
ing environmental challenges, better designing and monitoring the
impacts of environmental policies, and providing relevant informa-
tion to inform consumption and production decisions. Examples
of information instruments include eco-labelling or certification
schemes for products or technologies and collection and disclosure
of data on GHG emissions by significant polluters (Krarup and Rus-
sell, 2005).
15�3�4 Government provision of public goods
and services and procurement
A changing climate will typically be a ‘public bad’ and actions and
programmes by governments to counteract or prevent climate
change can thus be seen as ‘public goods’. There are many examples
where public good provision may be an appropriate form of miti-
gation or adaptation. Examples include physical and infrastructure
planning, provision of district heating or public transportation ser-
vices (Grazi and van den Bergh, 2008), and funding and provision
of research activities (Metz, 2010). Moreover, the removal of insti-
tutional and legal barriers that promote GHG emissions (or preclude
mitigation) should be included in this policy type. Afforestation pro-
grammes and conservation of state-owned forests are an important
example.
15�3�5 Voluntary actions
Voluntary actions refer to actions taken by firms, NGOs, and other
actors beyond regulatory requirement. Voluntary agreements repre-
sent an evolution from traditional mandatory approaches based on
conventional or economic regulations and intend to provide further
flexibility to polluters. They are based on the idea that, under certain
conditions, polluters can decide collectively to commit themselves to
abatement instead of, or beyond the requirements of regulation. Vol-
untary agreements, sometimes known as long-term agreements, can
be developed in different ways; in most cases the voluntary commit-
ment is assumed as a consequence of an explicit negotiation process
between the regulator and the pollutant. In other cases a spontane-
ous commitment may be viewed as a way to avoid future mandatory
alternatives from the regulator (Metz, 2010). Finally, there are cases
where the regulator promotes standard environmental agreements
on the basis of estimation of costs and benefits to firms (Croci,
2005).
15.4 Approaches and tools
used to evaluate policies
and institutions
15�4�1 Evaluation criteria
Several criteria have been usually employed to assess the effects of cli-
mate change policies and these have been laid out in Section 3.7. The
criteria that have been used are environmental effectiveness, economic
effectiveness (cost-effectiveness and economic efficiency), distribu-
tional equity and broader social impacts, and institutional, political,
and administrative feasibility and flexibility. Political and institutional
feasibility are not only a separate criterion, but also need to be taken
into account when judging other criteria such as economic effective-
ness. It would be misleading to show that a tax would have been more
cost-effective than, for example, a regulation if it would never have
been feasible to implement the tax at a sufficiently high level to have
the same effect as that regulation.
15�4�2 Approaches to evaluation
One can evaluate the effect of policy instrument x on a set of vari-
ables y that matter for the evaluation criteria either through model-
ling or through ex-post empirical measurement. For any evaluation
based solely on modelling, it will never be possible to know whether
all important aspects of the relationship between x and the y’s are cap-
tured appropriately by the model. For this reason, it is highly desirable
to have ex-post empirical analysis to evaluate a policy instrument. In
order to measure the effect of a policy instrument, one must compare
the observed y’s in the presence of x with the ‘but-for’ or ‘counterfac-
tual’ value of the y’s defined as their estimated likely value but for the
implementation of x.
Statistical methods can be used to attempt to control for the evolution
of the world in the absence of the policy. The most reliable basis for
estimating counterfactual developments is to build programme evalu-
ation into the design of programmes from their inception (Jaffe, 2002).
If the planning of such evaluation is undertaken at the beginning of a
programme, then data can be developed and maintained that greatly
increase the power of statistical methods to quantify the true impact
of a programme by controlling for but-for developments.
Statistical analyses capture only those policy effects that can be and have
been measured quantitatively. Qualitative analyses and case studies
complement statistical analyses by capturing the effects of policies and
institutions on other aspects of the system, and the effect of institutional,
social and political factors on policy success (e. g., Bailey etal., 2012).
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Of course, data for ex-post evaluation is not always available, and even
where it is, it is very challenging to capture all aspects of the situation
empirically. Therefore, there will always be a role for models to eluci-
date the structure of policy effects, and to estimate or put bounds on
the magnitude of effects. Such models can be purely analytical / theo-
retical, or they can combine empirical estimates of certain parameters
with a model structure, as in ‘bottom-up’ models where many small
effects are estimated and cumulated, or in simulation models, which
combine an analytical / theoretical structure with numerical estimates
of parameters of the model. Many such models are ‘partial equilib-
rium,’ meaning they capture the particular context of interest but
ignore impacts on and feedback from the larger system. There are also
computable ‘general equilibrium’ (CGE) models that allow for interac-
tions between the context of the policy focus and the larger system,
including overall macroeconomic impacts and feedbacks see for exam-
ple, Bohringer etal., (2006).
‘Experimental economics’ uses a laboratory setting as a ‘model’ of a
real-world process, and uses ‘experimental subjects’ responses in that
setting as an indicator of likely real-world behaviour (Kotani et al.,
2011). With any model, results are truly predictive of real-world results
only to the extent that the model — be it theoretical, simulation or
experimental — captures adequately the key aspects of the real world
in the experiment.
15.5 Assessment of the
performance of policies
and measures, including
their policy design, in
developed and developing
countries taking into
account development
level and capacity
15�5�1 Overview of policy implementation
In this section we assess the performance of a series of policy instru-
ments and measures, starting with economic instruments (taxes in
15.5.2, emissions trading in 15.5.3), regulatory approaches (15.5.4),
information programmes (15.5.5), government provision of public
goods (15.5.6) and voluntary agreements (15.5.7). We assess aspects
of these and other policies in Section 15.6 on technology and R&D pol-
icy, and in Section 15.7 that deals with interactions between policies.
Many policy instruments are in principle capable of covering the entire
economy. However, as mentioned in Section 15.2, in practice the instru-
ments are often targeted to particular sectors or industries. This partly
reflects the fact that certain barriers or market failures are specific to
or more pronounced in certain sectors or industries. Furthermore, some
policies may cover only part of the economy as a result of the ability
of special interests to exempt some sectors or industries (Compston,
2009), (Helm, 2010).
Broader coverage tends to promote greater cost-effectiveness. How-
ever, on fairness grounds there is an argument for partly or fully
exempting certain industries in order to maintain international com-
petitiveness, particularly when the threat to competitiveness comes
from other nations that have not introduced climate policy and would
gain competitive advantage as a result.
Table 15.2 brings together policy instruments discussed in sector
chapters (Chapters 7 to 12). Two broad themes emerge from this sur-
vey. First, while policies that target broad energy prices — taxes or
tradable allowances are clearly applicable across all sectors — a wide
range of other policy approaches are also prevalent, which enable
policy design that addresses sector specific attributes. For example,
in the buildings sector regulatory instruments are an important tool.
In the absence of a building code enforcing enhanced efficiency, an
energy price signal alone might be insufficient to induce a builder to
invest in an energy efficient building that they plan to sell or rent.
Building and product standards also increase investor certainty
thereby reducing costs. Similarly, the transport sector relies not only
on pricing policies but also on government provision of infrastructure
and regulation that guides urban development and modal choices.
The industry sector faces information and other barriers to investment
in efficiency, which can be overcome by audits and other informa-
tion based programmes. In Agriculture, Forestry, and Other Land Use
(AFOLU), government regulation to protect forests and set the condi-
tions for REDD+ (Reducing Emissions From Deforestation and Forest
Degradation) plays a substantial role, as do certification programmes
for sustainable forestry.
Sector-specific policies often exist alongside broader ones. In energy
supply, broad-based GHG emissions pricing has often been supple-
mented by specific price- and quantity-based mechanisms (such as
feed-in-tariffs (FITs) and portfolio standards) and underpinned by
sufficient regulatory stability (including non-discriminatory access to
electricity and gas networks). In industry, relatively broad tax exemp-
tions may be combined with mandatory audits, with the former help-
ing ‘level the playing field’ and providing the impetus for action, and
the latter addressing an information barrier; thus each instrument
addresses a separate market failure or barrier. The implementation
of multiple policy instruments within a single sector can promote
cost-effectiveness when the two instruments address distinct market
failures. On the other hand, multiple instruments can work against
cost-effectiveness when the two instruments fail to address different
market failures and thus are simply redundant. This issue is discussed
further in Section 15.7 below.
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Table 15�2 | Sector Policy Instruments.
Policy Instruments Energy (See 7�12) Transport (See 8�10) Buildings (See 9�10) Industry (See 10�11) AFOLU (See 11�10)
Human Settlements
and Infrastructure
(See 12�5)
Economic
Instruments — Taxes
(Carbon taxes may be
economy-wide)
•Carbon taxes •Fuel taxes
•Congestion charges,
vehicle registration
fees, road tolls
•Vehicle taxes
•Carbon and / or energy
taxes (either sectoral
or economy wide)
• Carbon tax or energy
tax
•Waste disposal taxes
or charges
•Fertilizer or Nitrogen
taxes to reduce nitrous
oxide
•Sprawl taxes, impact
fees, exactions,
split-rate property
taxes, tax increment
finance, betterment
taxes, congestion
charges
Economic
Instruments — Tradable
Allowances
(May be economy-wide)
•Emissions trading (e. g.,
EU ETS)
•Emission credits under
the Kyoto Protocol’s
Clean Development
Mechanism (CDM)
•Tradable Green
Certificates
•Fuel and vehicle
standards
•Tradable certificates
for energy efficiency
improvements (white
certificates)
•Emissions trading
•Emission credits under
CDM
•Tradable Green
Certificates
•Emission credits under
CDM
•Compliance schemes
outside Kyoto protocol
(national schemes)
•Voluntary carbon
markets
•Urban-scale Cap
and Trade
Economic
Instruments — Subsidies
•Fossil fuel subsidy
removal
•Feed-in-tariffs for
renewable energy
•Capital subsidies
and insurance for 1
st
generation Carbon
Dioxide Capture and
Storage (CCS)
•Biofuel subsidies
•Vehicle purchase
subsidies
•Feebates
•Subsidies or tax
exemptions for
investment in efficient
buildings, retrofits and
products
•Subsidized loans
•Subsidies (e. g., for
energy audits)
•Fiscal incentives (e. g.,
for fuel switching)
•Credit lines for low
carbon agriculture,
sustainable forestry.
•Special Improvement
or Redevelopment
Districts
Regulatory Approaches
•Efficiency or
environmental
performance standards
•Renewable Portfolio
Standards for
renewable energy
•Equitable access to
electricity grid
•Legal status of long-
term CO
2
storage
•Fuel economy
performance standards
•Fuel quality standards
•GHG emission
performance standards
•Regulatory restrictions
to encourage modal
shifts (road to rail)
•Restriction on use
of vehicles in certain
areas
•Environmental capacity
constraints on airports
•Urban planning and
zoning restrictions
•Building codes and
standards
•Equipment and
appliance standards
•Mandates for energy
retailers to assist
customers invest in
energy efficiency
•Energy efficiency
standards for
equipment
• Energy management
systems (also
voluntary)
•Voluntary agreements
(where bound by
regulation)
•Labelling and
public procurement
regulations
•National policies
to support REDD+
including monitoring,
reporting and
verification
•Forest law to reduce
deforestation
•Air and water pollution
control GHG precursors
•Land-use planning and
governance
•Mixed use zoning
•Development
restrictions
•Affordable housing
mandates
•Site access controls
•Transfer
development rights
•Design codes
•Building codes
•Street codes
•Design standards
Information
Programmes
•Fuel labelling
•Vehicle efficiency
labelling
•Energy audits
•Labelling programmes
•Energy advice
programmes
•Energy audits
•Benchmarking
•Brokerage for industrial
cooperation
•Certification schemes
for sustainable forest
practices
•Information policies
to support REDD+
including monitoring,
reporting and
verification
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Policy Instruments Energy (See 7�12) Transport (See 8�10) Buildings (See 9�10) Industry (See 10�11) AFOLU (See 11�10)
Human Settlements
and Infrastructure
(See 12�5)
Government Provision
of Public Goods or
Services
•Research and
development
•Infrastructure
expansion (district
heating / cooling or
common carrier)
•Investment in transit
and human powered
transport
•Investment in
alternative fuel
infrastructure
•Low emission vehicle
procurement
•Public procurement of
efficient buildings and
appliances
•Training and education
•Brokerage for industrial
cooperation
•Protection of national,
state, and local forests.
•Investment in
improvement and
diffusion of innovative
technologies in
agriculture and forestry
•Provision of utility
infrastructure
such as electricity
distribution, district
heating / cooling
and wastewater
connections, etc.
•Park improvements
•Trail improvements
•Urban rail
Voluntary Actions
•Labelling programmes
for efficient buildings
•Product eco-labelling
•Voluntary agreements
on energy targets or
adoption of energy
management systems,
or resource efficiency
•Promotion of
sustainability by
developing standards
and educational
campaigns
15�5�2 Taxes, charges, and subsidy removal
15�5�2�1 Overview
Taxes on carbon (together with emissions trading systems) are eco-
nomic instruments. In the presence of rational consumers, firms, and
complete markets, they achieve any given level of emissions reduc-
tion in the least costly way possible. Economic instruments like carbon
taxes are attractive because of their simplicity and broad scope cover-
ing all technologies and fuels (Section 3.8) and thus evoking the cost-
minimizing combination of changes to inputs in production and tech-
nologies to changing behaviour as manifested in consumption choices
and lifestyles. This is the reason they have the potential to be more effi-
cient than directly regulating technology, products, or behaviour.
1
To
minimize administrative costs, a carbon tax can be levied ‘upstream’
(at the points of production or entry into the country). Finally, unlike an
emissions trading system that requires new administrative machinery,
a tax can piggyback off existing revenue collection systems.
Despite these attractive properties, carbon taxes are not nearly as
prevalent a policy instrument as one might expect. As yet, the Scandi-
navian countries, the Netherlands, the UK, and the Canadian province
of British Columbia are the only large jurisdictions with significant and
fairly general carbon taxes of at least USD 10 / tCO
2
.
2
The reasons for
this are not entirely clear. It may be that a carbon tax, unlike a nar-
rower sectoral regulation, attracts more hostile lobbying from fossil
1
If psychological or institutional barriers to adoption or other market failures are
the main factor impeding choice then regulations or other instruments may be
an efficient complement or stand-alone instrument to deal with this (see Section
15.4).
2
Australia has a fixed fee hybrid system sometimes described as a tax that will be
converted into an ETS.
fuel interests
3
for whom the stakes it creates are high (Hunter and Nel-
son, 1989; Potters and Sloof, 1996; Goel and Nelson, 1999; Godal and
Holtsmark, 2001; Skjærseth and Skodvin, 2001; Kolk and Levy, 2002;
van den Hove etal., 2002b; McCright and Dunlap, 2003; Markussen
and Svendsen, 2005; Pearce, 2006; Beuermann and Santarius, 2006;
Deroubaix and Lévèque, 2006; Pinkse and Kolk, 2007; Bridgman etal.,
2007; Bjertnæs and Fæhn, 2008; Blackman etal., 2010; Sterner and
Coria, 2012). Secondly, the payments required by a tax are transparent,
unlike the less visible costs of regulations. The general public, not being
aware of the above-mentioned efficiency properties of a tax, may be
less likely to accept such an instrument (Brännlund and Persson, 2010).
Third, policy may be driven by perceived risks to competitiveness and
employment as well as the distribution of costs rather than on consid-
erations of pure efficiency (Decker and Wohar, 2007). Finally, a set of
institutional path dependencies may have led to a favouring of emis-
sions trading systems over taxes, including a post-Kyoto preference
for emissions trading in key bureaucracies, supported by creation of
supportive industry and other associations (Skjærseth and Wettestad,
2008; Paterson, 2012).
Countries that have sizeable general carbon taxes are fewer
still — mainly a few Northern European countries. The carbon tax in
Sweden is 1100 SEK or USD165 / tCO
2
, which is an order of magnitude
higher than the price of permits on the EU emissions trading scheme
(ETS) market or than the carbon taxes discussed in many other coun-
tries. Such high taxes typically have some exemptions motivated by
the fact that other (competing) countries have no (or low) taxes. Swe-
den, for example, exempted the large energy users who participate in
the EU ETS from also paying the carbon tax on the grounds that there
would otherwise be a form of ‘double’ taxation (See 15.5.2.4 for a
more thorough discussion).
3
These can be either producers (for instance of fossil fuels) or users of energy, rang-
ing from energy intensive industries to truck drivers.
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Although general carbon taxes are so far uncommon, there are many
policies that have similar effects but (for political reasons) avoid using
the words ‘carbon’ and / or ‘tax’, (Rabe and Borick, 2012). Taxes on fuels,
especially transport fuels are very common. While narrower in scope,
they nevertheless cover a significant fraction of emissions in many
countries. They can be interpreted as sectoral carbon taxes; in some
countries this is clearly stated as an objective of fuel taxes, in others it
is not. Fuel taxes may be politically easier to implement in some coun-
tries since (private) transport is hardly subject to international competi-
tion and hence leakage rates are low. A large share of all revenues
from environmentally related taxes in fact come from fuel taxes, which
were introduced in various countries, beginning with Europe and Japan,
though they are also common in low income, oil-importing countries.
One of their main stated purposes is to finance road building, although
additional arguments include reducing expensive imports, government
revenue raising, and reducing environmental impacts. Irrespective of
the motivation, the effect of carbon taxes on fuel is to raise prices to
consumers and restrict demand (see Section 15.5.2.2). Fuel taxes are
important for climate change mitigation since the transport sector
represents a large and increasing share of carbon emissions (27 % of
global energy-related CO
2
emissions in 2010 — see Section 8.1). Theory,
simulation, and empirical studies all suggest strongly that taxing fuel is
a lower cost method of reducing emissions compared to policies such
as fuel efficiency mandates, driving restrictions, or subsidies to new
technologies
4
(Austin and Dinan, 2005). However, consumers who buy
vehicles may be unable to correctly internalize the long-run savings of
more fuel-efficient vehicles. This would be considered a ‘barrier’ and
would provide motivation for having fuel efficiency standards in addi-
tion to fuel taxes (see Section 15.5.4).
Variation in fuel prices is generated by subsidies as well as taxes. Fossil
fuel subsidies are prevalent in many countries, being most common
in oil and coal producing countries. According to the International
Monetary Fund (IMF) (2013), the Middle East and North Africa region
accounts for around 50 % of global energy subsidies. In 2008, fossil
fuel subsidies — for transport fuels, electricity, tax breaks for oil and
gas production, and for research and development into coal genera-
tion, exceeded USD
2010
489.1 billion globally (IEA / OECD, 2011). A more
recent estimate by the IMF (2013) puts the figure at USD
2010
469.5 bil-
lion or 0.7 % of global GDP in 2011. This is a pre-tax estimate and
includes petroleum products, electricity, natural gas, and coal. A large
share is in the fossil fuel exporting countries. After factoring in nega-
tive externalities, through corrective taxes, the IMF reports USD
2010
1.85 trillion in implicit subsidies. This figure assumes damages corre-
sponding to a USD 25 / t social cost on carbon, consistent with United
States Interagency Working Group on Social Cost of Carbon (2010).
‘Advanced economies’ make up 40 % of the global post-tax estimate.
Reviewing six major studies that estimate fossil fuel subsidies, Ellis
(2010) notes that removal of such subsidies would increase the aggre-
gate GDP in OECD and non-OECD countries in the “range from 0.1 per
4
See also Section 15.12 on climate finance.
cent in total by 2010 to 0.7 per cent per year to 2050 (Ellis, 2010).” The
studies reviewed include both modelling and empirical exercises.
15�5�2�2 Environmental effectiveness and efficiency
Assessing the environmental effectiveness of carbon taxation is not
straightforward because multiple instruments and many other factors
co-evolve in each country to produce policy mixes with different out-
comes in terms of emissions. For example, energy taxes varying by sec-
tor have been prominent in the Nordic countries since the 1970s with
carbon taxes being added on in the early 1990s. Ex-post analyses have
found varying reductions in CO
2
emission from carbon taxes in Nor-
way, Sweden, Denmark, and Iceland, compared to business-as-usual
(see Andersen (2004) for an extensive review of these studies and their
estimation techniques).
The UK’s Climate Change Levy (CCL), introduced in 2001 on manufac-
turing plants and non-residential energy users (offices, supermarkets,
public buildings, etc.), has had a strong impact on energy intensity
(Martin et al., 2011). Electricity use, taxed at a rate of about 10 %,
declined by over 22 % at plants subject to the levy as compared to
plants that were eligible to opt out by entering into a voluntary agree-
ment to reduce energy use. There was no evidence that the tax had any
detrimental effect on economic performance or led plants to exit from
the industry (Martin etal., 2011).
From 1990 to 2007, the CO
2
equivalent emissions in Sweden were
reduced by 9 % while the country experienced an economic growth of
+51 %. In Sweden, with the highest carbon tax (albeit with exemptions
for some industrial sectors), there was a very strong decoupling of car-
bon emissions and growth with reductions in carbon intensity of GDP
of 40 % (Johansson, 2000; Hammar etal., 2013). Per capita emissions
in Denmark were reduced by 15 % from 1990 to 2005; the experience
in Scandinavia, the UK, and the Netherlands was similar (Enevoldsen,
2005; Enevoldsen etal., 2007), (Bruvoll and Larsen, 2004), (Cambridge
Econometrics, 2005), (Berkhout etal., 2004; Sumner etal., 2011; Lin
and Li, 2011). Of course, many factors may be at play, and these dif-
ferences cannot be attributed solely to differences in taxation. Overall,
the evidence does suggest that carbon taxes, as part of an environ-
mental tax reform, lead to abatement of GHG emissions, generate rev-
enue for the government, and allow reductions in income tax threaten-
ing employment. Theory strongly suggests that if a tax is implemented
then it would also be cost effective, but it is for natural reasons hard to
demonstrate this empirically at the macro level.
There is much more evidence available on the environmental efficacy
of fuel as compared to carbon taxation. In the short run, consumers
may be locked into patterns of use by habit, culture, vehicle charac-
teristics, urban infrastructure, and architecture. The short-run response
to higher fuel prices is indeed often small — price elasticity estimates
range between – 0.1 to – 0.25 for the first year. However long-run price
elasticities are quite high: approximately – 0.7 or a range of – 0.6 to
11611161
National and Sub-national Policies and Institutions
15
Chapter 15
– 0.8. This range is the average found by surveys of hundreds of stud-
ies that use both market based variations in fuel price as well as pol-
icy induced variations and exploit both temporal and cross-sectional
variations in the data; the individual study estimates range substan-
tially more depending on countries or regions covered, time period,
method and other factors (Oum, 1989; Goodwin, 1992; Graham and
Glaister, 2002; Goodwin etal., 2004). In the long run, therefore, 10 %
higher fuel prices will ultimately lead to roughly a 7 % reduction in fuel
use and emissions. Income elasticities are about 1, which means that
5 % growth in income gives 5 % growth in emissions. If instead a 2 %
reduction is desired there is a 7 % gap between the 5 % increase and
the – 2 % desired and a 10 % increase in fuel price every year would be
needed to achieve such a reduction in emissions with a 5 % growth in
income.
The long-run effects of transport fuel taxation have been large. Sterner
(2007) shows that in Europe, where fuel taxes have been the high-
est, they have contributed to reductions in CO
2
emissions from trans-
port by 50 % for this group of countries. The whole Organisation for
Economic Co-operation and Development (OECD) would have had
30 % higher fuel use had not the European Union and some other
members imposed high fuel taxes (i. e., if all the OECD countries had
instead chosen as low fuel taxes as in the United States). Similarly, the
OECD could have decreased fuel use by more than 35 % if all member
countries would have chosen as high taxes as the United Kingdom.
The accumulated difference in emissions over the years leads to a dif-
ference in several ppm in CO
2
concentration, presumably making fuel
taxes the policy that has had the largest actual impact on the climate
up till now (Sterner, 2007).
The environmental effect of a fuel tax is illustrated in Figure 15.2,
where the fitted curve is from a log-linear regression of the emission
intensity of liquid fuels on the price of diesel. The cross-country varia-
tion in diesel prices is mostly due to variation in taxes (and in some
cases, subsidies). Figure 15.2 suggests that the effect of a change in
the price of a fuel on emissions is greater at low prices. This is intuitive,
since fuel will be consumed wastefully when it is cheap, allowing for
greater demand reductions when the price rises.
Though there are few clean experiments, the market continuously cre-
ates ‘quasi-experiments’ which are analogous to the introduction of
policies. Increased fuel prices in the USA in 2008, for instance, led to
a shift in the composition of vehicles sold, increasing fuel-efficiency,
while also reducing miles travelled (Ramey and Vine, 2010; Aldy and
Stavins, 2012).
Other price instruments that have been used in the transport sector are
congestion charges, area pricing, parking fees, and tolls on roads or
in cities. These have been used to reduce congestion; emission reduc-
tion is a co-benefit. The USD
2010
15.4 congestion fee in London led to
reductions in incoming private cars by 34 % when introduced. Over-
all congestion was also estimated to have been reduced by 30 %, and
emissions fell (Leape, 2006). The smaller (USD
2010
2.6) congestion fee in
Stockholm reduced total road usage by 15 % (Johansson etal., 2009).
Reducing subsidies to fossil energy will have a significant impact on
emissions. Removing them could reduce world GHG emissions by 10 %
at negative social cost by 2050 (Burniaux and Chateau, 2011).The IMF
calculates that the removal of these subsidies induce a 15 % reduction
in global energy related carbon emissions or 5 billion tCO
2
in absolute
terms and concludes that the post-tax estimate of USD
2010
1.85 tril-
lion in subsidies is ‘likely to underestimate’ energy subsidies due to the
assumptions made, hence the impact on carbon emissions is likely to
be higher. Ellis (2010) reports a range of effects from just a few percent
to 18 % by 2050 depending on the size of the subsidy reduction.
Recognizing the potential impact of a reduction in subsidies to fossil
fuels, the G20 and APEC blocks agreed in 2009 to phase out inefficient
fossil fuel subsidies in all countries (G20 Leaders, 2009).
In China, the energy saving policies adopted in 1991, the 1998 Law
on Energy Conservation, and the 2004 Medium and Long Term Spe-
cific Schema on Energy Saving, led to higher energy prices and explain
half the decline in energy intensity of Chinese industries between 1997
and 1999, while R&D accounted for only 17 % of the decline (Fisher-
Vanden etal., 2006; Yuan etal., 2009).
15�5�2�3 Distributional incidence and feasibility
Although fuel taxes have often been criticized for being regressive
(that is, for imposing a proportionally higher burden on the poor),
this is not always the case. There are large variations in distributional
impacts both within and between social groups the effects range from
regressive or progressive (Rausch etal., 2010, 2011); see also 6.3.5.2.
Studies of the distributional incidence of fuel taxes show that they
may be neutral or weakly regressive (before revenue recycling) in rich
countries, but they are generally progressive in poor countries. In many
Figure 15�2 | The impact of average diesel prices across the world on the emissions
intensity of liquid fuels.
Diesel Price [USD
2010
/l]
Liquid Fuel Emissions Intensity [kgCO
2
eq/Hundred USD
2010
of GDP]
Diesel Price [USD
2010
/l]
Diesel Price [USD
2010
/l]
Area of Circle Proportional to
Country's Total Emissions
0
1
2
3
4
0 50 100 150 200 250
11621162
National and Sub-national Policies and Institutions
15
Chapter 15
least developed and developing countries such as India, Indonesia,
China, and many African countries, the progressivity of fuel taxes is
in fact quite strong. In Europe they are approximately neutral (Sterner,
2012). Carbontaxation can sometimes have regressive effects prior to
recycling revenue, but recycling can make the poorest households bet-
ter off. Generally, the degree of progressivity can be selected depend-
ing on the method of recycling revenues. The environmental taxation
gives rise to government income that can be allocated in ways that
either benefit the poor or any other group giving a considerable range
of options for how progressive or regressive the politicians want to
make the overall package (Bureau, 2011).
The distributional effects of other taxes vary significantly. Kerosene
taxes in developing countries are regressive since kerosene is used
predominantly by the poor (Younger etal., 1999; Gangopadhyay etal.,
2005; Datta, 2010). This regressivity may also apply to taxes on elec-
tricity or coal. The distributional effects of a more general carbon tax
will depend on the mode of implementation with respect to different
fuels and sectors and typically be more complex than for a single fuel,
since the potential substitution possibilities are many. Results vary, but
for instance, Hassett etal. (2009) finds a carbon tax to be regressive in
the USA, showing that the cost is about 3.74 % for the poorest decile
four times the effect on the highest decile. In India, on the other hand,
a carbon tax would be progressive (Datta, 2010). The pro- or regressiv-
ity of carbon taxes will vary between countries but can also be affected
by design, as shown for instance by Fullerton etal., (2012) or Sterner
and Coria (2012).
The assertion that fuel taxes are regressive is often used as an argu-
ment and can make fuel taxes politically difficult to implement even if
not true. Feasibility is however not tied in any simple way to income
distribution effects. If a tax is progressive, this does not necessarily
increase feasibility since this means that the interests of influential
groups are affected, which may be a much bigger impediment to feasi-
bility (Datta, 2010). Fear of social unrest may hold up subsidy removal.
Protests over reduced petrol subsidies are common; for example,
recently riots erupted in Nigeria when President Jonathan Goodluck
tried to eliminate very costly petrol subsidies with only partial success.
Some countries such as Iran and Indonesia have recognized that fuel
subsidies actually accrue to the relatively wealthy and managed to
successfully reduce the subsidies without much unrest, by making sure
that revenues saved are spent fairly — for instance through general
lump-sum cash transfers (Coady etal., 2010; Atashbar, 2012; Sterner,
2012; Aldy and Stavins, 2012).
15�5�2�4 Design issues: exemptions, revenue recycling,
border adjustments
As mentioned above in 15.5.2.1, despite the attractive efficiency prop-
erties of a broad carbon tax, and even its progressivity in many cir-
cumstances, it may face political resistance. To have a big effect on
emissions a tax must be high. Carbon and fuel taxes have often been
initially resisted, but once introduced it seems the fee level has often
been increased, (Sumner etal., 2011b). Another factor may be a path
dependency since the taxes reduce the use of fossil fuel and lower fuel
use means less opposition to fuel taxes, (Hammar etal., 2004). This
path dependency may be the rationale for raising the fuel or carbon
taxes slowly and steadily as done by the Conservative government in
the UK with the Fuel Price Escalator starting in 1993, a policy that was
continued under the successor Labour government for several years.
An emissions tax involves a transfer from economic agents to the
state, namely the tax revenue from the residual emissions that are
not abated. Private parties have to make this transfer in addition to
bearing the cost of actually reducing emissions. There are a number
of approaches to designing a tax (or fee) so that the transfer does not
take place and resistance from incumbent polluters is reduced.
One approach is simply to exempt certain carbon-intensive indus-
tries — such as heavy industry in Sweden, as mentioned earlier. Such
policies with incomplete coverage are less cost efficient than general
policies (Montgomery, 1972 and Chapter 6.3.5.1). This lack of effi-
ciency applies not only to carbon emissions — it applies even more
broadly to agriculture, forestry and to other climate gases such as
methane or nitrous oxide (Bosetti etal., 2011). However, narrow sec-
toral policies may be politically more feasible due to concerns about
international competitiveness, the structure of winners and losers, and
consequent lobbying (Holland etal., 2011).
A related approach that tries to avoid the loss of coverage is to exempt
some firms from taxes conditional on their undertaking emission
reduction commitments. In Denmark, for example, companies signing
an energy savings agreement with the government received a 25 %
tax reduction (OECD, 2001; Agnolucci, 2009; Sumner etal., 2011; Ekins
and Speck, 2011; Aldy and Stavins, 2012). Similarly, in the UK some
firms may sign Climate Change Agreements (CCA) to reduce emissions
that exempt them from the CCL. This experience offers a cautionary
tale: on average the agreements did not require firms to reduce emis-
sions beyond what they would have done anyway (Martin etal., 2011).
Conditional exemptions amount to unconditional ones if the condi-
tions are lax.
Yet another approach to avoiding a large transfer to the state is to
recycle all or part of the tax revenue. In the Canadian province of Brit-
ish Columbia, revenue from the broad carbon tax of USD
2010
29.1 / tCO
2
is fully rebated to the general population via income tax cuts and
transfers to low-income people who do not pay income tax. British
Columbia raised the tax gradually in increments of USD
2010
4.8 / tCO
2
annually to its current level (Jaccard, 2012).
Sometimes revenues are recycled to firms in emission-intensive indus-
tries. Again, this relies on identifying the recipients, so it is usually con-
fined to a few sectors with the attendant disadvantages mentioned
above. Refunded emission payments and other combinations of taxes
and subsidies may be designed to be neutral so that, for example, the
11631163
National and Sub-national Policies and Institutions
15
Chapter 15
industry pays the cost of abatement but does not pay a tax for the
allowed or reference level of pollution (Fischer, 2011). One expression
of this is fees, which are collected in environmental funds and sub-
sequently used in ways that benefit the polluters. An example from
NO
x
emissions in Sweden is that a refunded emission payment may
be politically more acceptable and thus environmentally more effective
than simply a tax. Since the fee is refunded (in proportion to output),
there is considerably less resistance to the fee and it can be set much
higher than what would have been acceptable for a pure tax. Nor-
way has pioneered another instrument for NO
x
emissions — taxes are
refunded to cover abatement expenses. This implies a combination of a
tax on emissions with a subsidy on abatement. Experience shows that
a lower fee can achieve the same result with this instrument design
as a tax (Fischer, 2011). Norway is considering promoting similar solu-
tions for carbon emissions (Hagem etal., 2012). The drawback of such
schemes for reducing carbon emissions is that their sectoral nature
reduces coverage and raises costs.
Abatement subsidies have also been financed out of general revenues.
Abatement subsidies need to be financed through tax revenues. The
taxes needed to finance the subsidies in general involve a marginal
excess burden. This deadweight loss is an extra cost of subsidies rela-
tive to emissions taxes. Furthermore, there is an efficiency penalty due
to their sectoral nature. If applied to firms, subsidies may create per-
verse incentives to enter or to fail to exit from, a polluting industry, and
raise costs (Polinsky, 1979). Perhaps for such reasons, they are seen in
residential and commercial sectors, for instance, tax breaks are pro-
vided for building insulation or refurbishing. There are also white certif-
icates and innovative financing schemes that allow loans to be repaid
as part of electricity bills (See Section 9.10 for further discussion).
Another reason for tax exemptions is to avoid a loss of competitive-
ness in industries exposed to foreign competition that is not subject to
taxation or equivalent policies. A pure tax (at a high level) may incen-
tivize industries to move to neighbouring countries. This is known as
‘leakage’, since emissions `leak’ to jurisdictions not subject to taxa-
tion. It is generally hard to find decisive empirical evidence of carbon
leakage, though this may be partly because high carbon taxes have
not been tried in any significant way for trade-exposed sectors. As
discussed in Chapter 5, some simulations suggest that there could be
sizeable effects (Elliott etal., 2010). Though the overall effects of bor-
der tax adjustment on leakage are subject to debate (see Jakob etal.,
2013), a recent model comparison suggests that full border tax adjust-
ments would moderately decrease leakage rates from on average from
on average 12 to 8 % (Bohringer etal., 2012). Border tax adjustments
are taxes levied on imported goods that impose equivalent taxes on
emissions `embedded’ in the goods. Aichele and Felbermayr (2011)
find that sectoral carbon imports for a committed (i. e., taxed) coun-
try from an uncommitted exporter are approximately 8 % higher than
if the country had no commitments and that the carbon intensity of
those imports is about 3 % higher. When measurement of embedded
emissions is uncertain, border tax adjustments can be criticized for
introducing trade barriers in environmental guise (Holmes etal., 2011).
Leakage can also occur intertemporally. As shown by Sinn (2008,
2012), a carbon tax might not only encourage demand in other areas.
There may also be a perverse supply side reaction (referred to as the
Green Paradox) increasing the current supply of fossil fuels in antici-
pation of rising carbon taxes. Subsequent research (Gerlagh, 2011;
Hoel, 2012) has shown that, strictly speaking, this only applies to very
simplified and special models with complete exhaustion of all fossil
fuels (which would lead to very drastic climate change) and also only
to models in which the carbon tax actually starts low and rises faster
than the discount rate. A number of conclusions can be drawn from
the debate: (1) generally, the supply side should not be neglected; (2)
if a tax is used, there are arguments for making it high rather than low
and fast-growing; and most importantly, (3) instruments used need to
cover as many countries and sources as possible. It may be difficult to
find a single optimal tax, and it may be necessary, rather to formulate
a tax rule that will decide how the tax rate is to be updated (Kalkuhl
and Edenhofer, 2013).
15�5�3 Emissions trading
15�5�3�1 Overview of emissions trading schemes
Over the past three decades, emissions trading, or cap and trade, has
evolved from just a textbook idea (Dales, 1968) to its current role as a
major policy instrument for pollution control. Earlier experiences with
emissions trading include schemes such as the California RECLAIM
Program and the US Acid Rain Program (Tietenberg, 2006; Ellerman
etal., 2010).
But since the start of the EU carbon trading system (See Section
14.4.2), several countries and sub-national jurisdictions (e. g., New
Zealand, Australia, California, northeastern United States, Quebec,
South Korea, Tokyo, and five cities and seven provinces in China) have
also put in place or proposed trading schemes to control their carbon
emissions. This section provides a brief overview of the literature (see
further Perdan and Azapagic, 2011; Aldy and Stavins, 2012) and draws
lessons for the design of carbon trading programmes.
15�5�3�2 Has emissions trading worked?
We begin by assessing environmental effectiveness. There were three
GHG cap-and-trade programmes that were operational
5
by 2012 (New-
ell et al. 2013). The EU ETS, reviewed in 14.4.2, is by far the largest.
Emissions are estimated to have fallen by 2 – 5 % relative to business-
as-usual in the first pilot phase from 2005 – 2007 (Ellerman, Convery,
De Perthuis, etal., 2010). Similarly, Egenhofer et al., (2011) attribute
5
California and Quebec started recently in 2013, as did Australia with its ‘fixed-
price’ or tax period; trading starts 2014 and S Korea starts even later. None of
these can be evaluated empirically at present.
11641164
National and Sub-national Policies and Institutions
15
Chapter 15
reduction of emission intensity by 3.35 % per year in 2008 – 2009, in
contrast to only 1 % in 2006 – 2007, to the EU ETS. Permit prices have
fallen to around USD 10 – 15 in 2012 (Newell et al., 2013). Section
14.4.2 concludes that environmental effectiveness has been compro-
mised to a large extent by a structurally lenient allocation of permits
that was driven by the necessity for institutional and political feasibil-
ity.
The Regional Greenhouse Gas Initiative (RGGI), (see 15.5.3.3) has
been ineffective since the cap has never been binding and is not
expected to become so for several years (Aldy and Stavins, 2012). The
third, much smaller, New Zealand ETS, appears to have had a small
impact on emissions (Bullock, 2012). The last of the emissions trad-
ing schemes in GHGs, the Clean Development Mechanism (CDM), was
an offset programme, not a cap-and-trade scheme. Section 13.13.1.2
finds that there are many challenges when it comes to additionality,
baseline definition and leakage but possibly some advantages from
the viewpoint of generating income in developing countries.
This experience shows that it is has been very difficult to get a cap-
and-trade programme for GHGs enacted with a cap tight enough to
have a significant environmental effect, at least initially. Other pro-
grammes (notably for the whole USA) that have been suggested have
not made it through the political process. It is unclear to what extent
this issue is peculiar to ETSs but there is a similar if not stronger oppo-
sition to the other major economic instrument, carbon taxation. One
of the advantages claimed for an ETS is a greater option of allocat-
ing rights to appease opponents of a tax scheme. Hence there is a
tradeoff between feasibility, distributional effects, and environmental
effectiveness at least in the short run. Older non-GHG cap-and-trade
programmes such as the SO
2
and leaded petrol phase-out programmes
in the United States have been environmentally effective (Tietenberg,
2006; Schmalensee and Stavins, 2013).
6
It may be that any policy
instrument stringent enough to have a significant environmental effec-
tive programme may have faced opposition in the particular circum-
stances. One possible lesson for design may be to build a price ceiling
into any proposed cap-and-trade programme. In that case, the concern
that a tight cap would lead to very high costs, would be alleviated and
may make it politically feasible to have a somewhat more ambitious
cap (Aldy and Stavins, 2012).
Cost-effectiveness is the main economic rationale for using emis-
sions trading as opposed to simpler regulation. The experience with
regard to GHG programmes is too limited to draw any conclusions yet.
As in many of the earlier markets, cost savings in the US Acid Rain
Program — an allowance trading system established in 1995 to con-
trol SO
2
emissions from coal-fired plants in the continental United
States — were substantial (Carlson etal., 2000; Ellerman etal., 2000).
6
Note that there is literature (e. g., Lohmann, 2008) much less enthusiastic about
the concept of emissions trading for reasons of justice and environmental integ-
rity, among others, and more so after the current collapse of carbon prices in the
EU-ETS (Lohmann, 2008).
Cost savings in this programme came not only from equalizing mar-
ginal costs across affected electric utility units on a period-by-period
basis but also from equalizing (present value) marginal costs intertem-
porally as firms have saved current permits for future use in what is
known as banking of permits. According to (Ellerman and Montero,
2007), the use of banking has been substantial and remarkably close
to what would be expected in a well-functioning market. Recently, the
price has collapsed to zero also in this market as the Environmental
Protection Agency (EPA) has used other instruments to push for further
reductions.
Banking has also been responsible for a large part of the significant
cost savings in the US Lead Phasedown Program, a trading scheme
established in 1982 to provide refineries with flexibility to gradually
remove lead from gasoline. In addition to banking, cost savings in this
program were driven by dynamic efficiencies, i. e., the faster adoption
and / or development of more efficient refining technologies (Kerr and
Newell, 2003). In contrast, dynamic efficiency has played a minor role
in explaining cost savings in the US SO
2
allowance program (e. g., Eller-
man etal., 2000; Fowlie, 2010; Kumar and Managi, 2010).
The introduction of a price on carbon through either a carbon tax
or cap-and-trade can have substantial distributional consequences.
Extensive analyses of these effects have been conducted in the US
context. Burtraw et al. (2009) illustrate in the context of a trading
programme that the outcome for the average household will depend
much more importantly on the use of the value associated with emis-
sions allowances than with the actual stringency of the regulation. For
example, lump sum dividends or some kinds of tax reform can be pro-
gressive. Similarly Hassett etal. (2009) find that the degree of regres-
sivity is much reduced when a lifetime measure of income is used.
Parry (2004) shows in an analytical framework that emissions trading
can be regressive, especially if implemented with free allocation to
incumbent emitters (grandfathering). Bovenberg etal. (2005) find that
profits can be maintained throughout the economy by freely allocating
less (sometimes considerably less) than 25 % of pollution permits, with
the rest auctioned. These considerations are very similar for tax or cap-
and-trade systems. Granting greater than this quantity for free would
lead to windfall profits. In simulation modelling of the US electricity
market, Burtraw and Palmer (2008) find that it would be sufficient to
allocate just 6 % of the allowances to the electricity industry to offset
costs under a CO
2
trading programme because a majority of costs are
borne by consumers; greater allocation would again lead to windfall
profits. Hassett etal. (2009) examine regional effects and find them
not to be very significant. Blonz etal. (2012) show that even if pro-
grammes are regressive, social safety nets, which adjust automatically
to inflation, generally protect low-income groups in the United States,
and middle income groups may be most vulnerable.
It should be noted that the experience with emissions trading, whether
for greenhouse gases or other, non-climate-related pollutants, has
been wholly in high-income countries. Coria and Sterner (2010)
describe some success for air pollution in a middle income country like
11651165
National and Sub-national Policies and Institutions
15
Chapter 15
Chile but it is unclear to what extent these can be transferred to devel-
oping countries.
15�5�3�3 Sector coverage and scope of the cap
A key component in a trading scheme is establishing the pollutants
(e. g., greenhouse gases) and entities that will be regulated. There are
several factors that may affect this decision: (1) the quality and cost of
emissions measurement and verification, (2) the ability to target sec-
tors with the greatest mitigation potential, (3) the ability to broaden
the coverage to unlock low-cost mitigation opportunities, (4) the politi-
cal and institutional feasibility of including certain sectors, and (5) the
interactive effects the cap may have with other policies.
In most trading schemes, the affected sources are relatively large
emitting sources whose emissions have been closely monitored
(smaller sources are often regulated with alternative instruments).
This applies to the earlier programmes (e. g., Acid Rain, RECLAIM, Lead
Phasedown)
7
but also in carbon markets. In other words, there are few
cases in which the point of obligation has been upstream, i. e., different
than the emitting point. The trading scheme in Australia, launched in
2012, covered 373 entities comprising approximately 60 % of Austra-
lia’s GHG emissions. Electricity generation, industrial processes, fugi-
tive emissions, and non-legacy waste are under permit liability (Clean
Energy Regulator, 2012). Small-scale stationary fossil fuel use (espe-
cially gas) is covered by upstream permit liability on fuel distributors.
Liquid fuels used in aviation / shipping and synthetic GHGs are subject
to an equivalent carbon price through changes to existing taxes. Agri-
culture and forestry can produce offset credits (Macintosh and Waugh,
2012; Caripis etal., 2012).
8
Coverage in the carbon-trading scheme in New Zealand, is the most
comprehensive and covers all GHGs and all sectors. It has expanded
in stages from the forestry sector (in January 2008) to fossil fuels and
industrial emissions (in July 2010), and will cover the waste sector in
May 2014. The agricultural sector must report emissions since Janu-
ary 2012 but a decision on when it will face surrender obligations has
not yet been made. This is the only national emissions trading scheme
to include forestry, and is intended to shift land-use change decisions
towards greater carbon sequestration and less deforestation (Karpas
and Kerr, 2011; Adams and Turner, 2012). Coverage is also scheduled
to expand in stages in the recently launched carbon market in Cali-
fornia (Hanemann, 2009). In the first compliance period, which runs
from 2013 – 2014, electricity generating and industrial facilities that
7
An exception is the market for particulates established in Santiago-Chile in 1992
for industrial sources (Montero et al., 2002). The trading commodity was not
actual emissions, which were difficult to monitor on a daily basis, but a firm’s
maximum capacity to emit.
8
For more see Section 7A of the National Greenhouse and Energy Reporting Act
2007 (National Greenhouse and Energy Reporting Act 2007, 2007). The carbon
market in South Korea, to start in 2015, will cover around 450 large facilities and
about 60 % of the country’s GHG emissions (Kim, 2011).
exceed 25,000 tonnes of CO
2
eq per year will be obligated to abide
by the agreement; the second period (2015 – 2017) adds distributors
of transportation, natural gas, and other fuels; and the third period
(2018 – 2020) adds transportation fuels (CARB, 2011). All major sources
will be covered over time, which will represent an equivalent of 85 %
of California’s GHG emissions (CARB, 2011). Offset projects are fore-
seen in forestry management, urban forestry, dairy methane digesters,
and the destruction of ozone-depleting substances.
There are other carbon markets that are less ambitious in scope. The
trading scheme in Tokyo, launched in April 2012, includes 300 indus-
trial facilities — which in total consume at least 1,500 kl of crude oil
equivalent per annum — and a combined 1,000 commercial and insti-
tutional buildings. In aggregate, this is equivalent to only 20 % of
Tokyo’s total CO
2
emissions (Partnership for Market Readiness, 2012).
Though the programme may be limited in scope, it is one of the first
programmes in the world to address emissions from urban buildings,
which can be quite significant (Nishida and Hua, 2011). The Regional
Greenhouse Gas Initiative (RGGI), a cap-and-trade programme initi-
ated in 2009 and that covers nine Northeast and Mid-Atlantic states
in the United States (Connecticut, Delaware, Maine, Maryland, Massa-
chusetts, New Hampshire, New York, Rhode Island, and Vermont), only
regulates CO
2
emissions from power plants.
15�5�3�4 Setting the level of the cap
The cap defines the stringency of the trading scheme. Naturally, the
permit prices also depend on many circumstances such as the eco-
nomic growth. In many of the trading programmes reviewed above,
the caps appear however to have been set below what would lead
to efficient levels of abatement — since the allowance prices (the mar-
ginal abatement costs) have ended up below most estimates of the
marginal environmental benefits from abatement. The RECLAIM Pro-
gram which covers NO
x
and SO
2
is an example as are the acid rain
and lead phase-out programmes. It should be noted, however, that to
varying extents, carbon trading programmes include mechanisms to
tighten the cap gradually.
Caps in the carbon markets have slower reductions maybe because
of higher short-term mitigation costs. In the Australian scheme, there
is no cap on emissions during the initial so-called ‘fixed-price phase’
(2012 – 2014) but a price that rises from AUS 23.00 per tonne in
2012 / 2013 to AUS 25.40 in 2014 / 2015. The fixed price scheme, has
many of the characteristics of a tax and offered advantages in the
specific political circumstances that failed to agree on an emissions
target but not on a price (Jotzo etal., 2012) hence preferring implic-
itly uncertainty on emissions rather than on the price (Jotzo and Betz,
2009; Jotzo and Hatfield-Dodds, 2011; Pearce, 2012). The fixed price
period naturally established a price signal and provided time for
important elements of the flexible price period to be implemented,
such as an auction platform. Starting with the first flexible-price phase
(2015 – 2018), the government will set annual caps for five-year peri-
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ods, extending the cap by one year every year. A default cap (associ-
ated to a GHG emissions reduction of 5 % from 2000 levels by 2020)
will apply in the event the parliament cannot agree on a cap (CAUS,
2012).
New Zealand, on the other hand, has operated within the Kyoto cap
for 2008 – 2012 by requiring every unit of emission to be matched by
a Kyoto unit at the end of the Protocol’s true-up period. For 2012 and
forward, the government has proposed legislative amendments to
introduce a domestic cap and remove the requirement to back domes-
tic emission with Kyoto units (NZME, 2013).
The cap in the California scheme is set in 2013 at about 2 % devi-
ating under the projected level for 2012, and then drops about 2 %
in 2014 and about 3 % from 2015 to 2020 on an annual basis (4 %
of allowances will be held in reserve to contain costs). The Regional
Greenhouse Gas Initiative has introduced a ‘soft’ fixed cap from 2009
to 2014 to decline by 2.5 % per year. Economic growth and natural
gas prices have been lower than expected, so it is unlikely that the cap
becomes binding by 2020 (Aldy and Stavins, 2012).
9
15�5�3�5 Allocations
Permits have been allocated either by auction, or have been given
away for free. In the latter case, allocation has been proportional to
past emissions or output (i. e., grandfathered) or proportional to cur-
rent output. Earlier programmes relied almost exclusively on grand-
fathering. The SO
2
allowance programme allocated less than 3 % of
the total cap, through revenue-neutral auctions; mainly to provide an
earlier and more reliable price signal to participants (Ellerman, Conv-
ery, De Perthuis, etal., 2010). Some of the recent carbon markets also
provide free allocations because of concerns about emissions-intensive
trade-exposed industries. In fact, the programme in New Zealand con-
siders a very limited amount of auctioning (although increasing over
time) unlike RGGI, which allocates the vast majority of permits through
auctions (the softer cap in RGGI may explain the difference). Australia
and California are somewhere in the middle in terms of auctioning,
roughly 50 % and 80 % respectively.
The Californian and Australian schemes also make explicit output-based
(free) allocation rules for energy-intensive, trade-exposed sectors, where
recent production determines firm-level allocation. The Australian expe-
rience on this matter has also shown the influence that industry lobby
groups can have in policy design (Garnaut, 2008; Pezzey etal., 2010)
and how politically involved this can become (Macintosh etal., 2010).
9
There is a proposal from the RGGI states, however, to reduce the cap in 45 % by
2020 (Regional Greenhouse Gas Initiative, Inc., 2013).
15�5�3�6 Linking of schemes
Linking occurs when a trading scheme allows permits from another
trading programme to be used to meet domestic targets. Such link-
ages can be mutually beneficial as they can improve market liquid-
ity and lower costs of compliance. However, these benefits need to be
weighed against challenges like losing unilateral control over domestic
design and being subject to international price movements. Linking,
however, involves certain tradeoffs in terms of exposure to interna-
tional prices and loss of flexibility to unilaterally change features in
the domestic design once links are established. International linkage
of trading schemes might be simpler than harmonizing carbon taxes
through international agreements (Karpas and Kerr, 2011). There is
however, not general agreement on this point; to the contrary, agree-
ments on taxes might avoid the most contentious baseline issues see
for instance Nordhaus (2007).
The experience with linking is limited because carbon markets are
relatively recent. One example of a linking process is the ongoing col-
laboration, since 2007, between California and the Canadian prov-
ince of Quebec, which will both place compliance obligations on large
emitters under their trading schemes beginning in January 2013 and
continue negotiations for a full linking of the two schemes later on in
2013 (CARB, 2011). Another example is the announcement in 2013
of an Australia-EU ETS link by 2018 preceded by a transition phase
in which Australian installations can use EU-Allowances for compli-
ance from 2015 on. Interestingly, Australia is also exploring ways for
establishing links with schemes in South Korea and California, which,
de facto, would create links between all these trading schemes.
10
We
do not yet know if linking schemes without prior commitment on
overall caps will facilitate or complicate future negotiations on the
caps.
15�5�3�7 Other design issues: banking, offsets, leakage,
price volatility and market power
There are additional, important, aspects of policy design on which
we can only briefly touch here. Unlike borrowing, banking of per-
mits for future use is a feature used in many trading schemes with
good results in terms of cost savings and environmental benefits (i. e.,
absence of emission spikes and acceleration of emission reductions).
A well-documented example is the US SO
2
allowance programme (Ell-
erman and Montero, 2007). A dramatic example of volatility is given
by the RECLAIM programme where in the summer of 2000 permit
prices that began under USD 5,000 per ton of NO
x
increased abruptly
in price to almost USD 45,000, leading to a relaxation of the cap see
Metcalf (2009). Offsets, the possibility of using emission credits out-
side the capped sectors either domestically or internationally (e. g.,
CDM or REDD), is another design feature common in most trading
10
The firm intentions of New Zealand and Australia about linking their systems came
to a sudden end after the latter announced it was linking its system to the EU ETS.
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schemes but of much concern because of the well-known tension
between cost-effectiveness and additionality. One way to somewhat
assuage this tension is to move away from a project-based crediting
approaches (e. g., CDM) to scaled-up approaches — to the level of the
sector, jurisdiction or country. Offset provisions, if well designed, can
also help alleviate the ‘leakage’ problem of moving emissions from
capped to uncapped sectors. An alternative design option to address
leakage might be to use output-based allocation rules although this
will raise concerns related to output subsidy. Another problem is mar-
ket power specific to permit trading which has been the subject of
much research since the work of Hahn (1984). It seems, however, that
market power is less of a problem than anticipated (Liski and Mon-
tero, 2011), also confirmed by findings from laboratory experiments
(Sturm, 2008).
15�5�3�8 Choice between taxes and emissions trading
Regarding the choice between taxes and tradable permits, longstand-
ing economic theory (Weitzman, 1974; Hoel and Karp, 2001, 2002;
Newell and Pizer, 2003) suggests that in the presence of uncertainty
about the marginal cost of emission reduction, for a stock pollutant
like CO
2
, a carbon tax is more economically efficient than a tradable
permit system. According to the Weitzman intuition, a tax is preferred
since the benefits curve is fairly flat for a stock pollutant (this result
could be changed in the presence of a major threshold effect). The
reason is essentially that when there is a negative shock to the cost
of emission reduction, as has been the case in the EU following the
economic slowdown that began in 2008, cost efficiency calls for doing
more abatement, with less being done at other times when the abate-
ment cost is higher. This is achieved with a tax, but not with a cap that
is fixed in each period. The slump in the carbon price in the EU ETS is
thus suggestive of a loss of cost-effectiveness.
In the very long run there may be more uncertainty about the level
of an optimal tax than about a quantity target and policymakers may
then prefer to legislate a long-run abatement target in a cap-and-trade
system. As seen above, this can entail short-run efficiency losses and it
would be desirable to allow flexibility with regard to annual caps that
would add up to the long run target, but concerns about credibility
mean that such flexibility must be severely limited. As shown in Chap-
ter 2 (Section 2.6.5), there is a literature on regulatory uncertainty that
shows extra costs deriving from the hesitancy by investors in the face
of all regulatory uncertainty but in particular perhaps, when it comes
to cap-and-trade systems.
To prevent a large loss of efficiency in a cap-and trade-system, and to
avoid exceptionally high price volatility that deters investment, price
floors and ceilings can be used, although care would be needed in
design to avoid breaching the integrity of the cap. Banking and bor-
rowing of permits (see Section 15.5.3) are another means of providing
intertemporal flexibility in abatement as are the availability of credit
reserves or of offsets.
As explained in Section 15.7, a tax can be used in conjunction with
other policy instruments while a cap-and-trade system either renders
the other policies environmentally irrelevant or is itself rendered envi-
ronmentally irrelevant by them. This is a major concern when decision
making takes place at several levels.
As discussed in Section 15.5.2.4, the issues of intertemporal (and spa-
tial) leakage discussed in the green paradox literature would appear to
give preference to cap and trade over taxes but this is partly a simpli-
fication. The green paradox mainly exists in oversimplified models and
poorly designed tax schemes. There are however, lessons from this lit-
erature concerning design details. For example, one might prefer high
taxes that grow slowly to low taxes that rise very fast, and one might
be careful with too much flexibility, particularly borrowing in permit
systems. Kalkuhl and Edenhofer (2013) compares four policies, (1) a
conventional Pigouvian carbon tax, (2) a carbon tax rule (that adjusts
the tax level dependent on GHG concentrations), a permit trade (3)
with or (4) without banking and borrowing) in the context of a (weak)
green paradox setting with respect to three different criteria: the infor-
mational burden for the government, the commitment problem of the
government, and the robustness of the policy with respect to devia-
tions in behaviour (discount rate) by agents in the economy. They find
that a tax and a trading scheme without banking and borrowing have
high informational requirements. The ETS with banking and borrow-
ing shifts the timing problem of carbon emissions to the private sector,
but does not work well if these have different discount rates from the
regulator. The flexible tax rule or an ETS with restricted banking and
borrowing can lead to an optimal allocation even in this case, but then
again the informational requirements for the regulator are daunting.
One of the attractions of emissions trading schemes appears to have
been that they may meet with less opposition from industry, which
can be allocated permits for free. Taxation is often resisted by lobbies
and sometimes for constitutional reasons. Taxation is also resisted by
those who want a smaller government — in which case environmen-
tal fiscal reform (raising carbon taxes while lower other taxes) may
be more acceptable. Another argument that has been made in favour
of an ETS is that it may be easier to link permit schemes across bor-
ders than to agree on common taxes. Harmonization is advantageous,
since it reduces costs (15.7). There is however, no general agreement
on this. Some analysts believe the opposite, that it will be easier to
link taxation systems within an international agreement (Helm, 2003;
Nordhaus, 2007; Jaffe etal., 2009; Metcalf and Weisbach, 2011) and
(15.8.1). Finally, linking cap-and-trade systems would automatically
involve financial transfers between countries. These might be a ben-
efit for low-income countries if they can be carbon-efficient and maybe
less controversial than negotiated side payments but this hinges on
agreement concerning the various country targets.
Finally taxes, unlike an emission-trading scheme, do not require a new
institutional infrastructure to keep track of ownership of emissions
allowances. This consideration may be especially important in develop-
ing countries.
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15�5�4 Regulatory approaches
15�5�4�1 Overview of the implementation of regulatory
approaches
As discussed in Section 15.2, economy-wide carbon pricing, though
widely discussed in the literature, has been rarely implemented. Those
policies that have been implemented have often been sector-specific,
and have often fallen in the category of a regulatory approach. Regula-
tory approaches are used across sectors, usually alongside other poli-
cies, as can be seen in Table 15.2. For example, Renewable Portfolio
Standards (RPS), and energy efficiency standards may be combined
with fuel subsidy reduction in the energy sector (Chapter 7). In the
transport sector, vehicle efficiency and fuel quality standards are used
alongside government provision of mass transit, and fuel taxes (Chap-
ter 8). In the building sector, a number of complementary policies, such
as appliance standards, labelling, and building codes are employed,
along with tax exemptions for investment in energy-efficient build-
ings (9.9). In the industrial sector, energy audits for energy-intensive
manufacturing firms are also regularly combined with voluntary or
negotiated agreements and energy management schemes. Information
programmes are the most prevalent approach for energy efficiency,
followed by economic instruments, regulatory approaches and volun-
tary actions (10.11).
Several of these regulatory approaches often contain market-like fea-
tures so that the distinction between regulatory approaches and eco-
nomic instruments is not always sharp. Renewable Portfolio Standards
programmes often, for example, allow utilities to satisfy their obliga-
tions by purchasing renewable energy credits from other producers,
while feed-in tariffs involve both regulations and subsidies for renew-
able energy. Low-carbon fuel standards also sometimes incorporate
market-like features including trading among suppliers.
Regulatory approaches play the following roles in mitigation policy.
First, they directly limit greenhouse gas emissions by specifying tech-
nologies or their performance. Second, in sectors such as AFOLU (see
Chapter 11) and urban planning (see Chapters 8 and 12) in which
much activity is strongly influenced by government planning and pro-
vision, regulations that take climate policy into account are clearly
important. These are discussed in further in Section 15.5.6. Third,
regulations such as RPS can promote the diffusion and innovation of
emerging technologies, a role that is examined in Section 15.6. Fourth,
regulations may remove barriers for energy efficiency improvement.
These may arise when firms and consumers are hindered by the dif-
ficulty of acquiring and processing information about energy efficient
investments, or have split incentives as in landlord-tenant relation-
ships.
Regulatory approaches have been criticized, both for being environ-
mentally ineffective, and more strongly, for lack of cost-effectiveness,
as the governments have limited information and may make govern-
mental failures in intervention (Helm, 2010; see also Section 3.8.2).
Some are opposed to the regulations on libertarian philosophical
grounds (Section 3.10.1.1). In what follows, we assess the environ-
mental and cost effectiveness of regulatory approaches, largely focus-
ing on short-run effects of energy efficiency policies that have been
extensively studied. Long-run effects acting through technology devel-
opment are assessed in Section 15.6. There is insufficient literature on
distributional incidence and feasibility to underpin an assessment of
these dimensions.
15�5�4�2 Environmental effectiveness of energy efficiency
regulations
Several prospective studies reviewed by Gillingham, Newell, and
Palmer (2006) and one large ex-post study of US energy efficiency
standards for appliances (Meyers etal., 2003) found substantial energy
savings. Such savings have also been found in the building sector
across countries (Section 9.10) in a study of best-practice building
codes and other standards. Recently, econometric studies in the United
States have also found energy reductions from building codes (Aroon-
ruengsawat, 2012; Jacobsen and Kotchen, 2013). These studies also
reported significant energy savings and related CO
2
reduction. Fuel
economy standards for vehicles have also been successful in reducing
fuel consumption in many countries (Anderson etal., 2011). Generally
speaking, energy efficiency policies that address market failure can
result in energy savings (7.10, 8.10, 9.10, Table 9.8, 10.10). Some case
studies however, identified weak environmental effectiveness due to
lack of implementation. Such examples were found for building codes
and energy management systems.
Rebound effects need to be taken into account in interpreting these
findings of environmental effectiveness of energy efficiency regula-
tions. The rebound effect refers to the increase in energy consumption
induced by a fall in the cost of using energy services as a result of
increased energy efficiency. For detailed general discussion on rebound
effects, see Sections 3.9.5 and 5.6.2. For sector-specific studies of
rebound effects, see Section 9.6.2.4 for building sector and Chapter 8
for transport sector. With regard to appliance standards and fuel-econ-
omy regulations in the United States, environmental effects remain
large even when taking the rebound effect into account (Gillingham
et al., 2006; Anderson et al., 2011). More generally, direct rebound
effects (within the regulated sector as a result of the fall in the cost of
energy services) are commonly found to be in the range of 10 % – 30 %
in various sectors in developed countries, and higher in developing
countries (Sorrell etal., 2009; Gillingham etal., 2013). Indirect rebound
effects, which result from increased economic growth resulting from
the fall in the cost of energy services, can be much larger. Reviewing
claims of rebound effects in excess of 100 %, Dimitropoulos (2007)
concluded that although the evidence base and methodologies were
weak, the possibility of significant rebound effects could not be dis-
missed. A recent review suggests that total rebound effects are unlikely
to exceed 60 % (Gillingham etal., 2013).
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While the scale of the rebound effect varies, its presence suggests that
complementary policies that include carbon pricing are called for so
that mitigation is not compromised. Some countries, such as the UK,
have begun to account for a direct rebound effect in energy policies
(Maxwell etal., 2011).
Regulations such as emissions standards have also been criticized
on the ground that they are less flexible than incentive-based
approaches and may even provide perverse incentives and increase
emissions under certain conditions like treating new units more strin-
gently than old ones (Burtraw etal., 2010). Yet, recent modelling that
incorporates institutional features of various policies in the United
States, including the capacity to adjust the stringency of a regulation
or a cap / tax, suggests that emissions standards may be more effec-
tive than cap and trade in reducing overall emissions (Burtraw and
Woerman, 2013).
15�5�4�3 Cost effectiveness of energy efficiency
regulations
Regulatory approaches are often implemented in contexts in which
market failures or barriers to adoption of energy-efficient technologies
exist. There is a considerable sectoral literature showing that energy
efficiency regulations have been implemented at negative costs to
firms and individuals, meaning that their value to consumers exceeded
programme costs on average. In the transport sector, fuel economy
standards have been shown to produce net cost savings over the life
of the vehicle (Chapter 8.10). In the building sector, a range of energy
efficiency policies including appliance standards and building codes
have been found to have negative private costs (Table 9.8), (Gilling-
ham etal., 2006, 2009a). In the industrial sector, a number of case
studies on energy management systems and energy audit systems
show that they have been cost effective (Chapter 10.10).
The cost effectiveness of such regulations has been the subject of
heated debate. Economic theory points to the following circumstances
in which regulations may be implemented with negative private costs.
Buyers may have less information about the efficiency and cost of a
device than sellers. They may not be able to assess the energy sav-
ings from an appliance even after using it. This can lead to a situation
in which low-efficiency devices drive more expensive high-efficiency
models out of the market. Efficiency standards in this setting can
improve consumer welfare by reducing the informational asymmetry
between buyers and sellers (Akerlof, 1970; Leland, 1979; Goulder and
Parry, 2008). When competition is imperfect and sellers compete on
both quality (efficiency) and price, then a minimum quality standard
eliminates low-quality sellers from the market enhancing price com-
petition among high-quality goods. This can make all consumers better
off (Ronnen, 1991). Split incentives, as in landlord-tenant relationships,
can lead to economically inefficient devices persisting in the market,
absent intervention. For more details, see Box 3.10.
Individuals working in small workplaces often find it difficult to
acquire and analyze information on energy efficiency (see 2.6.5.3
on human behaviour on energy efficiency). As a consequence, those
individuals are prone to rely on intuition to make decisions. In many
cases, analyzing the minimum cost actions given the price signal is
too challenging, and thus cognitive costs may result in some consum-
ers simply not taking operating (energy) costs into account at all while
making their purchase decisions (Section 3.10.1.1). (Allcott, 2011)
exhibits this case in a recent survey of US car buyers, 40 % of whom
were shown not to consider fuel costs in their purchasing decision.
This kind of consumer decision making can lead sellers to offer — and
consumers to buy — less energy efficient products than if consumers
could more easily compute the operating costs. Section 9.8 indicates
that such barriers to energy efficiency are significant in the building
sector. Regulation and information measures can help overcome these
barriers.
Large firms have more resources than individuals to assess information
on energy efficiency, and so may be more sensitive to carbon pricing.
However, firms, especially small and medium enterprises, also face the
barriers such as split incentive and lack of information. Governments
may employ regulations (and information measures) to help correct
this by implementing energy efficiency standards for equipment. See
3.10.1.2 for more on behaviour of firms on energy efficiency.
Although both the theory and empirical evidence detailed above show
that policy interventions to remove barriers can have negative costs
to firms and individuals, it has been argued that unaccounted labour
and opportunity costs borne by governments, firms, and individuals
involved in policy design and implementation process, as well as loss
of amenity (for example, fuel economy standards may undermine other
functions of cars, such as speed, safety, quality of air conditioning, and
audio sets), result in understatement of regulatory costs. Such unac-
counted costs are called ‘hidden costs’ (Box 3.10).
On the other hand, an ex-post evaluation of expected and realized
costs of environmental regulations in the United States found that esti-
mates of the unit cost of regulations by the regulator were overstated
just as often as they were understated, while total costs were more
frequently overstated (Harrington etal., 2000). Furthermore, Gilling-
ham etal. (2006) note that in the United States, “even if unaccounted-
for costs of appliance standards were almost equal to those measured,
and actual energy savings only roughly half of those estimated, appli-
ance standards still would yield positive net benefits on average”
(Gillingham etal., 2006b). There may also be hidden benefits of regu-
lations, (Sorrell, 2009), such as improved amenities and ‘free drivers’
(which would occur if nonparticipants were induced to invest in energy
efficiency because others in the programme made such investments)
induced by regulation (Gillingham etal., 2006). In conclusion, while
it is clear that opportunities do exist to improve energy efficiency at
negative private cost by regulations, the literature is divided as to what
extent such negative private cost opportunities exist.
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It is the social rather than the private costs of regulations, however,
that are more relevant for public policy. This means that externalities
need to be taken into account and co-benefits of policies, such as local
air pollution reduction, would ideally be valued and subtracted from
costs. Such externalities can be large. Muller, Mendelsohn, and Nord-
haus (2011) found that the external costs of coal-fired utilities in the
United States exceeded value-added in that sector. These and other
costs and benefits have to be taken into account when evaluating poli-
cies.
15�5�5 Information measures
Information measures have been widely used in all sectors. To take
typical examples, energy efficiency labelling for home electric appli-
ances and thermal insulation of buildings, as well as carbon footprint
certificates and public awareness initiatives are implemented in the
building sector (9.10). Energy management systems, as well as govern-
ment-assisted energy audits, either mandatory or voluntary, are used
in the building, industry, and energy sectors (7.10, 9.10, 10.10). Man-
datory reporting of GHG emissions is common for firms in the power
and industrial sectors (7.10, 10.10), while labelling of automobile fuel
economy is used in the transport sector (8.10). Sustainability certificate
programmes are used in the forestry sector (11.10).
Regarding the environmental and economic effectiveness, a number of
case studies in the building sector are shown for the energy efficiency
labelling for home electric appliance, building label and certificates,
energy audit programmes, and awareness raising campaign to stimu-
late behavioural change (see 9.10, Table 9.8). For energy efficiency, the
role of information measures is the same with regulatory approaches,
that is, to address market failure such as lack of information and split
incentives. For details of the market failure and role of information
measures, see Section 15.5.4.
While some studies mentioned above reported high economic and
environmental effectiveness, the results are mixed in general, reflecting
the wide diversity of the information measures, and it is not appropri-
ate to draw a general conclusion. Note that some policy instruments,
such as energy management systems and energy audit in the indus-
trial sector that may fall either in regulatory approach and informa-
tion measures, are also covered in the section on regulatory approach
above.
Since information programmes typically provide information and
leave it to firms or consumers to take appropriate action, those
actions will usually only be taken spontaneously, or if they are per-
ceived to have negative private costs economically. The discussion of
hidden costs / benefits and rebound effects parallels that of regulatory
approach, are covered in Section 15.5.4.
It should be noted that the role of information measure has been
mostly supplementary to other policy instruments such as obligatory
standards or much wider policy package as detailed in sector specific
policy chapter (7.10, 8.10, 9.10, 10.10, 11.10). For example, energy
efficiency labelling is often followed by energy efficiency standard as a
single policy package. This also makes difficult to estimate the impacts
of the information measure alone.
15�5�6 Government provision of public goods
or services, and procurement
While formal assessment is difficult, it is clear that public provision and
planning can and have played a prominent role in the mitigation of
climate change at the national and sub-national levels, and in a wide
range of industries including energy, transport, agriculture, forestry,
and others. At the national level, government provision or funding is
crucial for basic research into low and zero-emission technologies (see
Section 15.7).
In the energy sector, the provision and planning of infrastructure,
whether for electricity transmission and distribution or district heating
networks, interconnectors, storage facilities, etc., is complementary to
the development of renewable energy sources such as wind and solar
energy (7.6.1.3). A modal shift from air to rail transport also requires
public planning or provision by national and local governments as a
part of the policy mix and in best-case scenarios could reduce associ-
ated emissions by 65 – 80 % (8.4.2).
Urban planning that incorporates climate change mitigation can have
a major impact on emissions (Chapter 12); therefore, municipal gov-
ernments have a very important role to play. Since mitigation poli-
cies have many co-benefits at the local level, including reduced local
pollution and congestion, and improved quality of urban space, cities
have an interest in mitigation policies in addition to the largely exter-
nal climate benefits they provide. Land-use and transport policies can
considerably influence the share of non-motorized transport, public
transport, and associated emissions (8.4.2.3). Buildings and associ-
ated energy supply infrastructure are very long-lasting (9.4.5) so public
planning to encourage the rapid adoption of new low-carbon tech-
nologies and avoid lock-in to high-emission infrastructure assumes
importance. Such planning would need to take into account transport
pricing relative to land prices, building, parking, and other zoning
regulation, city-wide district heating and cooling systems, and green
areas (see Section 12.5, and Baeumler etal., 2012). Capacity building
at the municipal level may be needed for incorporating climate change
mitigation and its co-benefits into the planning process, especially in
developing countries (see Section 15.10.3).
Government planning and infrastructure provision can complement a
carbon or fuel tax, addressing additional market failures that increase
the quantity response to the price instrument by making substitution
towards less energy and carbon-intensive lifestyles easier to imple-
ment. Conversely, whether or not a public transit system will gener-
ate sufficient demand to be economical depends on whether private
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transit (and its climate externalities) is suitably priced. By contrast, as
noted below in Section 15.8, a tradable permit system for emissions
would be a substitute, rather than a complement for emission reduc-
tion through public provision. In conjunction with a tradable permit
system, local actions would affect the cost of reducing emissions, but
not overall emissions themselves. This raises the possibility that local
governments may be de-motivated to integrate mitigation in their
planning if they are located in a national or international jurisdiction
with a tradable permit system. In that case, their actions would not be
‘additional’ in GHG emission reduction, rather they would reduce the
cost of meeting the overall cap. Furthermore, the cost reduction would
not be captured entirely by the residents of the local jurisdiction in
which the actions took place.
Since most of the world’s forests are publicly owned, provision of
sequestration services as part of forest conservation is largely in the
public sector. Forest protected areas make up 13.5 % of the worlds’
forests, and 20.8 % for tropical lowland evergreen broadleaf forests
(rainforests) (Schmitt et al., 2009). During the period 2000 – 2005,
strictly protected forest areas experienced 70 % less deforestation than
all tropical forests (Campbell et al., 2008), but impact studies must
also control for ‘passive protection’ (protected areas being located in
remote and inaccessible areas), and ‘leakage’ (more deforestation out-
side the protected area). The understanding of how protected areas
can contribute to forest conservation, and thereby be a means of cli-
mate change mitigation, has advanced much since AR4, due to better
spatial data and methods.
Andam etal. (2008) find substantial passive protection for protected
areas in Costa Rica. While a simple comparison suggests that pro-
tected areas reduce deforestation by 65 %, the impact drops to 10 %
after controlling for differences in location and other characteristics.
Gaveau et al. (2009) estimate the difference between deforestation
rates in protected areas and wider areas in Sumatra, Indonesia dur-
ing the 1990s to be 58.6 %; this difference falls to 24 % after propen-
sity score matching which accounts for passive protection. In a global
study, also using matching techniques, Joppa and Pfaff (2011) finds
that for about 75 % of the countries, protected areas reduce forest con-
version, but that in 80 % of these controlling for land characteristics
reduces the impact by 50 % or more. Thus, an emerging consensus is
that protected areas reduce deforestation (Chomitz etal., 2007), even
though protection is not perfect, and there is a medium to high degree
of passive protection. Estimates of leakage are more challenging, as
the channels of leakage are diverse and harder to quantify.
Local governance of forests can be an effective way of reducing emis-
sions from deforestation and forest degradation, as at least some of
the public goods provided by forest are included in the decision mak-
ing process. A meta-analysis of 69 cases of community forest manage-
ment finds that 58 % of these were successful in meeting ecological
sustainability criteria, e. g., ‘improved forest condition’ (Pagdee etal.,
2006). Similarly, using data from 80 different forest management
units in 10 countries, a study found positive correlation between
greater devolved authority at the local level with higher levels of
carbon sequestration (Chhatre and Agrawal, 2009). However, a study
analyzing forest cover of central Himalaya in India that controls for
confounders reports no statistically significant results (in forest cover)
between village and state-managed forests, even though the costs per
hectare are seven folds greater for the state-managed forests (Som-
anathan etal., 2009).
Where property rights are insecure, strengthening land rights is often
put forward as a way to contain deforestation, though the effects are
ambiguous. It is argued that the lack of tenure rights can discourage
investment in land and increase soil exhaustion. This would, in turn,
lead to greater incentives to deforest to compensate for the lost pro-
ductivity due to degradation. Unclear tenure can also lead to unpro-
ductive and violent land conflicts (Alston et al., 2000). However, by
increasing the value of land clearing, policies that strengthen private
property rights over land could increase deforestation (Angelsen,
1999).
15�5�7 Voluntary actions
It has become quite common for major firms, either individually or in
alliance with others, to commit to mitigation of climate change as part
of their corporate social responsibility through emission cuts at their
offices and facilities, technological research, development, and sales of
climate friendly equipment (See IPCC, 2007). Non-government organi-
zations also initiate voluntary actions (See Section 15.9).
This section focuses on voluntary agreements that are convened by
industries in association with government. Voluntary agreements have
been developed in very different ways in different nations, depending
on their institutional and corporate culture background. In what fol-
lows the literature will be reviewed according to the three categories
provided by Pinkse and Kolk (2009).
15�5�7�1 Government-sponsored voluntary programmes
for firms
Government-sponsored programmes for firms, where participation is
completely voluntary and there are no penalties for not participating in
the agreement, have been implemented in several countries, including
the United States and Australia. The United States EPA led voluntary
programmes foster partnerships with industry and the private sector
at large by providing technical support among other means (US EPA,
2013).
Ex-post case studies on the environmental and economic effective-
ness have been scarce compared to the wide range of activities. Where
available, they have been critical of this type of programme. Several
studies say little reduction was achieved (see Brouhle etal. (2009) ana-
lyzing a voluntary programme in the US metal-finishing industry) or
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the impacts were short lived, as was the case for the US Climate Wise
Program (Morgenstern etal., 2007). See also Griffiths etal. (2007) and
Lyon and Maxwell (2004) who conclude the US Climate Leaders pro-
gramme had little effect on firm behaviour.
15�5�7�2 Voluntary agreements as a major complement to
mandatory regulations
Voluntary agreements (VAs) often form a part of a larger climate policy
approach that contains binding policies such as a carbon tax or a cap-
and-trade programme. Voluntary agreements conducted jointly with
mandatory regulations have been widely implemented in Europe (Rez-
essy and Bertoldi, 2011).
This approach allows the regulated industries to use the voluntary
agreement as a partial fulfilment of the mandatory regulation. For
example, through participation in the CCA in the UK, energy intensive
industrial sectors established targets to improve energy efficiency and
the companies that met such targets received an 80 % discount from
the CCL (Price etal., 2008). Likewise, the Dutch government ensured
industries participating in Long-Term Agreements (LTA) were not sub-
ject to additional government policies regulating CO
2
emission reduc-
tions or energy conservation and that the new energy tax would not be
levied on the participating industries. In both cases participants estab-
lished a long term plan to save energy and reduce CO
2
, and imple-
mented energy management systems (Price etal., 2008; Stenqvist and
Nilsson, 2012).
Some studies found that the voluntary agreements were environmen-
tally and economically effective. Bressers etal. (2009) found positive
results in terms of ambition, compliance, goal attainment and behav-
ioural change. They also acknowledged the efficiency advantages of
flexibility in phasing technical measures. Ekins and Etheridge (2006)
analyzed the UK CCA and found that, while the targets were not very
stringent and were generally achieved in advance of the set date, the
CCAs appeared to have catalyzed energy savings by increasing aware-
ness. This allowed the net environmental benefits to exceed what
would have been achieved by levying a flat tax without rebates and
CCAs while also generating economic gains for the companies under
the CCAs (Ekins and Etheridge, 2006).
Rezessy and Bertoldi (2011) assessed the effectiveness of voluntary
agreements in nine EU member countries. In cases where there is
cooperative culture between governmental entities and the private
sector, VAs can have some beneficial effects compared to legislation.
They include willingness by the industry, sharing of information, flex-
ibility in phasing measures, and fine-tuned solutions to individual
industries. They emphasized that by engaging signatories in energy
audits, consumption monitoring, energy management systems and
energy efficiency project implementation, the voluntary agreements
helped overcome the barrier for energy efficiency improvement in a
systematic manner. Nevertheless, they also noted that the VAs had
been criticized for lenient targets, deficiencies in monitoring, and
difficulty in establishing the additionality. There are other critical
studies. Bohringer and Frondel (2007) argued that they found little
evidence that the commitment of the German cement industry was
effective, due to weak monitoring. Martin et al. (2011) concluded
that the CCL had strong negative environmental impacts. Voluntary
agreement between the European Commission and the car indus-
try which set a mid-term target of 25 % reduction on CO
2
emissions
from automobiles by 2008 completely failed (Newell and Paterson,
2010).
15�5�7�3 Voluntary agreements as a policy instrument in
governmental mitigation plan
Voluntary agreements may be used as a major policy instrument with
wide coverage and political salience in a governmental mitigation
plan. This type of voluntary agreement has been implemented in Japan
and Taiwan, province of China.
The Japanese Voluntary Action Plan (VAP) by Keidanren (Japan Busi-
ness Federation) was initiated in 1997. The plan, led by Keidanren
and joined by 114 industrial associations, covered about 80 % of
GHG emissions from Japan’s industrial and energy transformation
sectors. The plan is embedded in the regulatory culture in which the
government constantly consults with industrial associations. It was
reviewed annually in governmental committees, and an independent
third party committee was also established to monitor its implemen-
tation; the included industries were required to be accountable with
their environmental performance constantly. Industrial groups and
firms established energy and GHG management systems, exchanged
information, being periodically reviewed and acted to improve
energy efficiency and cut GHG emissions. Several industry sectors
raised the ambition levels with stricter targets during the course of
VAP, once they achieved original targets (Tanikawa, 2004; Akimoto,
2012; Uchiyama et al., 2012; Yamaguchi, 2012). An econometric
analysis found that voluntary actions by the manufacturing sector
led to significant energy efficiency investments (Sugino and Arimura,
2011).
Two successful case studies in VAP have been reported. In cutting
stand-by power by electric appliances, three major industrial associa-
tions announced 2001 the target to limit stand-by power less than 1
W for all electric appliances to be met by 2003. It was possible for
them to commit to the ambitious targets — ambitious in terms of the
level of target (1 W), wide coverage of appliances, and early timing of
goal — exactly because it was voluntary, not mandatory. In contrast,
other countries that took a regulatory approach have implemented
much weaker targets at later dates, and the coverage of appliances
had been small. By 2003, almost all appliances met the target on time
in Japan. Also, semiconductor industrial associations committed to cut
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Perfluorocarbons (PFC) emissions in 1998 and succeeded in reduction
by 58 % by 2009 (Wakabayashi, 2013).
Chen and Hu (2012) analyzed the voluntary GHG reduction agree-
ments of six different industrial sectors, as well as the fluorinated gases
(F-gas) reduction agreement of the semiconductor and liquid crystal
display (LCD) industries in Taiwan, province of China. They found that
the plan launched in 2005 was largely successful.
15�5�7�4 Synthesis
The voluntary agreements have been successful particularly in coun-
tries with traditions of close cooperation between government and
industry (IPCC, 2007; Rezessy and Bertoldi, 2011; Akimoto, 2012;
Yamaguchi, 2012).
Successful voluntary agreements are characterized by a proper institu-
tional framework. This framework consists of, first, capable and influ-
ential industrial associations that serve as an arena for information
exchange and development of common expectation among industries.
Second, governmental involvement in implementation review is cru-
cial. Third, accompanying measures such as technical assistance and
subsidies for energy audits and equipment can also be instrumental.
Finally, regulatory threats, even if they are not explicitly articulated, are
an important motivating factor for firms to be active in the voluntary
agreements.
The key benefits of voluntary agreements are: 1) quick planning and
actions when technological solutions are largely known but still face
uncertainties; 2) flexibility in phasing technical measures; 3) facilitating
coordination and information exchange among key stakeholders that
are crucial to removing barriers to energy efficiency and CO
2
reduc-
tions; and 4) providing an opportunity for ‘learning by doing’ and shar-
ing experiences.
However, several voluntary agreements have been criticized for not
bringing about significant environmental impacts due to their limited
scope or lack of proper institutional framework to ensure the actions
to be taken (see Sections 15.5.7.2 and 15.5.7.3).
As cross-national evaluations, Morgenstern and Pizer (2007) reviewed
voluntary environmental programmes in the United States, Europe, and
Japan and found average reductions in energy use and GHG emissions
of approximately 5 % beyond baselines. Borck and Coglianese (2009)
argued that, as an alternative to regulatory approaches, voluntary
agreements may effectively achieve small environmental goals at com-
paratively low cost.
The major role of voluntary agreements is to facilitate cooperation
among firms, industrial associations, and governments in order to find
and implement low cost emissions reduction measures. Such a role is
important because large mitigation potential exists, yet it is hampered
by formidable barriers such as lack of information and coordination
among actors. In such context the voluntary agreements can play an
important role as part of a policy package.
15�5�8 Summary
This section has reviewed a range of policy instruments. Among the
four policy evaluation criteria, literature is rich for economic and envi-
ronmental effectiveness. The distributional incidence of taxes has
been studied quite extensively, much less is known about other policy
instruments. Political and institutional feasibility was also discussed as
a design issue of economic instruments. The reasons for which sector
specific policy instruments such as regulations and information mea-
sures have higher political feasibility than economy-wide economic
instruments were briefly discussed in Section 15.2, but there is a
dearth of literature really analyzing this issue.
Basic economics suggests that one instrument — e. g., a price on car-
bon — would be most cost effective in dealing with the market failure
associated with the release of greenhouse gases. The presence of other
market failures, however, means that one instrument is insufficient for
dealing comprehensively with issues related to the climate problem.
We have seen in Section 15.5.4 that there are cognitive and institu-
tional factors that imply barriers to market response to carbon prices.
Therefore, regulatory approaches, information programmes, voluntary
agreements, and government provision may serve as a complement to
pricing policy as a way to remove barriers, thereby saving the money
of firms and individuals and reducing social costs. There are strong
separate arguments for a technology policy to correct for the external-
ity implied by insufficient protection of property rights, as detailed in
Section 15.6. Furthermore, because carbon-pricing policy is often lack-
ing or insufficient for political reasons in nations, various policy instru-
ments are playing substitutive role (see Section 8.10 for examples of
the transport sector).
In several sectors such as transport, urban planning and buildings,
energy, and forestry, government planning and provision of infra-
structure is important, even crucial, for achieving emission reduc-
tions in a cost-effective manner. Absent the appropriate infrastruc-
ture, the costs of achieving significant emission reduction might be
prohibitive.
As discussed in Section 15.2 and this section, real-world politics tend
to produce various policy instruments and differentiated carbon price
across sectors owing to politics. Those policy instruments may posi-
tively interact as illustrated above, but may also negatively interact.
Such interactions will be further detailed in Sections 15.7 and 15.8.
Policymakers face the challenge to understand how the policy package
is constructed in their nation and must harmonize various policy instru-
ments so that they interact synergistically.
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15.6 Technology policy
and R&D policy
15�6�1 Overview of the role of technology
policy and R&D policy
As discussed in Chapter 3.11, there are market failures associated with
research, technology development, and technology diffusion that are
distinct from and interact with the market failures associated with
environmental harm of human activities such as anthropogenic climate
change. There is therefore a distinct role for technology policy in cli-
mate change mitigation, which is complementary to the role of policies
aimed directly at reducing current GHG emissions, which are discussed
in Section 15.5 above.
Public policies and institutions affect the rate and direction of techno-
logical change at all points in the chain from the invention, to inno-
vation, to adoption and diffusion of the technology, and unaddressed
market failures or barriers at any stage in the chain can limit policy
effectiveness (Nemet, 2013). The innovation systems literature stresses
that technology development and deployment are driven by both tech-
nology push (forces that drive the development of technologies and
innovation such as R&D funding and tax breaks for R&D, patents), and
demand pull forces that increase the market demand for technologies
such as technology subsidies and standards (Gallagher et al., 2012;
Wilson etal., 2012).
Box 15�2 | National and sub-national policies specific to least developed countries (LDCs)
A number of developing countries have developed legislative and
regulatory frameworks to measure and manage GHG emission
(Box 15.1). These frameworks or strategies can be a part of larger
development plans that aim to shift the economy to a low carbon
and climate resilient trajectory. These plans can serve an important
signaling function by aiding coordination of government agencies
and stakeholders in addition to providing the government’s com-
mitment to a low-carbon policy framework (Clapp etal., 2010).
There are pre-requisites to develop these low carbon development
strategies. Achieving this policy ‘readiness’ entails assembling the
technical knowledge and analytical capacity, legal and institu-
tional capacity, and engagement of stakeholders in the process
(Aasrud etal., 2010; van Tilburg etal., 2011). Capacity building
is also a continuous process that aims to improve strategies over
time to enhance low carbon outcomes. Readiness for market-
based instruments increases mitigative capacity in general and
enables implementation and monitoring of mitigation policies
(Partnership for Market Readiness, 2011). Due to tremendous
variation in capacity across countries, sufficient flexibility to allow
these strategies to evolve over time is needed (Clark etal., 2010;
van Tilburg etal., 2011).
Evidence from CDM projects indicates that capacity building is
necessary but not sufficient to allow countries to attract CDM
projects. Targeted measures like support for Designated National
Authorities have shown to be successful (Okubo and Michaelowa,
2010). In addition, CDM projects have been an important mecha-
nism for creating awareness about climate change mitigation, and
have served as an indirect link between cap-and-trade systems
around the world (Michaelowa, 2013). Some developing country
beneficiaries of CDM are also moving towards implementing
longer-term national mitigation policies. For an assessment of
the Clean Development Mechanism, please refer to Chapter 13
(13.13.1.2) and Chapter 16 (16.8) for the technology component.
Climate change mitigation has also been pursued through a co-
benefits approach (See Section 15.2). Increasing access to energy
services is an important priority for policymakers in developing
countries (Chapter 4). An estimated 1.3 billion of the world’s
people have no access to electricity and roughly three billion rely
on highly polluting and unhealthy traditional solid fuel for house-
hold heating and cooking (IEA, 2012; Pachauri etal., 2012, p.19)
(see Section 14.3.2.1). In the short term, policies may address use
of climate-friendly technologies like solar lighting alternatives to
kerosene lamps (Lam etal., 2012), and gasifier cook stoves (Grie-
shop etal., 2011), while longer term policies may address more
comprehensive approaches such as universal grid connectivity.
Chapter 6 (Section 6.6.2.3) and Chapter 16 (Box 16.3 in Section
16.8) use global scenario results to conclude that universal basic
energy access can be achieved without significantly increasing
GHG emissions.
One option particularly relevant for developing countries is a
repeal of regressive subsidies given to fossil fuel based energy car-
riers, together with suitable compensating income transfers so as
not to limit energy access or increase poverty (see Section 15.5.2).
In some developing countries, subsidies to fossil fuels are slowing
penetration of less expensive renewables. For example subsidies
to natural gas result in an incremental levelized cost of wind
power in Egypt of an estimated 88 % (Schmidt etal., 2012). Care
must also be taken to ensure transparency and to clearly demon-
strate that the savings that accrue from the removal of subsidies
will be used to benefit the poor.
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Technology systems may create path dependencies in the innovation
process. The current dominance of the carbon-based system creates
incentives to improve carbon technology rather than non-carbon.
This has been observed in private (Aghion etal., 2012) as well as
public institutions (Unruh, 2000) exemplified by fossil fuel subsidies
(OECD, 2013). Escaping carbon lock-in is essentially a problem of
coordination (Rodrik, 2007; Kretschmer, 2008), which can be facili-
tated by public policy that addresses technology-push, demand-pull,
and framework conditions in a complementary fashion (Nemet,
2013).
This section addresses the generic issues that arise in the implementa-
tion of policies intended specifically to foster the development and
implementation of low-GHG technologies. It begins by discussing
technology policy instruments in three overarching categories: 1) the
patent system and other forms of intellectual property (IP); 2) public
funding of research, tax subsidies for firms engaging in R&D; and 3)
various policies designed to foster deployment of new technologies.
It then moves on to discuss the impact of environmental policy on
technological change in general, technological change in a broader
social framework often termed an ‘enabling environment’ together
with interactions across various elements of innovation systems, and
finally the importance of incorporating programme evaluation into the
design of technology policy.
15�6�2 Experience with technology policy
15�6�2�1 Intellectual property
Public policy towards IP inherently involves a tradeoff between the
desire to create incentives for knowledge creators and developers,
and the desire to have new knowledge used as widely as possible
once it is created (Hall, 2007). It is therefore crucial to analyze the
extent to which IP protection such as patents, will foster climate
change mitigation, by encouraging the creation and development of
new GHG-reducing technologies, versus the extent to which it will
hamper mitigation by raising the cost and limiting access to such
new technologies as are developed. Intellectual Property policy will
affect climate change mitigation both through its effects on the cre-
ation of new technology and on the international transfer of miti-
gation technology. The first of these mechanisms will be considered
here; the effect of IP policy on technology transfer is discussed in
Chapter 13.9.
In general, the empirical evidence that IP protection stimulates inno-
vation is limited to the chemical and pharmaceutical sectors, and to
developed economies (Park and Ginarte, 1997). It is unclear to what
extent IP protection is relevant to the development of the kind of tech-
nologies that would mitigate climate change in advanced and middle
income countries, and it appears unlikely to be relevant to indigenous
technology development in the poorest countries (Hall and Helmers,
2010).
11
The Trade Related Intellectual Property Rights (TRIPS) agreement gener-
ally commits all countries to create and enforce standard IP protections,
but it does allow for the possibility of exceptions to standard patent
regulations for public policy reasons (World Trade Organization, 1994).
Hence a major policy issue related to climate change is the extent to
which developing countries will be compelled within the TRIPS frame-
work to enforce strong IP protection relative to GHG-reducing technolo-
gies, or whether an exception or exceptions will develop for these tech-
nologies on public policy grounds (Derclaye, 2008; Rimmer, 2009).
Because the evidence that strong IP protection increases domestic
innovation is almost entirely limited to specific sectors in the devel-
oped world, it is unclear whether maintenance of strong IP protection
in less developed countries will increase those countries’ indigenous
creation or adaptation of GHG-reducing technologies. As discussed in
Chapter 13, however, the evidence does suggest that the presence of
an effective IP regime is a factor in fostering technology transfer into
a country.
15�6�2�2 Public funding of research and development
Public funding of research and development may address specific mar-
ket failures related to innovation (as discussed in Chapter 3.11), but
may also help to compensate for barriers to private investment that may
result from long lifetimes of incumbent technologies leading to lengthy
transition times from one system / technology to another (Fouquet and
Pearson, 2006; Fouquet, 2010), uncertainty about future levelized costs
of capital or discount rates (Nemet, 2013), or the lack of guarantee on
the success of an investment (Mazzucato, 2013; Nemet, 2013).
Public research expenditures that have the potential to foster the long-
run development of GHG-mitigating technology come under a number of
different common public research expenditure categories, including envi-
ronment, agriculture, materials, and others. There are no widely accepted
data that attempt to identify and sum up public expenditures across dif-
ferent categories that potentially relate to mitigation technologies. Much
discussion about the potential for technological change to mitigate GHG
emissions revolves around reducing and eliminating use of fossil fuels,
and the largest single category of public research expenditure related to
mitigation is energy research, discussed in Chapter 7.12.2.
Public energy-related research expenditures among the International
Energy Agency (IEA) countries currently comprise about 5 % of total
public R&D spending in those countries, less than half the share of
11
There are however other relevant examples for instance of indigenous knowledge
in developing countries being valuable when it comes to biodiversity and pharma-
ceuticals.
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such research in total public research spending in 1980. Gallagher et
al. (2012) report an increase in public funding for energy-technologies
among IEA member countries in the 2000s but also find a continued
prominence of funding for nuclear and fossil fuel technologies. A simi-
lar trend has been noted for non-IEA members like Brazil, China India,
Mexico, Russia, and South Africa (Gallagher etal., 2012). A gradual
but steady increase in this share is a major policy option for fostering
the long-run development of GHG-reducing technologies (Jaffe, 2012).
The U. S. National Research Council (NRC) evaluated Federal Energy
research, development, and demonstration (RD&D) investments in
energy efficiency and fossil energy for the period 1978 – 2000. The NRC
found that these investments “yielded significant benefits (economic,
environmental, and national security-related), important technological
options for potential application in a different (but possible) economic,
political, and / or environmental setting, and important additions to the
stock of engineering and scientific knowledge in a number of fields”
(U. S. National Research Council, 2001). In terms of overall benefit-
cost evaluation, the NRC found that the energy efficiency programmes
produced net realized economic benefits that ‘substantially exceeded’
the investment in the programmes. For the fossil energy programmes,
the net realized economic benefits were less than the cost of the pro-
grammes for the period 1978 – 1986, but exceeded the cost of the pro-
grammes for 1986 – 2000 (U. S. National Research Council, 2001). Japa-
nese technology RD&D programmes for renewable energy and energy
efficiency, known as Sunshine program and Moonlight program since
1974, were also found to be both economically and environmentally
effective (Kimura, 2010).
In the short run, the availability of appropriately trained scientists and
engineers is a constraint on a country’s ability to increase its research
output (Goolsbee, 1998) (See also Jensen and Thomson, 2013). This
factor combines with short-run adjustment costs in laboratory facilities
to make rapid ramp-up in research in a particular area likely to be cost-
ineffective, as found to occur, for example, as a result of the doubling
of US health research (Cockburn et al., 2011). Therefore, sustained
gradual increases in research are likely to be more effective than short-
run rapid increases. In the long run, it is possible to expand the supply
of scientific and technical labour available to perform energy-related
research. This can occur through training that occurs when publicly
funded research is carried out at universities and other combined
research and teaching institutions, and / or via direct public funding of
training. Success at increasing the technical workforce has been found
to be a crucial factor in the long-run benefits of health-related research
in the United States (Cockburn etal., 2011).
15�6�2�3 Policies to foster or accelerate deployment and
diffusion of new technologies
In addition to fostering technology development through research, many
policies seek to foster the deployment of GHG-mitigating technologies
in households and firms. Such deployment policies could be thought
of as a form of abatement policy, to the extent that they reduce emis-
sions relative to what would occur with the use of previous technologies.
But the more fundamental reason for public policy to foster technology
deployment is that deployment feeds back and enhances subsequent
improvement of the technology over time (Jaffe and Stavins, 1994; Hen-
kel and Hippel, 2005; Jaffe, 2012). For example, publicly funded research
certainly played a role in the digital revolution, but active government
involvement as an early purchaser was also crucial (Mowery, 2011). Pur-
chases were made of products meeting stated technical specifications,
and this approach has helped move products down the learning curve,
eventually allowing civilian versions to be sold competitively.
Market failure in the deployment of new technologies is often illus-
trated via an image of a ‘Valley of Death’ between small scale or
prototype developments and successful commercialization, in which
the need for substantial increase in the scale of investment combines
with uncertainty about technical reliability, market receptiveness and
appropriability to stall or slow deployment (Grubb, 2004; Nemet, 2013,
p.112). A variety of demand-pull public policies can operate to carry
technology deployment through the Valley of Death.
As laid out in Table 15.2, economic instruments such as subsidies, reg-
ulatory approaches, information programmes, government provision of
public goods and services, as well as voluntary actions are common
across sectors. The targeted technologies include low-emission vehi-
cles such as hybrid cars in the transport sector (8.10), efficient electric
appliances such as light-emitting diodes (LED) in the building sector
(9.10), and advanced industrial equipment (11.10). Feed-in-tariffs are
used for renewable in the power sector (7.10). Quantity requirement
are also common, including RPSs in the power sector (7.10), biofuel
mandates in the transport sector (8.10). Information programmes such
as labelling of home electric appliance may be used to promote the
sales of new, low emission technologies (9.10).
Since AR4, a large number of countries and sub-national jurisdictions
have introduced support policies for renewable energy. These have
promoted substantial diffusion and innovation of new energy tech-
nologies such as wind turbines and photovoltaic panels, though many
renewable energy (RE) technologies still need policy support, if their
market shares are to be increased (see 7.5.3, 7.6.1, 7.8.2, and Chap-
ter11 Bioenergy Annex).
Chapter 7 (citing the IPCC Special Report on Renewable Energy Sources
and Climate Change Mitigation (SRREN)) argued that “...some feed in
tariffs have been effective and efficient at promoting RE electricity,
mainly due to the combination of long-term fixed price or premium
payments, network connections, and guaranteed purchase of all RE
electricity generated”. Feed-in-tariffs have been effective in promoting
renewables in Germany and other nations (Couture and Gagnon, 2010;
Ragwitz and Steinhilber, 2013). It is also argued that the flexibility of
FITs can incorporate economic and technological changes (Klobasa
etal., 2013) and encourage dynamic innovation (Mitchell etal., 2006).
Proving dynamic efficiency in the narrow economic sense is more com-
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plicated, although Jaffe etal., (2005) have explored this in a somewhat
positive light.
There are different views on FITs, especially in relation to their cost-
effectiveness. Some criticize FIT of having ‘failed to harness market
incentives’ because it is not statically cost effective (i. e., it supports
photovoltaics in addition to wind energy, although the former is more
expensive than the latter) (Frondel etal., 2008, 2010) . Schmalensee
(2012), using a simple model, argues that while FITs shift risk away
from investors in renewable energies, they may not reduce the risk to
society as a whole. In a paper for the European Union, Canton and
Linden (2010) argue that feed-in premiums are preferable to FITs if
internal market distortions are to be avoided.
With the increasing market shares of intermittent generation, new
challenges have to be addressed in respect to grid and market integra-
tion such as capacity constraints, demand spikes, back up capacity, and
transmission. A reform of market design, including flexible demand
side pricing, is proposed to make the system more flexible so it can
react to the new challenges (See 7.10 and SSREN Chapter 8 for details
(Sims etal., 2012).
A theme that runs through many of the sectoral deployment policy
discussions is the importance of information, and the relationship
between incomplete information and risk. Uncertainty about the physi-
cal and economic performance of new technologies is a major factor
limiting their diffusion, so policies that address information issues may
be complementary with economic incentives or regulatory approaches.
Many nations, including Germany, Spain, China, India, among others,
have implemented ambitious deployment programmes for renewables
consisting of capacity targets, FIT, and so forth (Jänicke, 2012), result-
ing in rapid capacity expansion and lower costs of technologies. Such
progress may result in economic and environmental efficiency in the
long run at the global scale (Kalkuhl etal., 2013). Ondraczek (2013)
identifies awareness among consumers as a critical element in market
development in Kenya and Tanzania and finds evidence for a ‘virtu-
ous cycle’ between dissemination and awareness. Friebe etal. (2013)
emphasize the need for including pre and post-sales services to sustain
the uptake of solar home systems. Glemarec (2012) highlights the role
for public-private partnerships to deliver energy access but underlines
the need for public investment in capacity and market development.
Many developing countries face a somewhat different set of choices
in encouraging technology deployment because of the dominance
of state-owned or other monopoly enterprises in the energy sector.
Liu and Kokko (2010) evaluate the factors related to the significant
growth of wind power in China, and conclude that administrative rules
stipulating levels of wind usage have been more effective than incen-
tives operating through the pricing system. Pegels (2010) describes
the introduction of a renewable FIT guaranteed for 20 years in South
Africa, but notes that it is unclear what effect this will have on the
investment decisions of the monopolist electricity supplier.
15�6�3 The impact of environmental policy
instruments on technological change
There is some empirical literature assessing the impact of generic
environmental policy instruments (discussed in the previous section)
on technological change. For surveys, see Newell (2010) and Popp
etal. (2010b). Jaffe and Palmer (1997), looking across industries in the
United States., found that more stringent regulation was associated
with higher R&D expenditures (controlling for industry fixed effects),
but did not find any impact on industry patents. Lanjouw and Moody
(1996) did find that across the United States, Germany, and Japan, pat-
enting rates were correlated at the industry level with pollution control
expenditures.
A number of studies have looked at the impact of energy prices on
energy-saving technological change. These effects can be seen as
indicative of the possible consequences of GHG policies that increase
the effective price of emitting GHG. Popp (2002) found that rising
energy prices increased the rate of patenting with respect to alterna-
tive energy sources and energy efficiency, with more than one-half
the effect coming within five years of energy price changes. Newell
(1999) found that rising energy prices increased the efficiency of the
menu of household appliances available for purchase in the United
States. The Norwegian carbon tax appears to have triggered technol-
ogy innovation in the form of carbon dioxide storage in the Sleipner
gas field (Sumner etal., 2011). Fuel taxes moved auto industry innova-
tion towards more efficient technologies (Aghion etal., 2012), and the
EU ETS moved the firms most affected by its constraints towards low-
carbon innovation (Calel and Dechezleprêtre, 2012).
At a theoretical level, there are arguments why incentive-based policies
such as carbon taxes or tradable permits are more conducive to inno-
vation than regulatory approaches (Popp, Newell, etal., 2010b). After
the 1990 Clean Air Act Amendments in the United States implemented
a tradable permit programme for sulphur dioxide, Popp (2003) found
that the rate of patenting on techniques for sulphur removal increased,
and Lange and Bellas (2005) found that both capital and operating
expenditures for scrubbers were reduced. In a survey of research on
the effects of tradable permit systems on technology innovation and
diffusion, Bellas (2011) concluded “The general result is that tradable
permit programs have improved the pollution control technology com-
pared to the previous regulation used.” Sterner and Turnheim (2009)
find similarly that the very high fee on NO
x
in Sweden has led to a
rapid process of both innovation and technology diffusion for abate-
ment technologies.
More recently, a few studies have explored the effect of renewable
energy policies on energy innovation. Johnstone etal. (2010) found
that policy had a significant impact on patent applications for renew-
able technologies, with different policy instruments being effective for
different technologies. Popp etal. (2010a) found that the link between
greater patenting and investment in specific technologies is weak, but
there does seem to be an association between policy and investment.
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15�6�4 The social context of technological
transitions and its interaction with
policy
The central insight from the empirical literature is that both technol-
ogy push and demand pull policies are required to be most effective
(Nemet, 2009). A ‘virtuous cycle’ (IEA, 2003; Edenhofer etal., 2012)
can occur, derived from learning from combined technology push and
market pull whereby as ‘learning’ from market demand feeds back in
to research and development, the improved product leads to more
market demand and reduced costs. This virtuous technology and mar-
ket cycle has been extended to include a third cycle of policy learning
(Jänicke, 2012) whereby as learning from a successful policy occurs
across the innovation chain, it can also be fed back into the process.
A technology policy will be more effective if it addresses multiple
aspects such as institutions, regulations and standards, political mod-
els, laws, social norms and preferences, individual behaviours, skills,
and other characteristics. This idea was originally developed and
encapsulated in the UNFCCC definition of an ‘enabling environment’
(UNFCCC, 2001).
12
This general intention to match up specific technol-
ogy requirements with the system situation in which they develop has
been called framework conditions (Grubb, 2004), enabling environ-
ment (Edenhofer etal., 2012; Johansson etal., 2012), enabling factors
(Nemet, 2013), and complementary innovations (Grubb etal., 2014).
There is a literature base that explores technology transitions and the
implications of multilevel interactions across social and technological
elements (e. g., Geels, 2011; Meadowcroft, 2011; Foxon, 2011). Three
social challenges are raised as especially salient to social management
when attempting to alter the technological system: (1) the size and vis-
ibility of transfers and assets created; (2) the predictability of pressure
to expand the focus of the policies to broaden the social benefits; and
(3) the potential for market incentives and framings of environmen-
tal issues to undermine normative motivational systems (Parson and
Kravitz, 2013). Managing these social challenges may require innova-
tions in policy and institutional design, including building integrated
policies that make complementary use of market incentives, authority,
and norms (Foxon, 2011; Gallagher et al., 2012; Parson and Kravitz,
2013). Doing so will reduce the risk of market incentives failing to
achieve behavioural change and recognizes that incentives and norms
have to be integrated to achieve sustainability transitions.
12
Enabling environment is defined as: “the component of the framework [that]
focuses on government actions such as fair trade policies, removal of technical,
legal and administrative barriers to technical transfer, sound economic policy,
regulatory frameworks and transparency, all of which create an environment
conducive to private and public sector technology transfer” (UNFCCC, 2001).
15�6�5 Building programme evaluation into
government technology programmes
Evaluation of government programmes to foster new energy technolo-
gies has been hampered by a lack of complete and consistent evalu-
ation data at the programme level (U. S. National Research Council,
2001). This problem is common to many government technology pro-
grammes. Proper evaluation requires that data on project selection and
project performance be collected as programmes commence and main-
tained after they are completed (Jaffe, 2002). Wider use of such evalua-
tion methods would allow experience with relative effectiveness of dif-
ferent programmes to be used to improve outcomes over time. While
the above argument applies to all governmental policy in general, it is
particularly important for technology development programmes that
may be vulnerable to governmental failure related to the picking and
choosing of technologies under high uncertainty (Helm, 2010).
15�6�6 Summary of technology policy and R&D
policy
There is a distinct role for technology policy in climate change mitiga-
tion. This role is complementary to the role of policies aimed directly at
reducing current GHG emissions (15.6.1).
The availability of new technologies is crucial for the ability to realis-
tically implement stringent carbon policies. Technology policy will be
most effective when all aspects of the innovation / deployment chain
are addressed in a complementary fashion (see Section 15.6.1). Invest-
ment depends on the willingness of a variety of actors to manage the
balance between the risks and rewards in each step of the chain, and
government decisions are crucial to this balance.
Evidence suggests that the presence of an effective IP regime increases
domestic innovation. However, as evidence is almost entirely limited
to specific sectors in the developed world, it is unclear whether strong
IP protection in less developed countries will increase those coun-
tries’ indigenous creation or adaptation of mitigation technologies
(15.6.2.1).
Worldwide investment in research in support of climate change miti-
gation is small relative to overall public research spending. The effec-
tiveness of research support will be greatest if it is increased steadily
rather than dramatically or erratically (15.6.3).
A wide range of policy approaches is prevalent across sectors, which
enable policy design that addresses sector- and technology-specific
attributes. These policies are often designed as complementary sets of
policies, or policy packages (15.5.1 and 15.6.2.3).
Complementary framework conditions, or an enabling environment,
may complement a package of technology-push and demand-pull poli-
cies (15.6.4). Managing social challenges of technology policy change
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may require innovations in policy and institutional design, including
building integrated policies that make complementary use of market
incentives, authority and norms (15.6. 4).
It is important that data collection for programme evaluation be built
into technology policy programmes (15.6.5), because there is very little
empirical evidence on the relative effectiveness of different mecha-
nisms for supporting the creation and diffusion of new technologies.
15.7 Synergies and tradeoffs
among policies
This section discusses interactions between policies with different
main objectives as well as between differing climate policies with the
same objective. Section 15.7.2 discusses relationships between poli-
cies with different principal objectives — for example, between climate
policy and development policy. The next two sections consider inter-
actions between climate policies. Section 15.7.3 describes interactions
between different climate policies at different levels of government,
and 15.7.4 takes up interactions between climate policies enacted at
the same level of government. The interactions in 15.7.3 and 15.7.4
reflect the absence of policy coordination, and they affect the environ-
mental and economic outcomes. Deliberate linking of policies is dis-
cussed in Section 15.8.
15�7�1 Relationship between policies with
different objectives
Governments throughout the world have enacted various policies to
support the mitigation of climate change, which is the central objec-
tive of climate policy. However, the implementation of mitigation poli-
cies and measures can have positive or negative effects on additional
objectives — and vice versa. To the extent these side-effects are posi-
tive, they can be deemed ‘co-benefits’; if adverse and uncertain, they
imply risks.
13
The co-benefits of climate policy are primary benefits of
policies with other main objectives. Social development is a primary
benefit of development policy, since such development is the main
objective. Similarly, enhanced energy security, technological develop-
ment, and reduced air pollution are primary benefits of energy security,
technological development, and air-pollution policies, respectively. To
the extent that these other policies (with other objectives) lead to miti-
gation, such mitigation is a co-benefit of these other policies.
13
Co-benefits and adverse side-effects describe effects in non-monetary units
without yet evaluating the net effect on overall social welfare. Please refer to the
glossary in AnnexI for definitions and to Chapters 3.6.3 and 4.8 for a discussion
of how the concept of co-benefits relates to welfare and sustainable development,
respectively.
Although there is growing interest in research on mitigation as a
co-benefit (see Sections 1.2.1 and e. g., Kahn Ribeiro and de Abreu,
2008), the great majority of the literature assessed in other chapters
focuses on the co-effects of sectoral mitigation measures (Chapters
7.9, 8.7, 9.7, 10.8, 11.7, 11.13.6, and 12.8) or transformation path-
ways (Section 6.6) on additional objectives. Table 15.1 in Section
15.2.4 provides a roadmap for the assessment of those co-benefits
and adverse side-effects on the many objectives examined in vari-
ous chapters of this report and highlights that the effects on energy
security and air pollution as well as the associated reductions in
health and ecosystem impacts are discussed in all sector chapters.
For example, stringent mitigation results in reduced combustion of
fossil fuels with major cuts in air pollutant emissions significantly
below baseline scenarios (see 6.6.2.1 and, e. g., ApSimon et al.,
2009) for a discussion of policy interaction in Europe); by increas-
ing the diversity of energy sources and reducing energy imports in
most countries, mitigation often results in energy systems that are
less vulnerable to price volatility and supply disruptions (see 6.6.2.2
and, e. g., Lecuyer and Bibas, 2011) for a discussion of policy interac-
tion in Europe).
According to recent scenario studies assessed in Chapter 6.6.2.7, strin-
gent climate policies would significantly reduce the costs of reaching
energy security and / or air pollution objectives globally. Recent litera-
ture assessed in Chapters 6.6.2.3, 7.9.1 and 16.8 finds that increas-
ing access to modern energy services may not conflict with mitigation
objectives — and vice versa.
There are two important advantages to coordinating separate policies
and their various benefits. By coordinating policies, the various ben-
efits and costs can be considered in an integrated fashion, which offers
information helpful to determining how to achieve the objectives at
low cost (see 6.6.2.7). In addition, coordinating policies can improve
political feasibility. The concept of ‘mainstreaming’ climate policy
refers to the linking of climate policy with other policy efforts, particu-
larly policy efforts that have broad recognition. The prospects for suc-
cessful climate policy can be enhanced through such mainstreaming
(Kok and de Coninck, 2007).
Development frameworks at international or national levels, or by sec-
tor, may include mainstreaming as a key element. For it to be effective,
climate change mitigation needs to be mainstreamed in appropriate
national and sector planning processes to widen development goals
within national and sectoral contexts. For developing countries, such
integration of mitigation into development planning can reduce prob-
lems of cooperation and coordination that may arise across different
levels of government (Tyler, 2010).
Mitigation plans can be embedded in national policy-making processes
to align economic and social development with mitigation actions. For
example, in China, the National Leading Group on Climate Change is
part of the National Development and Reform Commission, the princi-
pal national planning body (see Section 15.2.2.2).
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Limited institutional capacity in developing countries presents the
most significant barrier to mainstreaming of mitigation policies. This
includes a lack of knowledge and / or expertise in climate change
issues, a lack of (or weak) oversight and / or enforcement. Developing
countries aiming to mainstream and implement climate change miti-
gation policies must; 1) encourage awareness on the topic; 2) establish
related training programmes; 3) ensure an adequate level of finance
for enforcement; and 4) enhance coordination between ministries (Ellis
etal., 2009).
15�7�2 Interactions between climate policies
conducted at different jurisdictional
levels
Climate policy has been conducted at various jurisdictional levels:
international, national, regional (state or provincial), and local (munici-
pal). Important interactions can occur across jurisdictional levels. Some
interactions are beneficial, reinforcing the intended effects; others are
problematic, interfering with the planned objectives. Sound policymak-
ing requires attention to these interactions.
15�7�2�1 Beneficial interactions
Policies introduced by a local jurisdiction sometimes reinforce the
goals of efforts undertaken at a higher jurisdictional level. In particu-
lar, a sub-national policy can enhance cost-effectiveness if it addresses
market failures that are not confronted by a national climate policy.
Thus, for example, as seen in Sections 15.5.4 and 15.5.6, an RPS in
the electricity sector and an R&D subsidy could usefully complement a
national emissions pricing policy.
The connections between instruments that deal with climate change
and those that deal with congestion or local pollution also present an
opportunity to policymakers, but they are very different since the latter
vary depending on the socioeconomic context, technology, fuel, and
vehicle use (Parry etal., 2007; Oikonomou and Jepma, 2008; Vander-
schuren etal., 2010; Parry, 2013). For example, urban planning imple-
mented jointly with fuel or carbon taxes can help fast growing devel-
oping countries minimize resource waste by avoiding urban sprawl.
Policies incentivizing more dense urban architecture combined with
the appropriate infrastructure for modern public transport can be an
important complement to energy taxation. Such policies can be sup-
ported (and possibly financed) by fuel taxes if the policymaker wants
to discourage citizens from making private decisions that are incom-
patible with this broader vision; policy combinations for this sector are
discussed in greater detail in Chapter 8. Conversely, subsidizing fuels
and taking a hands-off urban planning approach can result in urban
sprawl and a growth in private automobile use along with growth in
resulting emissions.
Local-level action can also be a good source of information by allow-
ing experimentation. In the United States, environmental policies by
the federal government have a history of evolving out of successful
policy ‘experiments’ undertaken by states (Goulder and Stavins, 2011;
Shobe and Burtraw, 2012). Thus, an appealing feature of local-level
actions are their ability to try out policy options not currently in place
at the higher jurisdictional level; the higher jurisdiction may have more
confidence in introducing a policy subsequently if it already has a suc-
cessful track record at the more local level.
Finally, local policies can produce beneficial strategic interactions. If
national policy is insufficiently stringent, a stringent state / province or
even municipal policy may create pressure on the national government
to increase its own policy’s stringency. Goulder and Stavins (2011) cite
the example of California, which repeatedly increased the stringency
of its local air pollution standards and was repeatedly followed by the
federal government increasing Clean Air Act regulations’ stringency.
Similarly, Lucon and Goldemberg (2010) note the importance of São
Paulo’s GHG-reducing policies in influencing other local and even
regional governments in Brazil.
15�7�2�2 Problematic interactions
Policies introduced at different levels sometimes interact in ways
that compromise or weaken the intended environmental or economic
impacts.
One particular difficulty that may arise is the problem of emissions
leakage. This can occur, for example, when a climate policy introduced
at a lower jurisdictional level is ‘nested’ within a cap-and-trade pro-
gramme implemented at a higher jurisdictional level. Consider the
case where a cap-and-trade programme exists at the national level,
and where a sub-national authority introduces a new policy intended
to reduce its own (sub-national) emissions beyond what would result
from the national programme alone. The sub-national jurisdiction’s
efforts might indeed yield reductions within that jurisdiction, but facili-
ties in other sub-national jurisdictions covered by the cap-and-trade
programme will now use these allowances leading to higher emissions
in these jurisdictions completely compensating the abatement effort in
the more stringent jurisdiction. Since overall emissions at the higher
level are determined by the given national-level cap, the effort by the
sub-national jurisdiction does not succeed in reducing nationwide: it
just causes emissions leakage — offsetting increases in emissions else-
where in the nation. The national cap effectively prevents sub-national
jurisdictions from achieving further emissions reductions (Goulder and
Stavins, 2011; Shobe and Burtraw, 2012).
The issue applies to the United Kingdom’s efforts to reduce emis-
sions through a carbon tax on the power sector (electricity genera-
tors). The generators are required to pay the tax on every unit of
carbon emissions while also being subject to the EU ETS cap on over-
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all emissions. While the tax may lead to greater reduction in carbon
emissions by the generators in the UK, the impact on overall emis-
sions in the EU might be negligible, since overall European emissions
are largely determined by the Europe-wide cap under the EU ETS. On
this, see (Böhringer etal., 2008; Sartor and Berghmans, 2011; Goul-
der, 2013)
This leakage problem can be avoided when the lower-level jurisdic-
tion’s programme is nested within a carbon tax programme, rather
than emissions cap, at the higher level. In this case, the sub-national
policies generally are not environmentally irrelevant. The reduced
emissions in the sub-national jurisdiction do not lead to a fall in the
emissions price (the carbon tax) at the national level; hence there
are no offsetting increases in emissions in jurisdictions outside the
jurisdiction introducing the more stringent policy (De Jonghe etal.,
2009; Fankhauser etal., 2010; Goulder and Stavins, 2011). This can
be an important advantage of a carbon tax over a cap-and-trade sys-
tem.
15�7�3 Interactions between policies conducted
at the same jurisdictional level
Interactions also can arise when different policy instruments are intro-
duced at the same jurisdictional level. These interactions can be ben-
eficial or problematic in terms of the cost-effectiveness of reducing
greenhouse gas emissions.
15�7�3�1 Beneficial interactions
The potential for cost-reducing interactions is greatest when the dif-
ferent instruments address different market failures. A fundamental
principle of public policy is that the most cost-effective outcome results
when there are as many policy instruments as the number of market
failures involved, with each instrument focusing mainly on a different
market failure (Tinbergen, 1970).
Climate policy is meant to address one market failure in particu-
lar — the climate-change-related externalities associated with GHGs.
As seen in Section 15.6, another important market failure applies in
the market for innovation: because new knowledge can spill over to
third parties, innovators often cannot capture all of the social benefits
from the new knowledge they create. Introducing two policy instru-
ments, for example, emissions pricing to address the emissions exter-
nality, and a subsidy to R&D to address the innovation market failure,
can lower the costs of achieving given emissions reductions. In addi-
tion to helping reduce emissions by encouraging fuel-switching and
a reduction in demand, emissions pricing can help spur innovation.
Likewise, the R&D subsidy can promote invention of low-carbon tech-
nologies, thereby helping to curb emissions. Hence the interactions
of the two policies are beneficial. Although each of the two policies
might to some degree affect both of the market failures, emissions
pricing is particularly well focused on the first, while the R&D policy
sharply addresses the second. Using two instruments helps achieve
emissions reductions at the lowest cost. In this connection, Fischer
and Newell (2004) and Oikonomou et al. (2010) find that a policy
combination including a price on GHG emissions and renewable
energy subsidies achieves emissions reductions at significantly lower
cost than either of these policies alone. Schneider and Goulder (1997)
obtain a similar result for the combination of carbon tax and R&D
subsidy.
As noted already in Section 15.5.4.1, several studies (Greene, 1998;
Goulder and Parry, 2008; Gillingham etal., 2009b) argue that there
is a market failure associated with consumer purchases of durable
energy-using equipment (automobiles, refrigerators, etc.), according to
which consumers systematically underestimate their own future gains
from purchasing more energy efficient durables. To the extent that this
market failure is significant, the combination of emissions pricing and
a second instrument (for example, an energy-efficiency standard for
appliances) to address this additional market failure could lead to ben-
eficial interactions and promote cost-effectiveness.
Some studies suggest a market failure associated with reliance on
crude oil, claiming that reliance on oil produces an ‘economic vul-
nerability externality’, given the possibility of supply disruptions on
the world oil market (Jones etal., 2004). Under these circumstances,
the combination of emissions pricing (to address the climate change
externality) and a tax on oil consumption (to address the vulnerability
externality) can be a cost-effective way of dealing with both climate
change and economic vulnerability. Several authors (e. g., Nordhaus,
2009), emphasize that the vulnerability to world oil price changes is
largely a function of the share of overall oil consumption in GDP, rather
than the share of consumed oil that comes from imports. This suggests
that the vulnerability externality is best addressed through a tax on oil
consumption rather than a tax on imported oil.
15�7�3�2 Problematic interactions
Multiple policies at the same jurisdictional level also can yield prob-
lematic interactions. This can happen when multiple policies only
address the same market failure. Consider the situation where a given
jurisdiction attempts to reduce greenhouse gases through both emis-
sions pricing and another policy such as a performance standard (a
limit on the ratio of emissions per unit of production). Economic theory
claims that, absent market failures and other barriers, emissions pric-
ing tends to promote a highly cost-effective outcome by promoting
equality in the marginal costs of emissions-abatement across all the
facilities that face the given price of emissions (the carbon tax or the
price of emissions allowances). If, in addition, facilities face a perfor-
mance standard, then this added policy approach either is redundant
or it compromises cost-effectiveness.
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It is redundant if meeting the performance standard would involve
marginal abatement costs lower than the emissions price. In this event,
cost-minimizing firms would be induced to meet or exceed this stan-
dard by the emissions price alone: there is no need for the standard.
On the other hand, if the performance standard entails a cost per unit
of abatement that is significantly higher than the emissions price, then
this requirement sacrifices cost-effectiveness. Relying on emissions
pricing alone would have promoted emissions reductions by the facili-
ties that can achieve those reductions at the least cost. Thus it would
likely have led to a situation where the more expensive technology
approach was not employed. Hence in this case the combination of
emissions pricing and the performance standard does not promote
cost-effectiveness.
Emissions price policies interact with other policies differently
depending on whether the emissions price policy involves a quantity
limit (as is the case under cap and trade) or a stipulated emissions
price (as is the case under an emissions tax). In the presence of a
cap-and-trade programme, introducing an additional instrument
such as a performance standard might yield no further reductions
in overall emissions (Burtraw and Shobe, 2009; Fankhauser etal.,
2010). The reason is that overall emissions are determined by the
overall cap or number of allowances in circulation. The problem is
formally very similar to the difficulty described in Section 15.7.3
above, where in the presence of a national cap-and-trade pro-
gramme an effort by a sub-national jurisdiction to achieve further
emissions reductions is likely to have difficulty achieving that goal.
In contrast, introducing a performance standard in the presence of
an emissions tax can in fact lead to a reduction in overall emissions.
The price of emissions — the emissions tax — does not change when
the performance standard causes a reduction in emissions. For this
reason the reduction caused by the performance standard does not
lead to a compensating increase in emissions elsewhere. Overall
emissions fall.
For similar reasons, the same difficulty arises when a carbon tax is
introduced in the presence of a cap-and-trade programme at the same
jurisdictional level (Fischer and Preonas, 2010).
Nevertheless, as suggested above, the combination of emissions
pricing and some other policy could be justified in terms of cost-
effectiveness to the extent that the latter policy directly addresses a
second market failure that emissions pricing does not directly con-
front.
It is important to recognize that the notion of a ‘market failure’ per-
tains only to the criterion of economic efficiency. Another important
public policy consideration is distributional equity. Concerns about dis-
tributional equity can justify supplementing a given policy instrument
with another in order to bring about a more equitable outcome. This
may be desirable even if the multiplicity of instruments reduces cost-
effectiveness.
15.8 National, state and
local linkages
15�8�1 Overview of linkages across jurisdictions
In the last few years, an increasing number of sub-national administra-
tions across the world have been active in the design and application
of climate policies. Section 15.2 has reported some of these experi-
ences, whereas Section 15.7 has dealt with some of the interactions
that may arise with the simultaneous use of climate policy instruments
by several jurisdictions. This section goes back a little and is basically
interested in the allocation of climate policy responsibilities across
the different levels of government that usually exist in most countries
(central, provincial, and local administrations). Although such alloca-
tion involves the use the policy types described in Section 15.4, the
emphasis here will not be on instrument use in itself, as this was
already covered in Sections 15.5 to 15.7. The objective of this section
is to examine the theoretical backing for such practical applications
and to extract lessons that may be useful for future sub-national appli-
cations and even for the design and implementation of national and
supra-national mitigation policies. When dealing with the reasons for
and guidelines for the ‘vertical’ allocation of responsibilities among
jurisdictions that co-exist in a country, the theory of fiscal federal-
ism (economic federalism) offers valuable insights. In short, that the
responsibility for public decision making over a particular issue (e. g.,
allocation of public goods, economic stabilization, or distribution)
should be given to the jurisdictional level that could better manage
it. In this sense, fiscal federalism contends that the central govern-
ment should have the basic responsibility for functions whose national
extension would render ineffective and inefficient a sub-national
approximation, including ‘national’ public goods (Oates, 1999).
15�8�2 Collective action problem of sub-
national actions
Given the global and public good nature of climate change, its juris-
dictional allocation should actually be at the highest possible level.
A sub-global allocation, as observed in Chapter 13, would lead other
jurisdictions that are not active in climate change mitigation to ben-
efit without paying the costs, i. e., in a free-riding fashion (Kousky and
Schneider, 2003). Empirically, case studies found that climate policies
tended to be less intrusive at sub-national level. While co-benefits with
local development were pursued, policies that might incur costs to
local economy were avoided in prefectures in Japan (Aoki, 2010). The
costs for a sub-national administration may be actually beyond those
of pure mitigation, as climate policies implemented by a jurisdiction
might bring about leakage, (see the glossary in AnnexI for a defini-
tion) (Kruger, 2007; Engel, 2009). Moreover, the ‘reshuffling’ that may
be associated to sub-national policies may reduce their environmental
effectiveness (Bushnell etal., 2008). As a consequence, climate change
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mitigation would be provided in a sub-optimal level with sub-national
allocation of responsibilities.
15�8�3 Benefits of sub-national actions
Yet, even if the central government has a major responsibility in this
area, this does not preclude the allocation of mitigation responsibilities
within a federation, as observed in citizen’s attitudes on this matter
(Lachapelle etal., 2012). But even within the theory of fiscal feder-
alism there are other reasons that may justify sub-national action in
this field. First, as noted by Edenhofer etal. (2013), the exploitation of
heterogeneous sub-national preferences for mitigation would lead to
efficiency gains. This is actually one of the reasons for the decentraliza-
tion theorem, a centrepiece of fiscal federalism, which in fact justifies
sub-national allocation of certain public goods.
Moreover, decentralization can contribute to policy innovation by
providing an opportunity to experiment with different approxima-
tions. Indeed, there might be potential gains from learning by doing
in policy terms without imposing large costs on an entire country or
the world with untried options (Oates, 2002). Sub-national govern-
ments could also choose to be leaders in the development of climate
policies to obtain potential economic gains that are associated to
‘first movers’ (Jänicke and Jacob, 2004) and may provide guidance
and incentives to other jurisdictions to follow them (Bulkeley and
Castán Broto, 2012). Besides, as they tend to be smaller, sub-national
governments may be able to adapt to new situations in a swifter
manner and therefore may have a greater flexibility to modify exist-
ing climate policies or to define new ones (Puppim de Oliveira, 2009;
Galarraga etal., 2011).
Other general approaches to federalism, such as cooperative and dem-
ocratic federalism, may also provide reasons for sub-national involve-
ment in this area (Inman and Rubinfeld, 1997). On the one hand,
cooperative federalism argues for allocating pure public goods to the
local level, counting on the power of inter-jurisdictional bargaining to
improve allocations. On the other hand, democratic federalism incorpo-
rates sub-national representation in central decision making on public
goods. In any case, federal structures may be crucial for the transmis-
sion of mitigation policies because most sub-national governments are
now responsible for matters that have huge effects on GHG emissions,
namely: land use planning, building codes, waste management, traf-
fic infrastructure and management, and public transport (Collier and
Löfstedt, 1997; Bulkeley and Betsill, 2005; Doremus and Hanemann,
2008). But sub-national governments also have direct policies aimed
at GHG mitigation, including: energy efficiency programmes, educa-
tional efforts, green procurement standards, partnership agreements
with local businesses, or tree planting (Schreurs, 2008).
Yet another reason for a sub-national role in climate policies is beyond
the standard collective action approach. By indicating that external-
ity-correcting regulations and global agreements are not the only
pace to tackling climate change problems, Ostrom (2010) suggested
a polycentric approach in which mitigation activities are undertaken
by multiple (public and private) units at diverse scales. The prevalence
of sub-national actions in the field, contentious to other approaches,
may be actually a proof of polycentrism in the area (Byrne etal., 2007;
Sovacool, 2011b). The polycentric approach could be seen as a reinter-
pretation of the findings of the federalism literature, as actions should
involve many different agents in a reinforcing manner.
Finally, further issues may explain sub-national allocation. Local
authorities, for instance, may be more effective in reducing GHG emis-
sions from some sources such as waste and transport, as this may
provide significant co-benefits to local citizens (Kousky and Schneider,
2003). Moreover, sub-central administrations are usually closer to the
places and citizens impacted by climate change. Even though climate
change is a global phenomenon, the nature of its impacts and severity
varies significantly across locations so some sub-national governments
have reasons to be more protective than national or supranational
administrations (Andreen, 2008). This is also the case of adaptation,
where sub-national authorities can better manage challenges such
as flood risk, water stress, or ‘climate proofing’ of urban infrastruc-
ture (Corfee-Morlot etal., 2009). In all the preceding situations, sub-
national governments may tailor actions and policies to people’s
needs, with an easier identification of priorities and difficulties as they
are closer to citizens than more centralized administrations (Lindseth,
2004; Galarraga etal., 2011).
15�8�4 Summary
As in other environmental areas (Dalmazzone, 2006), there is theoreti-
cal backing for the allocation of climate-related policies to sub-national
levels of government, although there are several limiting factors to a
widespread reliance on these administrations. A federal structure that
provides coordination and enables an easier transmission of climate
policies throughout the agents of the economy is likely to increase the
effectiveness of actions against climate change. Moreover, the lessons
learned in the design and application of climate policies at different
jurisdictional levels could be used in a global setting.
15.9 The role of stakeholders
including NGOs
This section considers the role of stakeholders and civil society in
developing and delivering concrete mitigation action and focuses on
how stakeholders impact policy design and implementation. The range
of stakeholders is immense given the extent and complexity of climate
change. Devising policy in an inclusive manner may be lengthy and
politically challenging (Irvin and Stansbury, 2004), however adopting
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an inclusive approach to climate policy can bring advantages, notably
through increasing the legitimacy of policy design, its durability and
implementation (Lazo etal., 2000; Beierle, 2002; Dombrowski, 2010).
15�9�1 Advocacy and accountability
Some of the major functions and roles of NGOs can include raising
public awareness, which often involves translating scientific and tech-
nical knowledge into actionable forms, lobbying, influencing business
investment decisions, and monitoring and implementing agreements
(Gulbrandsen and Andresen, 2004; Guay etal., 2004; Betsill and Corell,
2008; Newell, 2008; Dombrowski, 2010). Their domains of action also
include engagement in sub-national and national policies and institu-
tions as well as international processes like UNFCCC (Wapner, 1995;
Lisowski, 2005). It is in these diverse forms that NGOs play a role in
“connecting knowledge with responsibility” (Szarka, 2013) and pro-
moting norms of accountability (Gough and Shackley, 2001; Newell,
2008).
Stakeholders can also affect when and how evidence of climate change
translates into policies via the domestic political system (Social Learn-
ing Group, 2001). The differing results of the same scientific evidence,
for instance, the political polarization in the United States versus more
proactive and consensual attempts to find solutions in Europe (Skjærs-
eth etal., 2013) demonstrate how stakeholder interests can filter sci-
entific evidence.
Evidence also indicates that that some fossil fuel companies went fur-
ther and promoted climate scepticism by providing financial resources
to like-minded think-tanks and politicians (Antilla, 2005; Boykoff and
Boykoff, 2007), although other fossil fuel companies adopted a more
supportive position on climate science (van den Hove etal., 2002a).
Differences in the attitudes of oil companies towards climate change
are explained in part by domestic institutional contexts and manage-
ment structures as well as the structure of assets or technologies of
different energy companies (Rowlands, 2000; Kolk and Levy, 2002).
15�9�2 Policy design and implementation
Three factors have been considered important for lobbying success in
policy design namely: how institutions shape the space for participa-
tion (Kohler-Koch and Finke, 2007), organizational resources (Eising,
2007), and the policy environment (Mahoney, 2008; Coen and Rich-
ardson, 2009).
In the case of the EU ETS, Skodvin et al. (2010) find that interest groups
are able to limit “spectrum of politically feasible policy options.”
Instrument choice is a function of the extent of resources these interest
groups control, the role of veto players in the political process, policy
networks and entrepreneurs (Skjærseth and Wettestad, 2009; Skodvin
etal., 2010; Braun, 2013; Skjærseth etal., 2013).
The role of business interests in supporting emissions trading as
opposed to taxation, in the UK, has also been recognized (Bailey and
Rupp, 2006; Nye and Owens, 2008). The political opposition to Austra-
lia’s Carbon Pollution Reduction Scheme has been explained largely by
the opposition of fossil fuel interests (Crowley, 2010, 2013; Macintosh
etal., 2010; Bailey etal., 2012). Similarly, in New Zealand, the agri-
culture sector has played a major role in obtaining a transition period
for the sector, use of an intensity-based accounting system, and free
credits (Bullock, 2012). This has led to questions regarding the environ-
mental effectiveness of the ETS (Bührs, 2008).
Stakeholders also affect policy durability, flexibility, and implementa-
tion. For example, European Climate Change Programme featured con-
sultation processes that ensured policy credibility by having the buy-
in of stakeholders. Similarly, the persistence of climate legislation in
California has been explained by the stability of coalition groups sup-
porting the legislation due to path dependence despite the economic
downturn in contrast to the emerging coalition at the national level
which broke down after economic shocks (Knox-Hayes, 2012).
15�9�3 Summary of the role of stakeholders
Early findings indicate the importance of institutions in creating spaces
for stakeholder participation, the organizational resources of the
stakeholders themselves, and the general policy environment as being
critical factors that determine the effectiveness of stakeholder engage-
ment. However, the degree to which policy design and implementation
to mitigate climate change is dependent on stakeholder engagement is
as yet under-researched and it must be stressed that the evidence base
is thin and that these results primarily derive from case studies.
15.10 Capacity building
As national and sub-national governments around the globe confront
the multifaceted challenge of climate change mitigation and adapta-
tion, capacity is essential. According to the Agenda 21, building a coun-
try’s capacity “encompasses the country’s human, scientific, techno-
logical, organizational, institutional, and resource capabilities” (United
Nations, 1992).
The priority for capacity building is strongly reflected in the Johan-
nesburg Plan of Implementation (United Nations, 2002), where capac-
ity building, especially for developing countries and countries with
economies in transition, features prominently. It is also stressed in the
UNFCCC’s capacity building framework for developing countries (Deci-
sion 2 / CP.7; UNFCCC, 2001). The goal of capacity building under this
framework is “to strengthen particularly developing country parties, to
promote the widespread dissemination, application and development
of environmentally sound technologies and know-how, and to enable
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them to implement the provisions of the Convention. In addition, the
COP under the UNFCCC requested the Subsidiary Body for Implemen-
tation to organize an annual in-session Durban Forum for in-depth
discussion on capacity-building following COP-17” (Decision 2 / CP.17;
UNFCCC, 2011). The Durban Forum provides an opportunity for rep-
resentatives from governments, UN organizations, intergovernmental
and non-governmental organizations, academia, and the private sec-
tor to share ideas, experiences, and good practices on implementing
capacity-building activities.
15�10�1 Capacity to analyze the implications of
climate change
Climate change is a severe and major problem that has the potential
to seriously derail poverty alleviation in a number of low income coun-
tries (Dell et al., 2009). Climate change will affect livelihood assets
by impacting health, access to natural resources and infrastructure
(Skoufias, 2012). It is also likely to erode agricultural productivity in
tropical climates (Skoufias, 2012). Given that the implications of cli-
mate change differ so dramatically between countries, to inform cli-
mate negotiations and allow countries to realize the full extent of their
adaptation needs, substantial capacity would be required to analyze
the implications of climate change and to formulate country posi-
tions. So far, the academic capacity is geographically very skewed. For
example, the International Social Science Council (ISSC) commissioned
a bibliometric study on social science research on climate change and
global environmental change in the period from 2000 until 2010. It
found that OECD countries completely dominated this research and
that the poorest countries, notably in Africa, hardly were visible at all
in the statistics (Hackmann and St Clair, 2012).
15�10�2 Capacity to design, implement and
evaluate policies
The design, implementation, and evaluation of national and sub-
national climate policies necessitate in-country human capital.
National governments and civil society require that climate policies be
adapted to local economic, cultural, and social conditions to ensure
their effectiveness and public support. To be politically acceptable, such
work generally needs to be done by citizens of the country in which
the policies are to be implemented. Political feasibility is mainly deter-
mined by policy design to improve environmental and economic effec-
tiveness and distributional equity (Bailey and Compston, 2012b). A
high level of scientific knowledge and analytical skills are required for
such work. Capacity building allows the leadership to be sensitive to
environmental constraints and encourages policymaking to meet the
needs of the people within these parameters (United Nations, 1992).
Many studies analyze the technological options for achieving deep
reductions in GHG emissions, however they do not necessarily reflect
the need for capacity building. For example, while Pacala and Socolow
(2004), through their ‘stabilization wedges’, increased the understand-
ing of the technological options that could be deployed to reach sta-
bilization targets, they did so without pointing out the capacity neces-
sary to reach such a potential. These do however need local adaptation.
Through the collaborative dialogue under the Durban Forum, key areas
for capacity building on mitigation have emerged, including: low-car-
bon development strategies; NAMAs; Monitoring, Reporting and Veri-
fication; Technology Needs Assessments (TNAs); and mitigation assess-
ments.
15�10�3 Capacity to take advantage of external
funding and flexible mechanisms
Climate change, and the global policies to mitigate and adapt to it,
also imply additional capacity challenges in order to take advantage of
international funding and flexible mechanisms such as the CDM in the
Kyoto Protocol, and REDD+. So far, the distribution of projects under
flexible mechanisms has been very skewed towards countries with
greater capacity. As an example, only 2.5 % of normal CDM projects
have been hosted by African countries (Fenhann and Staun, 2010).
In the preparations for the UNFCCC Durban Forum on Capacity Build-
ing (UNFCCC, 2011) it was noted that capacity-building in develop-
ing countries should be improved by (1) ensuring consultations with
stakeholders throughout the entire process of activities; (2) enhanc-
ing integration of climate change issues and capacity-building needs
into national development strategies, plans and budgets; (3) increas-
ing country-driven coordination of capacity-building activities; and
(4) strengthening networking and information sharing among devel-
oping countries, especially through South-South and triangular coop-
eration.
15�10�4 Capacity building modalities
Capacity building is about equipping people, communities, and organi-
zations with the tools, skills, and knowledge to address the challenges
of climate change. It can be delivered through education, outreach,
and awareness, but it can also be facilitated through peer learning,
knowledge platforms, information exchanges, and technical assistance
(Mytelka etal., 2012). The need for capacity building is large. Hundreds
of thousands of scientists of various disciplines need to be trained
globally in the coming decades as well as policymakers, civil servants,
businessmen, and civil society. These needs are not limited to develop-
ing countries, as it is needed at all levels of society and in all regions
of the world.
There are many different modalities. Since the 15th Conference of
the Parties (COP-15), partnerships have formed at the international,
national, and sub-national level aimed at climate readiness activities.
Capacity building in the private sector is also important. Studies indi-
cate that good management, trained workers, and clean manufacturing
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increase energy efficiency while reducing CO
2
emissions. Substantive
carbon reductions can be achieved at zero or negative cost through
improved workplace practices, optimized processes, and behavioural
changes in production (Bloom etal., 2010). Even this requires human
resources and capacity to be undertaken.
Capacity building requires a long time horizon, and this is particularly
evident in education-poor countries. Building in-country academic pro-
grammes that can graduate well-trained masters and PhD students can
take decades. When students graduate from such programmes it takes
an additional 5 – 10 years of post-doctoral and junior faculty positions
to build the experience and skills to contribute at a high international
level (Sterner etal., 2012). Capacity building initiatives are therefore
fragile and require continued support and nurturing by both national
governments and international organizations. This may be one addi-
tional and important area for climate finance.
15.11 Links to adaptation
This section discusses links between national and sub-national policies
and institutions for mitigation and adaptation. Links between adapta-
tion and mitigation policies at the international level are discussed in
Chapter 13, while adaptation in general is discussed in WGII. Adapta-
tion will be needed because some climate change is inevitable (Chap-
ter 5). Indeed, some governments have started to plan and implement
policies aimed at tackling changes that are likely to take place or have
taken place already (Aaheim etal., 2009). In the longer term, the level
of adaptation needed will depend on the success of mitigation efforts
and the resulting GHG concentrations, thus there is an obvious linkage
between mitigation and adaptation. However, the level of adaptation
needed will also depend on the climate response to any given GHG
level, around which there is high uncertainty. Mitigation will help to
reduce the uncertainty on future changes and is therefore helpful for
planning adaptation.
It has been argued that mitigation and adaptation policies are related
to each other (Smith and Olesen, 2010). This, however, is a controver-
sial issue (Hamin and Gurran, 2009). Any given mitigation policy at the
national or sub-national level is unlikely to have a significant effect on
the global climate, so that the climatic consequences of that policy for
the purpose of planning adaptation can usually be ignored. The direct
side-effects of a mitigation policy for adaptation are more relevant.
Examples of such direct effects are mainly in land use (discussed in
Section 15.11.3 below) where synergies and tradeoffs between mitiga-
tion and adaptation policies may arise.
It is, of course, true that mitigation policies can have effects on adap-
tation across sectors. For example, carbon pricing can make air-con-
ditioning more expensive, thus hindering adaptation to a warmer cli-
mate. However, this is simply one of many costs of a mitigation policy
that will be taken into account while making policies. Conversely,
adaptation to higher temperatures has led to increased electricity con-
sumption for cooling (Gupta, 2012) that has to be taken into account
while planning mitigation, but so do all changes in demand arising for
other reasons such as income growth.
On the national scale, the approach to mitigation and adaptation dif-
fers between high or upper-middle income countries and low or lower-
middle income countries due to the balance of responsibilities and the
focus on mitigation versus adaptation.
The early national policy focus in high or upper-middle income coun-
tries was largely on mitigation. These policies were largely developed
without in-depth consideration of adaptation linkages. Those high or
upper-middle income countries that are developing national adapta-
tion strategies and policies (e. g., see Bizikova et al., 2008; Stewart
etal., 2009; Bedsworth and Hanak, 2010; Biesbroek etal., 2010) have
shown limited consideration of the effects of adaptation policies on
greenhouse gas emissions to date. Neufeldt etal. (2010) investigated
the reasons for this disconnect in Europe and found it was due to a
strong sectoral separation: sectors that were major emitters have been
mitigation focused, and have received little attention on adaptation,
whereas climate sensitive sectors such as agricultural, although a
potential contributor to emission reductions, have focused on adapta-
tion. They also report that adaptation policy and actions have lagged
behind mitigation more generally, and the difference in timing also
contributes to the separation of the two domains. This is now start-
ing to change: Bruin etal. (2009) in the Netherlands considered the
potential GHG emissions of adaptation measures as part of a national
multi-criteria ranking of options.
To date, most of the national climate policy initiatives in low-income
countries, especially in the LDCs, have focused on adaptation, notably
through the National Adaptation Programme of Action (NAPAs). How-
ever, more recently there has been a shift with a number of national
policy initiatives that aim to develop climate resilient, low carbon
economies (also known as low-emission development strategies or
green growth). These include Ethiopia’s Climate Resilient Green Econ-
omy Vision (EPA Ethiopia, 2011) and Rwanda’s Green Growth and Cli-
mate Resilience National Strategy for Climate Change and Low Carbon
Development (Government of Rwanda, 2011). Given the importance
of climate change in these highly vulnerable countries, these initia-
tives look to build climate resilience, but also recognize the benefits in
advancing low carbon development. Research on the linkages between
emission reductions and adaptation is still at an early stage and most
of the synergies between adaptation and mitigation are centred on the
agricultural and forestry sectors.
Some local activities, such as those regarding land-use decisions, have
important implications for both mitigation (e. g., by means of carbon
sequestration) and adaptation (e. g., by means of increasing resil-
ience to climate change). Ravindranath (2007) explores the synergies
between mitigation and adaptation in the forestry sector. As forests
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are highly vulnerable to climate change, but provide opportunities
for mitigation (e. g., through afforestation), efforts to enhance carbon
sequestration need to embed adaptation elements so that exposure
to climate impacts can be addressed. Mitigation efforts through for-
est management regimes such as conservation areas and sustainable
forestry contribute to adaptation. Conversely, adaptation efforts such
as urban forestry and measures to conserve soil and water also have
mitigation effects (Ravindranath, 2007).
Similar issues have emerged for the agricultural sector, with the focus
on climate-smart agriculture. This focus recognizes the high vulnerabil-
ity of agriculture as a climate-sensitive sector, but also addresses the
fact that it is a major source of greenhouse gas emissions in develop-
ing economies. A number of options have been identified as potentially
beneficial for mitigation and adaptation, including (McCarthy et al.,
2011) soil and water conservation (including conservation agriculture,
low or minimum tillage, vegetation strips, terraces, structures such as
bunds contours, shade trees, tied ridges, small-scale water harvesting,
compost production, cover crops, improved fallows, crop residues),
agroforestry, and improved pasture and grazing management includ-
ing restoration. These options generally are based on sustainable agri-
cultural land management (SALM) practices. These practices reduce
climate related risks in the form of rainfall variability and soil erosion,
increase soil organic matter and soil fertility (thus increasing productiv-
ity), and reduce emissions by either reducing soil emissions or prevent-
ing other more emission intensive activities. More traditional measures
to increase productivity, such as fertilizer use or increased irrigation,
have the potential to increase greenhouse gas emissions because of
the high energy intensity of fertilizer production and the energy use in
water abstraction and pumping; however, they may still reduce land-
use emissions by increasing the productivity and yields per hectare, as
well we reduce future land-use pressures that may lead to deforesta-
tion (Chapter 11). However, as highlighted by McCarthy etal. (2011),
many of these climate-smart options involve important opportunity or
policy costs, higher risks, or may involve benefits that arise over longer
time periods (e. g., improved soil function), or involve wider environ-
mental benefits that are not immediately useful to farmers. They also
frequently involve institutional, financial, and capacity barriers, and so
may not happen autonomously.
Both the forest and agricultural sectors also link through to issues
of rural land-use change and land planning / management, which can
have synergistic effects on mitigation and adaptation (Pimentel etal.,
2010), but which can also involve complex tradeoffs.
Overall, the emerging evidence suggests that while there may be a
potential for synergistic mitigation and adaptation policy linkages
in the agricultural and forest sectors, the translation of these poli-
cies through to implementation may well be challenging because of
the different characteristics of mitigation and adaptation (e. g., the
global public good nature of mitigation versus the local benefits from
adaptation), because of the additional costs involved (e. g., involving
higher capital costs or opportunity costs associated with synergistic
options), because of institutional, technological or behavioural bar-
riers, and because different actors maybe involved in mitigation and
adaptation decisions, including the need to address cross-sectoral
aspects.
15.12 Investment and finance
15�12�1 National and sub-national institutions
and policies
The justification for investment and finance and the description of
the various financial agreements have been elaborated in Chapter 13.
Chapter 16 assesses in more detail the range of institutional arrange-
ments for mitigation finance at the global, regional, national, and sub-
national levels. This section concentrates on institutional mechanisms
which parties to the UNFCCC, developed and developing countries,
have been using or introducing to facilitate, tap, channel, and catalyze
climate change investment and finance. It also briefly touches on some
of the major policy directions and trends affecting mitigation finance
and investments. Earlier sections of this chapter presented the variety
of policy instruments available and being used both in developed and
developing countries. Public finance is needed for subsidies and public
provision (Sections 15.5.2 and 15.5.6). In this section we track the con-
sequences with a view to the aggregate funding needed.
Without dedicated financial policy, other policy instruments alone may
be insufficient to mobilize the large-scale investments needed to move
the world away from its current high-emission path.
Recent case studies and some empirical evidence highlight the impor-
tance of targeted public finance to help catalyze and leverage private
investment in some mitigation activities (CPI, 2012). For this purpose,
governments have at their disposal a variety of mechanisms that
include credit lines, bonds, guarantees, equity, venture capital, carbon
finance, and grants (Maclean etal., 2008). These mechanisms exist and
are effective mostly in developed and emerging economies (Kennedy
and Corfee-Morlot, 2012).
In addition, a number of innovative mechanisms are being promoted
in some developed countries with success. These include, ‘property
assessed financing districts’ where residential and commercial prop-
erty owners are provided with loans for renewable energy and energy
efficiency, ‘direct cash subsidies’ to promote the installation of energy
efficiency measures and renewable energy systems, ‘power purchase
agreements’, and ESCOs — Energy Service Companies to implement
performance-based energy efficiency projects (Ellingson etal., 2010).
National development banks are increasingly playing a critical role in
leveraging public and private resources in both developed and devel-
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oping countries. National development banks, which operate mainly
domestically, have an advantage in accessing local financial markets
and dealing with barriers that they understand better than others
(Smallridge etal., 2013).
International financing for mitigation and adaptation has impacted
the domestic climate discourse and has created incentives for sus-
tainable development at national and local levels in developing
countries (Metz and Kok, 2008). National and sub-national efforts
to finance climate change often have an explicit link to international
processes or support through the various mechanisms of the Con-
vention and Kyoto Protocol or those encouraged to facilitate fund-
ing for developing countries such as bilateral and multilateral chan-
nels. Some of these mechanisms have led to significant investment
in developing countries. An estimated USD 215.4 billion had been
invested in 4832 Clean Development Mechanism projects by June
15, 2012 (UNFCCC, 2012). Similarly, the Global Environment Facility
(GEF) estimates that since the start of its operations (1991 – 2013), it
has leveraged over USD 27 billion for climate change projects (GEF,
2013).
A new trend is the establishment by several developing countries of
funds and national funding entities dedicated to climate change. Table
16.2 lists some of these institutions, their objectives, governance, and
sources of funding. The missions and objectives are diverse and their
level of institutionalization varies from country to country. All are
designed to tap and blend funding available from international and
domestic sources — public and private — to catalyze climate invest-
ment in their country (Flynn, 2011).
National funding entities have the potential to help countries cope
with the proliferation of funds and entities offering financial resources
for mitigation activities (Glemarec, 2011; Smith etal., 2011). Increased
fragmentation of international assistance has increased transaction
costs for recipients while the multiplicity and competitive nature of
sources has challenged national and sub-national capacities (Knack
and Rahman, 2007; Anderson, 2012). Limited absorptive and human
capacity resources do however present serious challenges. Evidence of
the ability of national funding entities to ensure coherence between
national institutions dedicated to climate change and cabinet entities
such as the Ministry of Finance or the Office of the President relies
on case studies and, currently, does not yet offer general conclusions
(Thornton, 2010).
15�12�2 Policy change direction for finance and
investments in developing countries
There have been some significant trends in recent years regarding cli-
mate finance and the actors involved. Three are particularly relevant
for their impact on the way climate finance is being managed and who
does the management.
First, financing climate objectives by mainstreaming climate change
into development planning has been gaining ground. This is particu-
larly the case of countries wanting to integrate adaptation strategies
into their overall national strategy as a way to build resilience. It is
also evident in some of the climate change action plans and strate-
gies of some countries that are clearly linked to poverty reduction and
national development objectives (Garibaldi etal., 2013). However, the
benefits and costs of integrating climate change considerations into
development planning may be difficult to attain in practice. The OECD
(OECD, 2005) warns of ‘mainstreaming overload’ as climate change
competes with other issues like governance and gender to be main-
streamed into development planning. Barriers to integrating climate
and development objectives include: lack of human and institutional
capacity and lack of coordination among line ministries (Knack and
Rahman, 2007; Kok etal., 2008).
Second, is the growing recognition that financing climate actions
can have large co-benefits. Investments in clean energy, for example,
may result in improvement in health indicators as air pollution lev-
els decrease. Similarly, investing in forest conservation may result in
a reduction of GHG emissions from deforestation. Thus, the increas-
ing interest in the concept of co-benefits or climate and development
as ‘win-win’ outcomes. Reducing emissions has been seen as a by-
product of reducing energy costs in the case of China (Richerzhagen
and Scholz, 2008). Reducing emissions from deforestation and forest
degradation is seen as another major opportunity to deliver both emis-
sions reductions and livelihood benefits. However, Campbell (2009)
and Adams and Hulme (2001) argue that the ability to define these
win-win objectives is a major factor for success.
Third, the number of actors involved in climate finance and investment
is growing. Climate change finance is no longer a monopoly of the
public sector. There is now a multiplicity of actors from the private and
business world whose level of financing exceeds that of the public sec-
tor several fold, particularly in the middle-income and emerging econ-
omies (Gomez-Echeverri, 2013). This development has the potential
to address implementation gaps, generate greater participation from
stakeholders, and encourage public-private partnerships that promote
sustainable development (Pattberg, 2010).
Two areas of need emerge from the literature (Cameron, 2011; Zin-
gel, 2011). First, attracting climate finance investments will require
strengthening institutional and governance capacities at the national
and sub-national levels in recipient countries. Specifically, the ability to
formulate strategies and action plans, including policies and measures,
formulate, assess and approve projects, demonstrate accountability
and transparency to their own populations, as well as to the develop-
ment partners to raise levels of investment confidence will be needed.
Second, robust mechanisms are needed to ensure accountability. This
would involve greater transparency in both donor and recipient coun-
tries. The role of civil society organizations and the media could be
strengthened for good governance and accountability.
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15.13 Gaps in knowledge
and data
• Cross-country comparisons of institutional design options, particu-
larly mechanisms for coordinating and mainstreaming climate and
other related sector policies, are limited. Wider use of evaluation
methods would allow for the understanding of relative effective-
ness of different options and designs to be used to improve out-
comes over time.
• Evaluating the economic and environmental effectiveness of indi-
vidual policy instruments and packages is difficult as various juris-
dictions produce policy instruments influenced by context-specific
factors such as co-benefits and political economy considerations.
As a result, the cost of committing to a target and the actions
needed to meet it, are difficult to estimate. For example, fuel taxes
in the transport sector are implemented for multiple purposes
including energy security, congestion and pollution reduction, rev-
enue for road construction, mitigation of climate change, and so
forth. It is difficult to gauge the contribution of fuel taxes to miti-
gation efforts.
• While the distributional incidence of taxes has been studied
quite extensively, much less is known about the distributional
incidence of other policy instruments and packages. Similarly,
knowledge gaps remain uneven across policy instruments on
other criteria such as institutional, political, and administrative
feasibility.
• The asymmetry of methodologies regarding ‘negative cost’ policies
regarding regulation and information measures with case studies
arguing for negative private and social cost polices while critiques
basing results on economic theory and models has meant that con-
clusive results are not yet available.
• Understanding of the relative balance between demand pull and
supply push policies needed to accelerate technological innova-
tion remains an important gap. Data on global private invest-
ment in research and development is a major gap along in addi-
tion to public R&D figures in middle income and low-income
countries.
• The valuation of co-benefits from emission reduction has been
studied comprehensively in the United States (Muller etal., 2011),
but much less is known about other countries. This is important
because taking these co-benefits into account could significantly
lower the cost of emission reduction, and perhaps offer negative
costs, in several sectors.
15.14 Frequently Asked
Questions
FAQ 15�1 What kind of evidence and analysis will
help us design effective policies?
Economic theory can help with policy design at a conceptual level,
while modelling can provide an ex-ante assessment of the potential
impact of alternative mitigation policies. However, as theory and mod-
elling tend to be based on sets of simple assumptions, it is desirable
that they are complemented by ex-post policy evaluations whenever
feasible. For example, theory and bottom up modelling suggest that
some energy efficiency policies can deliver CO
2
emission reductions
at negative cost, but we need ex-post policy evaluation to establish
whether they really do and whether the measures are as effective as
predicted by ex-ante assessments (Section 15.4).
As climate policies are implemented, they can generate an empirical
evidence base that allows policy evaluation to take place. If evaluation
is built into the design of a programme or policy from its inception, the
degree of success and scope for improvement can be identified. Poli-
cies implemented at the sub-national levels provide sites for experi-
mentation on climate policies. Lessons from these efforts can used to
accelerate policy learning.
Much of the evidence base consists of case studies. While this method is
useful to gain context-specific insights into the effectiveness of climate
policies, statistical studies based on large sample sizes allow analysts
to control for various factors and yield generalizable results. However,
quantitative methods do not capture institutional, political, and admin-
istrative factors and need to be complemented by qualitative studies.
FAQ 15�2 What is the best climate change mitiga-
tion policy?
A range of policy instruments is available to mitigate climate change
including carbon taxes, emissions trading, regulation, information mea-
sures, government provision of goods and services, and voluntary agree-
ments (Section 15.3). Appropriate criteria for assessing these instruments
include: economic efficiency, cost effectiveness, distributional impact,
and institutional, political, and administrative feasibility (Section 15.5).
Policy design depends on policy practices, institutional capacity
and other national circumstances. As a result, there is no single best
policy instrument and no single portfolio of instruments that is best
across many nations. The notion of ‘best’ depends on which assess-
ment criteria we employ when comparing policy instruments and the
relative weights attached to individual criteria. The literature provides
11901190
National and Sub-national Policies and Institutions
15
Chapter 15
more evidence about some types of policies, and how well they score
against the various criteria, than others. For example, the distributional
impacts of a tax are relatively well known compared to the distribu-
tional impacts of regulation. Further research and policy evaluation is
required to improve the evidence base in this respect (Section 15.12).
Different types of policy have been adopted in varying degrees in
actual plans, strategies, and legislation. While economic theory pro-
vides a strong basis for assessing economy-wide economic instru-
ments, much mitigation action is being pursued at the sectoral level
(Chapters 7 – 12). Sectoral policy packages often reflect co-benefits and
wider political considerations. For example, fuel taxes are among a
range of sectoral measures that can have a substantial effect on emis-
sions even though they are often implemented for other objectives.
Interactions between different policies need to be considered. The
absence of policy coordination can affect environmental and economic
outcomes. When policies address distinct market failures such as the
externalities associated with greenhouse gas emissions or the under-
supply of innovation, the use of multiple policy instruments has con-
siderable potential to reduce costs. In contrast, when multiple instru-
ments such a carbon tax and a performance standard are employed to
address the same objective, policies can become redundant and under-
mine overall cost effectiveness (Section 15.8.4.2).
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15
Chapter 15
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