Working Group III: Mitigation

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Since the political factors on the “supply side” are so heterogeneous across nations, the focus here is on the demand for regulations, building on the literature reviewed above to draw conclusions about the likely preferences and positions of key interest groups involved in climate change policy. Five groups seem particularly important: environmental organizations (especially in the USA and Europe), producers of carbon-based fuels (e.g., coal and oil producers), large users of fuel (e.g., electric utilities), manufacturers of energy-using products (e.g., automobile manufacturers), and manufacturers of energy-efficient and GHG-abatement technologies (e.g., manufacturers of efficient lighting). Environmental organizations in the USA and Europe seem to be divided–some groups have embraced market-based policies such as emissions permits and carbon taxes, while others object to such policies being applied without restrictions. Some also object to the option of so-called exchanges of “hot air” (national quota surpluses not created by active policies).

The range of industry sectors with large stakes in global climate policy suggests an important point: the various regulatory instruments that might be employed in climate change policy would each act at different levels of regulation, creating different points of compliance with very different implications for interest groups. Examples are:

  • a system of tradable carbon permits (or a carbon tax, for that matter) imposed at the mine mouth, wellhead, or point-of-entry directly affects fuel producers (although the true economic incidence of the policy would be shared by downstream firms and consumers according to relative elasticities);
  • a CO2 tax, tradable emissions permit system, or emissions standard directly affects power plants; and
  • energy-efficiency or fuel-efficiency standards directly affect manufacturers.

Industry groups–in particular, large producers and users of fuel–are also likely to focus their efforts on the allocation of carbon-reduction responsibilities, whatever the instrument. If a system of emissions standards is put into place, for example, existing firms will benefit if tighter standards are imposed on new sources, as has happened in a number of countries. Under an emissions tax, firms are likely to seek tax credits, differential tax rates, or exemptions to relieve their tax burden. In a system of tradable permits, firms are likely to support the free allocation of permits to participants, rather than to sell them at auction or distribute them to the public (for subsequent sale to firms). For project-based mechanisms–CDM and JI–they would favour leaving much of the initiative with the private sector (Jepma and Van der Gaast, 1999). Industries that stand to profit from GHG abatement, including renewable energy sources, are likely supporters of climate policies (Michaelowa and Dutschke, 1999a, 1999b).

From a political standpoint, the success of such efforts at the distribution of the burdens (or rents) is likely to depend on the political saliency of climate change policy. Taxpayers and organized “public-interest groups” are likely to oppose allocation schemes that benefit firms and/or benefit existing firms at the cost of the newcomers, thus reducing the scope for competition. If such groups wield clout, and if public interest in climate policy is high, then mechanisms that appear to benefit polluters at the expense of the public are less likely to be implemented.

In contrast, some environmental organizations have not opposed the allocation of rents to industry, recognizing that free allocation of permits may be the most likely path to implementing emissions reduction in some countries. Such concessions on allocation of rents to the industry have allowed these groups to secure other goals in return, such as continuous emissions monitoring–the US Acid Rain Program is a good example (Kete, 1992; Svendsen, 1999). In summary, allocation schemes favourable to industry appear likely in practice, because the question of distribution is central to industry, including industries that will profit from climate policy, but it is only of secondary importance to environmental groups that do not support free allocation and to other groups that seek to reduce GHG emissions. In the US Acid Rain Program, for example, sulphur dioxide (SO2) emissions allowances worth about US$5 billion per year were allocated free to electric utilities, in part because of interest group politics (Joskow and Schmalensee, 1988).

Although the “supply side” is heterogeneous across nations, it is likely that some governments will favour policies that raise revenue while others will be more concerned with the distribution of costs across sources, regardless of the revenue implications.

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