Section 6.2.2 discusses various policy instruments to manage GHG emissions in isolation. Various authors (e.g., Bernstein, 1993; Richards, 1998; Stavins, 1998b) argue that to select the best approach to attain the environmental goal, various cost and other aspects must be taken into account. These include production costs, cost differences across sources, transaction costs, monitoring and enforcement costs, implementation, administrative costs, and other socio-economic conditions idiosyncratic to each country. For these reasons, it can be anticipated that in most countries GHG emissions will be managed using a portfolio of policy instruments, rather than a single policy instrument. Furthermore, the portfolio of instruments is likely to differ from country to country. Using a portfolio of policy instruments enables a government to combine the strengths, while compensating for the weaknesses, of individual policy instruments, thus improving overall effectiveness and efficiency.

Under some conditions a combination of market-based and information policies and regulations can improve economic efficiency. Well-designed policies aimed at energy prices are economically most efficient when transaction costs are low and/or cannot be substantially reduced through market transformation policies. They also work best when the potential for technological learning by doing is small or known with reasonable certainty. Well-designed regulatory and incentives-based policies aimed at factors other than energy prices are economically most efficient when the transaction costs are large and can be substantially reduced at low administrative cost. They also work best when the potential for technological learning by doing is large. Virtually all end-use markets for energy efficiency suffer from high transaction costs and related market problems. Also, many energy efficiency and renewables technologies exhibit large potentials for learning by doing. The most effective and economically efficient approach to achieve lower energy sector emissions is to apply market-based instruments, standards, and information policies in combination. Policies to administer energy price changes provide a uniform signal to all economic actors and overcome fragmentation. Standards and information policies can move the economy closer to the frontier of production possibilities, which raises total factor productivity.

Overriding non-economic reasons may also exist for combining different types of policy instruments to manage GHG mitigation. First, the number and diversity of sources is large and even the most comprehensive instruments (an emissions tax or a tradable permit system) is not suitable for all of these sources. Second, the conditions needed to administer efficiently these comprehensive instruments (e.g., a manageable number of participants, but enough to create a competitive market for a tradable permit system) may reduce the scope of their application. Third, different policy instruments can be used to distribute the mitigation-cost burden across sources in ways that lessen opposition to the policy goal. Fourth, policy instruments have multiple impacts, so different instruments and sets of impacts are preferred for different sources. Finally, governments have frequently adopted a portfolio of policies, rather than a single policy instrument, to deal with complex environmental issues.

One important aspect in the policy analysis has been a shift of attention from the assessment of single policy instruments to questions of the optimal policy mix (OECD, 1996b). Assessing the performance of particular environmental policy instruments from historical evidence is difficult because these were often combined in policy packages, as was the case with the phase-down of leaded petrol in a number of European countries. Econometric analysis has been employed to separate out the effects of individual policy instruments under such conditions, but this is not always possible (Katsoulacos and Xepapadeas, 1996; Boom, 1998).

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