Working Group III: Mitigation

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6.3.4 Other Policies and Instruments Regulatory Instruments

There are two ways to apply regulatory instruments internationally. One is to establish uniform standards for various products and processes for adoption by countries that participate in an international emission reduction agreement. There are several reasons why establishing uniform international standards for GHGs reduction is unlikely; for example, it is difficult to achieve agreement on the appropriate standards by affected interest groups in participating countries, and such an approach would limit the domestic policy choices of individual countries. The second way is to adopt fixed national emission levels (non-tradable emission quotas) for participating countries. These national emission limits can be considered performance standards that each country must meet through domestic action. This leads to inefficiency because marginal emission abatement costs differ among countries (IPCC, 1996, p. 404). International and Harmonized (Domestic) Carbon Taxes

An international carbon tax, payable to an international agency, or domestic carbon taxes harmonized across countries, offer potentially cost-effective means of obtaining CO2 reductions (IPCC, 1996, By associating a uniform price with carbon emissions in every country, only reductions that cost less than the tax will be implemented, assuming that the tax is implemented perfectly. To provide a common price signal in all countries, the new carbon tax may need to be differentiated across countries to account for existing domestic fuel taxes and revenue constraints (Hoel, 1993). Providing a common price signal to all sources subject to the tax also requires that all countries refrain from policies that directly or indirectly offset the tax (such as subsidies or regulations).

The revenue raised by an international carbon tax must be redistributed or used in an agreed manner. It is likely to be difficult to obtain an agreement on the share of the revenue that each country should receive. Harmonized domestic taxes avoid this difficulty by letting each country keep the revenue it collects. In practice, it is difficult also to achieve agreement on minimum levels of harmonized carbon and/or energy taxes high enough to impact carbon emissions significantly. Political pressures to combine tax proposals with exemptions for specific sectors contribute to this difficulty and, if accepted, reduce the efficiency and effectiveness of the tax.

International or harmonized taxes provide greater certainty about the likely costs of an emissions reduction programme, compared with a similarly designed international emissions trading programme (Toman et al., 1999). This advantage can also be obtained by a hybrid policy, consisting of domestic emissions trading programmes coupled with a harmonized “trigger price”, at which countries would sell additional permits domestically (McKibbin and Wilcoxen, 2000). The hybrid policy sets an upper bound on the marginal cost of abatement (like a carbon tax), but otherwise operates like an emissions trading programme. For a discussion of the pros and cons of such a hybrid system, see Sections and

The two major concerns about international price-based policies are the emissions levels, and the feasibility of international agreement:

  • The first concern is that price-based policies (taxes or hybrid systems) fail to guarantee particular emissions levels if it is not possible to adjust the tax rate frequently to achieve emission reductions in accordance with the set targets. If one assumes, for instance, that taxes are the only instrument used to fulfil the Kyoto Protocol commitments, in practice they most likely cannot guarantee that emissions commitments will be fulfilled either in the aggregate and/or for individual countries.
  • The second concern is that an international agreement involving international or domestically harmonized taxes may be more difficult to negotiate than one involving emissions quotas. Wiener (1998) argues that the voluntary assent nature of international agreements means that nations must be made better off to participate, unlike domestic policies for which individuals can be coerced. While in theory international or domestically harmonized taxes can be combined with side payments to compensate losers, in practice such side payments are difficult to negotiate and tend to introduce dynamic inefficiencies since individual firms (and countries) do not bear the full social cost of their activities (Mestelman, 1982; Baumol and Oates, 1988; Kohn, 1992).76

Cooper (1998) takes the opposite position, arguing that taxes are the more feasible international approach. He argues that because of their rising contribution to global emissions, the participation of developing countries is essential for the long-term success of a programme to stabilize GHG concentrations in the atmosphere. He argues that it may be impossible to forge an agreement between rich and poor countries on the allocation of future quotas. Instead, “mutually agreed-upon actions”, such as nationally collected emission taxes, are the logical alternative.

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