13.2.2 Linking national policies

13.2.2.1 National policy interactions/linkages and packages

Single instruments are unlikely to be sufficient for climate change mitigation, and it is more likely that a portfolio of policies will be required (see IPCC, 2001). Examples of areas where there are potential synergies include water management strategies, farm practices, forest management strategies and residential building standards. Instruments that maximize potential synergies could become socially and economically efficient and may offer opportunities for countries to achieve sustainable development targets, even in the face of uncertainties. This is especially important given the limited financial and human resources in developing countries (Dang et al., 2003). Climate change considerations also provide both developing and developed countries with an opportunity to look closely at their respective development strategies from a new perspective. Fulfilling development goals through policy reforms in such areas as energy efficiency, renewable energy, sustainable land use and/or agriculture will often also generate benefits related to climate change objectives.

A key synergy is that between adaptation and mitigation policies. Climate policy options can include both mitigation and adaptation (see Chapter 17 of IPCC (2007b) for a discussion on adaptation policies and Chapter 18 for a detailed analysis of interaction between mitigation and adaptation). Many adaptation options are consistent with pathways towards effective and long-term mitigation and, in turn, several mitigation options can facilitate planned adaptation.

In theory, a perfectly functioning market would need only one instrument (e.g. a tax) to address a single environmental problem, such as climate change. In such a situation, the application of two or more overlapping instruments could diminish economic efficiency while increasing administrative costs. In practice, however, there are market failures that may make a mix of instruments desirable. This section describes some of these cases and addresses situations in which multiple or overlapping objectives might justify a mix of policies.

Climate-related policies are seldom applied in complete isolation: in a large number of cases one or more instruments will be applied. The mere existence of an instrument mix, however, is clearly not ‘proof’ of its environmental effectiveness and economic efficiency. A rather obvious first requirement for applying an environmentally and economically effective instrument mix is to have a good understanding of the environmental issue to be addressed. In practice, many environmental issues can be complex. While a tax can affect the total demand for a product and the choice between different product varieties, it is less suited to address, for example, how a given product is used and when it is used. Hence, other instruments could be needed. A second requirement for designing efficient and effective policies is to have a good understanding of the links with other policy areas: not only do different environmental policies need to be co-ordinated, but co-ordination with other related policies is also necessary. A third requirement is to have a good understanding of the interactions between the different instruments in the mix.

Several authors describe situations in which a combination of policies might be desirable. Johnstone (2002) argues that the price signal from a tradable permits or tax system may not be sufficient to overcome barriers to technological development and diffusion and that additional policies may be warranted. These barriers include: (1) credit market failures that discourage lenders from providing capital to firms for high-risk investments associated with R&D and even the implementation of new technologies and (2) reduced incentives for private investment in R&D if firms can not prevent other firms from benefiting from their investments (i.e. ‘spill-over’ effects).^[30] Fischer and Newell (2004) find that the combination of a technology policy, such as government sponsored R&D, with a tax or tradable permit instrument could help overcome this type of market imperfection.

A second market failure that may require more than one instrument is the lack of information among consumers on the environmental or economic attributes of a technology. In such a case, a price signal alone may not sufficiently spur the diffusion of these types of technologies. One solution to this type of barrier is an eco-labelling system, which can help increase the effectiveness of a price instrument by providing better information on relevant characteristics of the product (OECD, 2003b; Braathen, 2005). Sijm (2005) notes that this type of market failure may exist for households who may lack the relevant information to invest in energy efficiency measures and may not respond to a price signal. Another market failure in the residential sector may be caused by split incentives where neither the landlord nor tenant has an incentive to invest in energy efficiency measures (Sorrell and Sijm, 2003).

With the implementation of the EU ETS, particular attention has been given to the interaction between a tradable permits mechanism and other policies. Sijm (2005) and Sorrell and Sijm (2003) argue that an emissions trading scheme can co-exist with other instruments as long as these other instruments improve the efficiency of the trading mechanism by addressing market failures or contributing to some other policy objective. However, they argue that the combination of an emissions trading scheme with other instruments could also lead to “double regulation”, reduced efficiency and increased costs if policies are not designed carefully. NERA (2005) and Morthorst (2001) assess the interaction of renewable energy policies with tradable permits programmes and conclude that if not designed properly, these policies can lower allowance prices but raise the overall costs of the programme.

There may be cases where a package of CO₂ mitigation policies is justified if these policies serve multiple policy objectives. Sijm (2005) gives several examples of policies and objectives that may be compatible with the EU ETS, including direct regulation that also reduces local environmental effects from other pollutants. Renewable energy policies can be used to expand energy supply, increase rural income and reduce conventional pollutants. Policies that encourage bio-fuel production and automobile fuel efficiency have also been advocated for their advantages in encouraging energy security and fuel diversity as well as GHG mitigation. In the USA, these types of energy policies have been proposed in conjunction with a tradable permits system as part of a package to address energy, security and environmental objectives (NCEP, 2004).