6.1.4 Criteria for Policy Choice
Governments implement policies and measures to achieve particular objectives
that they believe will not be achieved in the absence of government intervention,
possibly because externalities or public goods are involved. Policies and measures
can be generic, such as a general carbon tax or emissions trading, or sector-specific,
such as a regulation applied to the construction sector, or a subsidy for green
farming practices. The objective of this chapter is to assess different types
of policies and measures, not to provide a complete list of these, so sector-specific
policies and measures are discussed only in general terms.
Chapter 5 draws a distinction among five types of
policy targets, each of which refers to a different interpretation (definition)
of the concept of barriers to technological change: market potential,
economic potential, socioeconomic potential, technological potential, and physical
potential. Policies and measures can differ in the type of potential they aim
to reach, but it is difficult to link specific policy instruments and specific
potentials, because the potential achieved through virtually any policy instrument
depends upon the degree to which that instrument is employed. For
example, an emissions tax can be set at various levels; depending upon the level
at which the emissions tax is set, it could have the effect (if perfectly implemented)
of achieving any of the types of potential defined in Chapter
For this, among other reasons, the prime focus in this section is on the possible
criteria for policy instrument choice and evaluation.
Evaluation criteria are required both for the ex-ante choice of instruments
and for the ex-post assessment of implementation and performance. Each government
may apply different weights to the criteria when it evaluates GHG mitigation
Moreover, a government may apply different weights to the criteria when it evaluates
national and international policy instruments, and the appropriateness of the
criteria may vary depending on the degree of uncertainty about the pollution
abatement cost and pollution damage functions. This general remark should be
kept in mind when the various domestic and international policies, instruments,
and measures discussed in this chapter are evaluated against the background
of these criteria.
The criteria identified in SAR for the evaluation of policy options (Fischer
et al., 1998) are:
- Environmental effectiveness. How well does the policy achieve the environmental
goal, such as a GHG emissions reduction target? How reliable is the instrument
in achieving that target, does the instruments effectiveness erode over
time, and does the instrument create continual incentives to improve products
or processes in ways that reduce emissions?
- Cost-effectiveness. Whether the policy achieves the environmental goal at
the lowest cost, taking transaction, information, and enforcement costs into
- Distributional considerations. How the costs of achieving the environmental
goal are distributed across groups within society, including future generations.
- Administrative and political feasibility. This includes considerations such
as flexibility in the face of new knowledge, understandability to the general
public, impacts on the competitiveness of different industries, and other
government objectives (such as meeting fiscal targets and reducing emissions
The literature (e.g., OECD, 1997d) identifies some additional criteria, such
- Revenues raised in the case of market mechanisms, for instance, may constitute
a second source of benefits from their use, over and above their direct environmental
impact, depending on if and how the revenues are recycled.
- Wider economic effects include potential effects on variables such as inflation,
competitiveness, employment, trade, and growth.
- Wider environmental effects, such as local air-quality improvement (usually
referred to as the ancillary benefits).
- Soft effects, which relate to the impact of environmental policy
instruments on changes in attitudes and awareness.
- Dynamic effects, which relate to the impact on learning, innovation, technical
progress, and dissemination and transfer of technology.
The above lists of criteria guide the discussion of national and international
policies and measures related to GHG abatement. However, the economics literatureparticular
theory developmentfocuses more on the cost-effectiveness criterion than
on the other criteria mentioned, and there is a similar emphasis in this chapter,
which is a review of the best available scientific literature. Wherever possible,
literature on the potential equity impact of policies and measures is referred
to. In addition, specific attention is paid to the political economy literature
that describes policy choice (Section 6.1.5), the interactions
of policy instruments with fiscal systems (Section 6.5.2),
and the impacts on technological change (Section 6.5.3).