6.3.4 Other Policies and Instruments
220.127.116.11 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).
18.104.22.168 International and Harmonized (Domestic) Carbon
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, 22.214.171.124).75
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
126.96.36.199 and 188.8.131.52.
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.