IPCC Fourth Assessment Report: Climate Change 2007
Climate Change 2007: Working Group III: Mitigation of Climate Change Criteria assessment

Any evaluation of the instruments based on the criteria discussed herein is challenging for two reasons. First, practitioners must be able to compare potential instruments based on each of the evaluative criteria. Unfortunately, in many cases it can be difficult if not impossible to rank instruments in an objective manner. For example, Fischer et al. (2003) conclude that it is not possible to rank environmental policy instruments based on their technology-stimulating effects. Consequently, it will be difficult to determine which of the available instruments is the most cost-effective. Distributional considerations are also particularly difficult to evaluate. Revesz and Stavins (2006) provide a discussion of the difficulties involved in evaluating instruments based on distribution or equity. They also cite a number of authors that propose different approaches to evaluating policies.

Nevertheless, it is possible to make general statements about each instrument according to the criteria we have selected. For example, it is generally believed that market-based instruments will be more cost effective than regulations and standards (Wiener, 1999). However, this belief implicitly assumes that a country has well-functioning institutions, the lack of which can result in a market-based instrument being more costly to implement (Blackman and Harrington, 2000). Table 13.1 summarizes the seven instruments presented in this chapter for each of the four criteria we discuss. Sterner (2003) and Harrington et al. (2004) provide similar summaries for other instruments.

Table 13.1: National environmental policy instruments and evaluative criteria a

Instrument Criteria 
Environmental effectiveness Cost-effectiveness Meets distributional considerations Institutional feasibility 
Regulations and standards  Emissions level set directly, though subject to exceptions. Depends on deferrals and compliance. Depends on design; uniform application often leads to higher overall compliance costs. Depends on level playing field. Small/new actors may be disadvantaged. Depends on technical capacity; popular with regulators in countries with weakly functioning markets.  
Taxes and charges Depends on ability to set tax at a level that induces behavioural change.  Better with broad application; higher administrative costs where institutions are weak. Regressive; can be ameliorated with revenue recycling.  Often politically unpopular; may be difficult to enforce with underdeveloped institutions. 
Tradable permits Depends on emissions cap, participation and compliance. Decreases with limited participation and fewer sectors. Depends on initial permit allocation. May pose difficulties for small emitters. Requires well functioning markets and complementary institutions.  
Voluntary agreements Depends on programme design, including clear targets, a baseline scenario, third party involvement in design and review and monitoring provisions. Depends on flexibility and extent of government incentives, rewards and penalties. Benefits accrue only to participants. Often politically popular; requires significant number of administrative staff. 
Subsidies and other incentives Depends on programme design; less certain than regulations/standards.  Depends on level and programme design; can be market distorting. Benefits selected participants, possibly some that do not need it. Popular with recipients; potential resistance from vested interests. Can be difficult to phase out. 
Research and development Depends on consistent funding; when technologies are developed and polices for diffusion. May have high benefits in the long term.  Depends on programme design and the degree of risk. Benefits initially selected participants; potentially easy for funds to be misallocated. Requires many separate decisions. Depends on research capacity and long-term funding. 
Information policies Depends on how consumers use the information; most effective in combination with other policies.  Potentially low cost, but depends on programme design.  May be less effective for groups (e.g. low-income) that lack access to information. Depends on cooperation from special interest groups. 


a Evaluations are predicated on assumptions that instruments are representative of best practice rather than theoretically perfect. This assessment is based primarily on experiences and published reports from developed countries, as the number of peer reviewed articles on the effectiveness of instruments in other countries is limited. Applicability in specific countries, sectors and circumstances – particularly developing countries and economies in transition – may differ greatly.

Environmental and cost effectiveness may be enhanced when instruments are strategically combined and adapted to local circumstances.

Second, policymakers must determine how much weight to assign each of the evaluative criteria. Consider two instruments that are equally environmentally effective and both institutionally feasible, but one has unfavourable distributional implications while the other is less cost-effective. In order to choose one instrument over the other, one must assess the relative importance of distribution versus cost-effectiveness. However, the determination of just what weight should be given to each evaluative criterium is a subjective question and one left to policymakers to decide. Some authors do provide some guidelines on how policymakers can determine which evaluative criteria are the most important. Sterner (2003) argues that distributional considerations will likely be less important in an economy with relatively less inequality than in countries with large income disparities and also provides additional guidance on other criteria, including institutional flexibility and incentive compatibility. Bell (2003) and Bell and Russell (2002) argue that institutional feasibility is of critical importance in developing countries, where environmental effectiveness and cost-effectiveness may be determined in large part by a government’s institutional capacity. In general, the criteria that receive the most weight will be those that are assessed to be the most important in terms of each country’s specific circumstances.