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

National policy instruments, their implementation and interactions

The literature continues to reflect that a wide variety of national policies and measures are available to governments to limit or reduce GHG emissions. These include: regulations and standards, taxes and charges, tradable permits, voluntary agreements, phasing out subsidies and providing financial incentives, research and development and information instruments. Other policies, such as those affecting trade, foreign direct investments and social development goals can also affect GHG emissions. In general, climate change policies, if integrated with other government polices, can contribute to sustainable development in both developed and developing countries (see Chapter 12) [13.1].

Reducing emissions across all sectors and gases requires a portfolio of policies tailored to fit specific national circumstances. While the literature identifies advantages and disadvantages for any given instrument, the above-mentioned criteria are widely used by policy makers to select and evaluate policies.

Table TS.20: National environmental policy instruments and evaluative criteria [Table 13.1].

Instrument Criteria 
Environmental effectiveness Cost-effectiveness Meets distributional considerations Institutional feasibility 
Regulations and standards Emission levels 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 weak 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 improved 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 long-term  Depends on programme design and the degree of risk Initially benefits 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 

Note: Evaluations are predicated on assumptions that instruments are representative of best practice rather than theoretically perfect. This assessment is based primarily on experiences and literature from developed countries, since peer-reviewed articles on the effectiveness of instruments in other countries were 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.

All instruments can be designed well or poorly, stringent or lax. Instruments need to be adjusted over time and supplemented with a workable system of monitoring and enforcement. Furthermore, instruments may interact with existing institutions and regulations in other sectors of society (high agreement, much evidence) [13.1].

The literature provides a good deal of information to assess how well different instruments meet the above-mentioned criteria (see Table TS.20) [13.2]. Most notably, it suggests that:

  • Regulatory measures and standards generally provide environmental certainty. They may be preferable when lack of information or other barriers prevent firms and consumers from responding to price signals. Regulatory standards do not generally give polluters incentives to develop new technologies to reduce pollution, but there are a few examples whereby technology innovation has been spurred by regulatory standards. Standards are common practice in the building sector and there is strong innovation. Although relatively few regulatory standards have been adopted solely to reduce GHG emissions, standards have reduced these gases as a co-benefit (high agreement, much evidence) [13.2].
  • Taxes and charges (which can be applied to carbon or all GHGs) are given high marks for cost effectiveness since they provide some assurance regarding the marginal cost of pollution control. They cannot guarantee a particular level of emissions, but conceptually taxes can be designed to be environmentally effective. Taxes can be politically difficult to implement and adjust. As with regulations, their environmental effectiveness depends on their stringency. As with nearly all other policy instruments, care is needed to prevent perverse effects (high agreement, much evidence) [13.2].
  • Tradable permits are an increasingly popular economic instrument to control conventional pollutants and GHGs at the sectoral, national and international level. The volume of emissions allowed determines the carbon price and the environmental effectiveness of this instrument, while the distribution of allowances has implications for competitiveness. Experience has shown that banking provisions can provide significant temporal flexibility and that compliance provisions must be carefully designed, if a permit system is to be effective (high agreement, much evidence). Uncertainty in the price of emission reductions under a trading system makes it difficult, a priori, to estimate the total cost of meeting reduction targets [13.2].
  • Voluntary agreements between industry and governments and information campaigns are politically attractive, raise awareness among stakeholders and have played a role in the evolution of many national policies. The majority of voluntary agreements has not achieved significant emission reductions beyond business-as-usual. However, some recent agreements in a few countries have accelerated the application of best available technology and led to measurable reductions of emissions compared with the baseline (high agreement, much evidence). Success factors include clear targets, a baseline scenario, third-party involvement in design and review, and formal provisions for monitoring [13.2].
  • Voluntary actions: Corporations, sub-national governments, NGOs and civil groups are adopting a wide variety of voluntary actions, independent of government authorities, which may limit GHG emissions, stimulate innovative policies and encourage the deployment of new technologies. By themselves, they generally have limited impact at the national or regional level [13.2].
  • Financial incentives (subsidies and tax credits) are frequently used by governments to stimulate the diffusion of new, less GHG-emitting technologies. While the economic costs of such programmes are often higher than for the instruments listed above, they are often critical to overcome barriers to the penetration of new technologies (high agreement, much evidence). As with other policies, incentive programmes must be carefully designed to avoid perverse market effects. Direct and indirect subsidies for fossil fuel use and agriculture remain common practice in many countries, although those for coal have declined over the past decade in many OECD countries and in some developing countries (See also Chapter 2, 7 and 11) [13.2].
  • Government support for research and development is a special type of incentive, which can be an important instrument to ensure that low GHG-emitting technologies will be available in the long-term. However, government funding for many energy-research programmes dropped after the oil crisis in the 1970s and stayed constant, even after the UNFCCC was ratified. Substantial additional investments in, and policies for, R&D are needed to ensure that technologies are ready for commercialization in order to arrive at stabilization of GHGs in the atmosphere (see Chapter 3), along with economic and regulatory instruments to promote their deployment and diffusion (high agreement, much evidence) [13.2.1].
  • Information instruments – sometimes called public disclosure requirements – may positively affect environmental quality by allowing consumers to make better-informed choices. There is only limited evidence that the provision of information can achieve emissions reductions, but it can improve the effectiveness of other policies (high agreement, much evidence) [13.2].

Applying an environmentally effective and economically efficient instrument mix requires a good understanding of the environmental issue to be addressed, of the links with other policy areas and the interactions between the different instruments in the mix. In practice, climate-related policies are seldom applied in complete isolation, as they overlap with other national polices relating to the environment, forestry, agriculture, waste management, transport and energy, and in many cases require more than one instrument (high agreement, much evidence) [13.2].