Climate Change 2001: Working Group III: Mitigation

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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 5.¹⁰ 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 policy options.¹¹ 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 instrument’s 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 account.
  
• 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 of pollutants).

The literature (e.g., OECD, 1997d) identifies some additional criteria, such as:

• 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 literature–particular theory development–focuses 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).