Neoliberal Instrument Choice

Abstract

This book chapter reviews the influence on economic thought about instrument choice and its influence upon United States climate change policy. It shows that the theory of instrument choice made a positive contribution to the United States policy arsenal by emphasizing the cost effectiveness advantages of emissions trading. But because of an ideological climate uncritically supportive of free markets prevailed during the period of U.S. failure to address climate change, the United States favored overly broad trading programs, both in terms of geography and scope. This posture had a large influence on the Kyoto Protocol, leading the world to adopt a structure that creates significant risks of losing emission reductions and less incentive for innovation than a more narrowly designed program would offer. The chapter highlights the tension between sound regulatory policy and maximization of cost savings, which broad design favors. This chapter forms part of a forthcoming book, edited by the author, evaluating economic thought's influence on United States climate change policy.

Keywords: emissions trading, economic incentives, Kyoto Protocol, climate change, cap and trade, instrument choice, innovation, regulatory design

JEL Classification: K32, I18