Instrumentation Strategies and Instrument Mixes for Long Term Climate Policy

Abstract

The good intentions of COP21 are to be reached by novel climate policy instrumentation, beyond what has been developed till now. For the long term two fundamentally different strategies emerge, each leading to a set of instruments fit for the challenging task in principle. The first has a command and control orientation, developing and specifying the technologies required and bringing them in the market. Prime instruments are subsidies like feed-in tariffs and capital subsidies and standards and regulations, as to force coal fired power stations out of the market and efficient cars into the market. These technology specific instruments override the current strict EU cap-and-trade system. This governance orientation is on optimization from a broad and integrative perspective, including distributional issues, energy policy and transport policy. The second strategy has its focus on incentive creation and option creation, transforming and strengthening EU ETS into a price stabilized emission pricing system, ultimately as an emission tax. A core institutional element is the creation of a European open real time electricity market, with equal but quite variable prices for all primary and secondary producers and for all users. Two sets of instruments are substantially mutually exclusive; feed-in tariffs and user differentiated surcharges to fund them are not compatible with open electricity markets. The two sets of instruments are substantially mutually exclusive; for example feed-in tariffs and user differentiated surcharges to fund them are not compatible with open electricity markets and not compatible with pure cap-and-trade systems. Discussion and choices are due.

Keywords: Climate policy instrumentation, Instrumentation strategies, emission pricing, emission tax, climate governance, institutionalism, innovation incentives

JEL Classification: H21, H23