Incentives And Markets

William Nordhaus (2007: 20) provides salutary advice: '[I]t is unrealistic to hope that major reductions in emissions can be achieved by hope, trust, responsible citizenship, environmental ethics, or guilt alone.' Climate change mitigation requires finance: just reducing deforestation will cost billions of dollars every year for the foreseeable future. Who is going to put up this kind of money? The solution that has most promise is to harness the market. Creating a demand for allowances to emit greenhouse gas reduction and allowing their trade is the approach adopted by the United Nations Framework Convention on Climate Change in its Kyoto Protocol. Most rich countries have accepted emission allowances that are less than 1990 levels. To comply with their caps, countries are bound to adopt domestic policies that restrict greenhouse gas emissions. The cost of compliance is reduced by the ability of countries to trade emission allowances. If the price of allowances is above the cost of abatement, there is an incentive for the country to cut to below its cap and sell surplus allowances to countries with costs of abatement above the price of allowances, and the overarching cap is still achieved.

The policy instruments available to countries to reduce emissions within their borders boil down to two main types: a tax on greenhouse gas emissions, and this can easily be applied to the use of fossil fuels depending on their carbon content; or a cap on emissions by industries and businesses, and making the emission allowances tradable. These policies can be complemented by subsidies for research and development and adoption of new technology that makes targets cheaper to achieve.

If greenhouse emissions are taxed, industries and businesses can either avoid the tax if the cost of abatement is lower than the tax, or pay the tax if this is cheaper than abatement. Governments with greenhouse gas taxes can give a role to reforestation by paying subsidies for, or by applying tax rebates to, the carbon dioxide removed by plantations from the atmosphere.

In the alternative policy of cap and trade, so far the preferred option of several countries, reforestation can be given a role by treating a tonne of carbon dioxide removed from the atmosphere as equivalent to a tradable emission allowance. Developers of plantations can then sell the allowances generated by the carbon captured in the forestry sink. Moreover, capped industries and businesses may be allowed to offset their emissions by importing allowances generated by forestry projects elsewhere. Whatever the means, the greenhouse gas reductions achieved are entered into the national accounts, which all participating governments are required to maintain.

Thus the answer to the question 'who pays?' in the case of growing new forests as carbon sinks, is that industry and business will pay. Money can be made by selling emission allowances generated, or money can be saved by buying offsets rather than by abating. The effectiveness of both cap and trade and tax systems in stimulating forestry investment is dependent on the price of carbon; this in turn depends on the deepness in the cuts in greenhouse emissions or the size of the tax.

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  • Aldo
    What incentive do countries have in participating in the Kyoto protocol?
    12 months ago

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