27 - Price, quantity, and technology strategies for climate change policy

Summary

Introduction

Cost-effective market approaches to environmental management all entail the use of some form of price signal, and they can generally be grouped as quantity-based or tax-based regulations. The quantity-based approach, in the form of “cap-and-trade” programs, has gained an especial popularity in the past two decades. The political acceptance of cap-and-trade over the tax approach has its roots in a favorable set of political attributes (Hahn and Stavins, 1991) and a successful experience with the Title IV SO₂ cap. Its support among economists comes from its theoretical capability to achieve any stated cap at minimum cost. Most importantly, it has been accepted by those with a greater concern for environmental outcomes than for program costs, because the idea of a cap provides certainty of particular emissions levels in return for uncertainty about the costs of achieving those emissions levels.

Cap-and-trade was such a popular policy prescription during the 1990s that almost the entire discussion about climate change policy during that time was cast in terms of how to design a greenhouse gas (GHG) trading program, and how to build international agreements and institutions that could allow emission trading to function even where caps could not be directly imposed. (Joint implementation and the extensive set of rules and procedures surrounding the Clean Development Mechanism are examples of the latter.