Introduction

The purpose of this chapter is to discuss the design of environmental policy instruments with a particular focus on climate change. Economics holds some vital keys to the implementation in society of the technical or biological methods that natural scientists and engineers devise. There are already environmentally sound ways of supplying energy for buildings, transport, etc. These technical solutions provide the possibility of production with less carbon emission, less risk of nuclear accidents, less air pollution, etc. However, whether these techniques are adopted in the real world will depend on social “rules” the design of which can be improved by good economic analysis.

There are more options than just tradable permits. Among the policies highlighted are: the creation of well-defined property rights, subsidies, charges (of different kinds – emission, input, output), user fees, tariff construction, deposit refunds, imposition of technical standards, technology standards, emission standards, bans, quotas, the provision of information, labeling, and the provision of infrastructure or other public goods. We believe that there is much theoretical and empirical work, relevant for successful policy-making, which remains to be done on how these various instruments can be used and how they can be combined.

The need for policy instruments for combating climate change

To reach the Kyoto greenhouse gas (GHG) emissions target of an overall reduction of 5 percent (from 1990 levels) among developed countries is just a first step toward stabilizing the atmospheric carbon content at much lower levels.