| Review of: | Firms, governments and climate policy: incentive-based policies for long-term climate change edited by Carlo Carraro, Christian Egenhofer |
|---|---|
| Reviewed By: | Axel Michaelowa |
| Reviewed in: | International Affairs |
| Date accepted online: | 27/07/2004 |
| Published in print: | Volume 80, Issue 2, Pages 367-414 |
Energy and environment
Most books on climate policy do not discuss the interaction between emitters and government, but focus on one of the two. Carraro and Egenhofer take up this challenge, but unfortunately do not manage to address this interaction fully. While their intention to identify incentives to adopt climate policy in the long run is laudable, the book contains relatively disparate papers on aspects of climate policy that have been covered elsewhere.
Three papers look at the Kyoto mechanisms in various contexts ranging from an analysis of barriers and risks, their link with traditional environmental policy instruments and their impact on technical change. One paper discusses the role of voluntary agreements (VAs) and one looks at the future development of the climate policy regime.
Egenhofer's paper on the interaction of the Kyoto mechanisms with other instruments is uneven, repetitive and partially outdated, having been written in 2001. The debate shifts back and forth and does not systematically address the possibilities for linkage. It starts with a general discussion of market-based mechanisms in environmental policy, which goes on for more than 20 pages. The real issue-the link between domestic emissions trading, regulation and taxes-is treated superficially on just five pages and the project-based mechanisms are not mentioned at all.
Ten Brink, Morère and Wallace-Jones present a very nice, up-to-date study on the different forms of voluntary agreements, with five in-depth case-studies covering Denmark, Germany, Italy (which had so far not been analysed in an English-language paper), the Netherlands and the UK. After discussing the generic advantages and disadvantages of VAs, they analyse how this instrument is seen by government, companies and NGOs. A detailed analysis of incentives for participation shows that avoidance of other, more 'biting' instruments is the main reason for embarking on a VA. There follows a good discussion and quantification of transaction costs, as well as an assessment of the link to other policy instruments. A discussion of the notorious baseline issue is also very enlightening and clearly shows the problems that arise if a VA is negotiated ad hoc. The authors rightly conclude that in most cases voluntary agreements will not live up to their promises unless backed up by credible threats of sanctions or stringent alternatives. In Denmark and the UK, sanctions take the form of a retrospective elimination of tax exemptions, while in the Netherlands direct regulation can be introduced. The German agreement, which is not backed by such threats, is labelled as 'regulatory capture'. Together with the subsequent chapter by Janssen, this is the only part of the book to focus on the company level. The flowchart (p. 130) demonstrating how governments should design VAs is a must for every policy-maker!
Janssen draws on much of his work already published in
The next chapter, by Galeotti and Carraro, is a broad study of a model treatment of technology development and diffusion. They start with an assessment of promising technologies, discuss empirical evidence for a reduction in unit costs and continue with an assessment of the different efficiency improvement potentials and barriers that prevent the implementation of 'no regrets' projects. They then look at incentives for technology development through different policy instruments, differentiating between incentives for innovation and the adoption of a new technology. Emissions taxes and auctioned allowances score best. A discussion of factors influencing technology diffusion follows. A long section entitled 'empirical evidence' is in fact a comparison of different models, which is unfortunately not well structured. One interesting conclusion is that energy scenarios with widely differing emissions can have very similar costs. Unfortunately, the authors do not look at the processes on a company level at all.
The final paper by Galeotti and Carraro summarizes the current status of game theory in climate policy analysis. It begins with an assessment of the main hurdles for credible climate policy action-the atmosphere as a global public good, the long-term nature of climate change, the lack of technological quick fixes, pervasive uncertainty and strong interactions with other policies. The authors generally use a gloomy tone, especially when it comes to an evaluation of the institutions of global climate policy. I would contend that institutions and processes are astonishingly well established after just one decade since the advent of climate policy. A review of the results of game theory follows, starting with the point that the costs and benefits of climate policy depend on the underlying regime structure. After rightly stressing that the definition of a country's emissions baseline is a very strategic question, the incentives for unilateral mitigation actions are discussed. Partial and global agreements are considered next, with the latter seen as unlikely. Thus the authors look for incentives to enlarge a partial agreement-transfers, a universe of regional agreements or incentive-compatible accession rules. The challenge is to generate profits through transfers while enhancing regime stability. This can also be achieved through issue linkage. The authors see hot air as a typical transfer that can only be mobilized through emissions trading. They calculate that Kyoto will not be profitable for any country and call for an agreement that equalizes mitigation costs per capita.
Compared with other books on climate policy published in the last two years, this one is clearly a follower. It contains some interesting insights, especially in the context of voluntary agreements, but it is not a 'must-read'.