https://orcid.org/0000-0003-3415-3083
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ABSTRACT
We assess evidence from theoretical-modelling, empirical and experimental studies on how interactions between instruments of climate policy affect overall emissions reduction. Such interactions take the form of negative, zero or positive synergistic effects. The considered instruments comprise performance and technical standards, carbon pricing, adoption subsidies, innovation support, and information provision. Based on the findings, we formulate climate-policy packages that avoid negative and employ positive synergies, and compare their strengths and weaknesses on other criteria. We note that the international context of climate policy has been neglected in assessments of policy mixes, and argue that transparency and harmonization of national policies may be key to a politically feasible path to meet global emission targets. This suggests limiting the complexity of climate-policy packages.
Key policy insights
Combining technical standards or targets, such as renewable-energy quota, or adoption subsidies with a carbon market can produce negative synergy, up to the point of adding no emissions reduction beyond the cap. For maximum emissions reduction, renewable energy policy should be combined with carbon taxation and target expensive reduction options not triggered by the tax.
Evidence regarding synergy of information provision with pricing is mixed, indicating a tendency for complementary roles (zero synergy). Positive synergy is documented only for cases where information provision improves effectiveness of price instruments, e.g. by stimulating social imitation of low-carbon choices.
We conclude that the most promising packages are combining innovation support and information provision with either a carbon tax and adoption subsidy, or with a carbon market. We further argue that the latter could have stronger potential to harmonize international policy, which would allow to strengthen mitigation policy over time.
Acknowledgements
This study has received funding through an ERC Advanced Grant from the European Research Council (ERC) under the European Union’s Horizon 2020 research and innovation programme (grant agreement n° 741087). IS acknowledges financial support from the Russian Science Foundation (RSF grant number 19-18-00262).
Disclosure statement
No potential conflict of interest was reported by the authors.
Notes
1 Note that cases (i) and (ii) are sometimes also referred to as instruments being complementary. To avoid confusion, we use in this paper the term ‘complementary’ strictly for case (i).
2 A cap-and-trade system can itself already be regarded as a mix of policy instruments, namely a quantity-based instrument (i.e. a cap to emissions, defining the sum of all emission permits) and a price-based instrument (i.e. variable price due to trade of permits). Such a hybrid policy has various advantages (Hepburn, Citation2006; Grülla & Taschinibc, Citation2011). Specific additional elements add further benefits, such as limiting volatility of the carbon price through a minimum price or price floor, and avoiding unsurmountable costs for emitters through a maximum price or ‘safety valve’ (Jacoby & Ellerman, Citation2004; Philibert, Citation2009).
3 A few studies claim that despite negative synergy, the combination of carbon market and renewable energy policy can be useful: e.g., if the design of the permit market is imperfect (Lecuyer & Quirion, Citation2013, p. 2019) or energy market are imperfect (Lehmann & Gawel, Citation2013). Others point at long-term innovation benefits (del Río, Citation2017; Fagiani et al., Citation2014). However, direct innovation support seems more effective for this purpose and will avoid negative synergy with carbon markets (Section 3.3).
4 This can be compensated by a market stability reserve, as in the EU-ETS (Perino et al., Citation2019). Reducing the cap over time is another way to reduce negative synergy; more specifically, deducting the emissions reduced by the standards from the cap neutralizes the leakage (Richstein et al., Citation2015). A third option is installing a carbon price floor (Flachsland et al., Citation2020). Perino (Citation2018) warns, though, that this may not be a permanent solution.
5 Stoneman and David (Citation1986) compare adoption subsidies and information provision in their role as instruments to encourage diffusion.
6 An overall comparison of feebate and carbon tax should also account for any emissions reduction or increase due to use of carbon tax revenues.
7 This is one of the few studies that includes the four required treatments: no policy, either instrument in isolation, and their combination. Note that crowding-out (in) means that the combined effect is smaller (larger) than the sum of the two isolated effects.
8 With regard to the trade-off between effectiveness and efficiency, the prices-vs-quantities debate started by Weitzman (Citation1974) is relevant. It distinguishes between uncertainty about effectiveness of price instruments versus uncertainty about the costs of quantity instruments. While this debate is more about instrument choice and incentives than about a policy mix, it has been connected – even in the context of climate policy – to hybrid instruments such as tradeable permits with a price floor (kind of a policy mix). Such hybrids are found to perform better than each instrument alone (Pizer, Citation1997). Considering a setting with multiple pollutants, Ambac and Coria (Citation2013) find that the desirable policy mix depends on whether pollutants are complements or substitutes.
9 We considered adding equity to the set of performance criteria. However, it has not received much attention in studies assessing synergy of policy instruments, while its assessment requires information about generally unknown factors, such as wealth and income distribution, prices, sector shifts and associated unemployment. In addition, it depends on how revenues of carbon pricing are used (Klenert et al., Citation2018; Hafstead, Citation2019).
10 One might, as a transition approach, combine a carbon tax for small emitters with a carbon market for large emitters, as already happens in various EU countries. This evidently complicates the policy mix while adding the challenge of multiple, incongruent carbon prices.
11 Among the various instruments, global carbon pricing enjoys the advantage that negotiating it is relatively simple as it means a one-dimensional negotiation challenge (Weitzman, Citation2014, Citation2017). Instead, negotiating national emission targets among 200 countries implies a 200-dimensional coordination problem, while negotiating technical standards for n products or technologies would mean an n-dimensional challenge (with n possibly being very large). In addition, a carbon market can harmonize national climate policies. Indeed, most current harmonized carbon prices are due to carbon markets (Haites, Citation2018).