The Institutional Economics of Market-Based Climate Policy

About this book

The objective of this book is to analyze the institutional barriers to implementing market-based climate policy, as well as to provide some opportunities to overcome them. The approach is that of institutional economics, with special emphasis on political transaction costs and path dependence.

Instead of rejecting the neoclassical approach, this book uses it where fruitful and shows when and why it is necessary to employ a new or neo-institutionalist approach. The result is that equity is considered next to efficiency, that the evolution and possible lock-in of both formal and informal climate institutions are studied, and that attention is paid to the politics and law of economic instruments for climate policy, including some new empirical analyses.

The research topics of this book include the set-up costs of a permit trading system, the risk that credit trading becomes locked-in, the potential legal problem of grandfathering in terms of actional subsidies under WTO law or state aid under EC law, and the changing attitudes of various European officials towards restricting the use of the Kyoto Mechanisms.

Contents

Foreword. 1. Introduction. 1.1 Introduction. 1.2 Climate change, the Kyoto protocol and beyond. 1.3 Market-based climate policy, public goods and property right s. 1.4 The Kyoto mechanisms, institutional features and competitive advantages. 1.5 The emerging international greenhouse gas market. 1.6 Objective and approach of the book. 1.7 Overview of the book. Part I. Institutional Economics. 2. Design and implementation of market-based climate policy. 2.1 Introduction. 2.2 Tradeable emission rights and the private sector. 2. 2.1 Domes tic pe rmi t trading design. 2.2.2 Downstream permit trading with upstream monitoring. 2.3 Project-based emissions trading and the private sector. 2.4 Economic versus political hierarchy in market-based climate policy? 2.4.1 The theoretical superiority of permit trading in economics. 2.4.2 The problematic acceptability of permit trading in politics. 2.5 Some drawbacks of the existing literature. 2.6 Conclusion. 3. Path dependence and lock-in of market-based climate policy. 3.1 Introduction. 3.2 Definitions of institutional path dependence and l ock-in. 3 .3 Con dit ions for an institutional lock-in. 3.3.1 The superior alternative, imperfect markets and incomplete information. 3.3.2 Self-reinforcement, positive feedbacks and political transaction costs. 3.3.3 Probability, inevitability and remediableness. 3.4 Conditions for an institutional break-out. 3.4.1 Information, perceptions and experiments. 3.4.2 Problem-solving, crises and learning. 3.4.3 Switching costs, legal compatibilities and societal change. 3.5 The superiority of the superior alternative contested. 3.6 Novelties of an institutional path dependence approach. 3.7 A path-depen dent clim ate po lic y? 3.8 Conclusion. Part II. New Institutional Economics. 4. Environmental effectiveness of market-based climate policy. 4.1 Introduction. 4.2 Definitions of environmental effectiveness and emi ssion bas eline. 4 3 Environmental effectiveness of tradeable emission rights. 4.3.1 Macro-baseline, hot air trading and uncertainty. 4.3.2 Dynamic versus static perspectives on hot air trading. 4.3.3 Options to limit hot air trading. 4.3.4 Non-compliance and liability. 4.4 Environmental effectiveness of project-based emissions trading. 4.4.1 Micro-baseline, free-riding and gaming. 4.4.2 Ex post corrections of the micro-baseline. 4.4.3 Standardization of the micro-baseline. 4.5 Conclusion. 5. Transaction costs of market-based climate policy. 5.1 Introduction. 5.2 Definition of transaction costs. 5.3 Model versus muddle? 5. 4 Transac tion c ost s of tradeable emission rights. 5.4.1 Incremental design, set-up costs and thin markets. 5.4.2 Empirical evidence of transaction costs in permit trading markets. 5.5 Transaction costs of project-based emissions trading. 5.5.1 Baseline standardization, capacity-building and multilateral funds. 5.5.2 Empirical evidence of transaction costs in AIJ projects. 5.6 Methodological problems of comparing transaction costs. 5.6.1 Comparing AIJ

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