How to price carbon in good times...and bad!

Emissions trading systems and carbon taxes are two market-based policy instruments for responding to the climate change externality. This article focuses on the relationship between the design of these carbon pricing instruments and business cycle fluctuations. In particular, whether and how these instruments should respond to business cycles is a topical policy question. To answer it, the article brings together the relevant empirical and theoretical results from the academic literature. It finds that building responsiveness into the design of carbon pricing instruments can reduce the burden of regulation by distributing it more evenly over time. Specifically, relative to a fixed cap emissions trading system, this can be achieved by relaxing the cap during economic expansions and tightening it during recessions. Similarly, a carbon tax regime in which the tax is higher during expansions, and lower during recessions, is likely to improve welfare compared to a cyclically unresponsive tax. In practice, a mechanism which renders real-world carbon pricing instruments responsive is a challenging task. The article provides an overview of the trade-offs involved by focusing on the broad classes of mechanisms explored in the literature. The choice of responsiveness-inducing mechanism must crucially consider country characteristics such as the properties of fluctuations in the country’s GDP and emissions, any relevant political economy concerns and its institutional background

Climate change and forest sinks: Factors affecting the costs of carbon sequestration

The possibility of encouraging the growth of forests as a means of sequestering carbon dioxide has received considerable attention, partly because of evidence that this can be a relatively inexpensive means of combating climate change. But how sensitive are such estimates to specific conditions? We examine the sensitivity of carbon sequestration costs to changes in critical factors, including the nature of management and deforestation regimes, silvicultural species, relative prices, and discount rates. (C) 2000 Academic Press

A tale of two market failures: Technology and environmental policy

Market failures associated with environmental pollution interact with market failures associated with the innovation and diffusion of new technologies. These combined market failures provide a strong rationale for a portfolio of public policies that foster emissions reduction as well as the development and adoption of environmentally beneficial technology. Both theory and empirical evidence suggest that the rate and direction of technological advance is influenced by market and regulatory incentives, and can be cost-effectively harnessed through the use of economic-incentive based policy. In the presence of weak or nonexistent environmental policies, investments in the development and diffusion of new environmentally beneficial technologies are very likely to be less than would be socially desirable. Positive knowledge and adoption spillovers and information problems can further weaken innovation incentives. While environmental technology policy is fraught with difficulties, a long-term view suggests a strategy of experimenting with policy approaches and systematically evaluating their success. © 2005 Elsevier B.V. All rights reserved