The Institutional Economics of Market-Based Climate Policy
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.
Hardback 326 pp ISBN 9780444515735
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.
1. Introduction. 1.1 Introduction. 1.2 Climate change, the Kyoto protocol and beyond. 1.3 Market-based climate
policy, public goods and property rights. 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 Domestic permit 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 lock-in. 3.3 Conditions 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-dependent climate policy? 3.8 Conclusion.
Part II. New Institutional Economics.
Part III. Institutional Law and Economics.
4. Environmental effectiveness of market-based climate policy. 4.1 Introduction. 4.2 Definitions of environmental effectiveness and emission baseline. 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 Transaction costs 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 transaction costs with permit trading transaction costs. 5.6.2 Comparing market transaction costs with political transaction costs. 5.7 Conclusion.
6. WTO subsidization law and distortions of market-based climate policy. 6.1 Introduction. 6.2 Definition of competitive distortions. 6.3 Economic analysis of permit allocation and competitive distortions. 6.3.1 Perfect competition, efficiency and opportunity costs. 6.3.2 Imperfect competition, inefficiency and financial positions. 6.3.3 Fair competition, equity and level playing field. 6.4 Legal analysis of permit allocation and WTO subsidies law. 6.4.1 Permit allocation and actionable subsidies. 6.4.2 Permit allocation and non-actionable subsidies. 6.5 Political analysis of perceptions on subsidization. 6.5.1 Perceptions in political negotiations on permit allocation. 6.5.2 International harmonization of permit allocation rules. 6.6 Conclusion.
7. EC state aid law and distortions of market-based climate policy. 7.1 Introduction. 7.2 Economic analysis of permit allocation and competitive distortions. 7.2.1 Competitive distortions, efficiency and opportunity costs. 7.2.2 Competitive distortions, equity and level playing field. 7.3 Legal analysis of permit allocation and EC state aid law. 7.3.1 Permit allocation and state aid criteria. 7.3.2 Permit allocation and state aid exemptions. 7.4 Political analysis of perceptions on state aid. 7.4.1 Perceptions in political negotiations on permit allocation. 7.4.2 The political precedent of emissions trading in Denmark and the UK. 7.4.3 The political outcome of permit trading in the EU. 7.5 Possible extensions of the analysis to the polluter pays principle. 7.6 Conclusion.
Part IV. Neo-institutional Economics.
8. Theoretical aspects of restricting market-based climate policy. 8.1 Introduction. 8.2 Definition of supplementarity. 8.3 Economic analyses of the EU proposal on supplementarity. 8.3.1 Overall economic effects of the EU proposal on supplementarity. 8.3.2 Gainers and losers of the EU proposal on supplementarity. 8.4 Theoretical explanations of the EU proposal on supplementarity. 8.4.1 Hypotheses on restricting the use of the Kyoto mechanisms. 8.4.2 Alternative hypotheses and limitations of the theoretical analysis. 8.4.3 Ex post clustering of the hypotheses. 8.5 Conclusion.
9. Empirical aspects of restricting market-based climate policy. 9.1 Introduction. 9.2 Representativity and limitations of the empirical analysis. 9.3 Empirical analysis of the EU proposal on supplementarity. 9.3.1 Content analysis of EU documents. 9.3.2 Hypothesis testing among key EU officials. 9.3.3 Analysis of questions on supplementarity among key EU officials. 9.3.4 Bargaining behaviour of the EU at CoP6. 9.4 The institutional break-out of EU climate policy. 9.4.1 A path-dependent history of market-based climate policy in the EU. 9.4.2 A path-dependent future of market-based climate policy in the EU? 9.5 Conclusion.
Part V. Conclusion.
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10. Conclusion. 10.1 Developments in environmental economics. 10.2 The institutional economics of market-based climate policy. 10.3 The new institutional economics of market-based climate policy. 10.4 The institutional law and economics of market-based climate policy. 10.5 The neo-institutional economics of market-based climate policy. 10.6 Some policy implications. Appendix (questionnaire). References. About the author.
: European Commission
: climate change
: environmental science