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Climate Finance

Climate Finance: Regulatory and Funding Strategies for Climate Change and Global Development

Richard B. Stewart
Benedict Kingsbury
Bryce Rudyk
Copyright Date: 2009
Published by: NYU Press
Pages: 352
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  • Book Info
    Climate Finance
    Book Description:

    Preventing risks of severe damage from climate change not only requires deep cuts in developed country greenhouse gas emissions, but enormous amounts of public and private investment to limit emissions while promoting green growth in developing countries. While attention has focused on emissions limitations commitments and architectures, the crucial issue of what must be done to mobilize and govern the necessary financial resources has received too little consideration. In Climate Finance, a leading group of policy experts and scholars shows how effective mitigation of climate change will depend on a complex mix of public funds, private investment through carbon markets, and structured incentives that leave room for developing country innovations. This requires sophisticated national and global regulation of cap-and-trade and offset markets, forest and energy policy, international development funding, international trade law, and coordinated tax policy.Thirty-six targeted policy essays present a succinct overview of the emerging field of climate finance, defining the issues, setting the stakes, and making new and comprehensive proposals for financial, regulatory, and governance mechanisms that will enrich political and policy debate for many years to come. The complex challenges of climate finance will continue to demand fresh insights and creative approaches. The ideas in this volume mark out starting points for essential institutional and policy innovations.

    eISBN: 978-0-8147-8657-4
    Subjects: Law

Table of Contents

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  1. Front Matter
    (pp. i-iv)
  2. Table of Contents
    (pp. v-x)
  3. Acknowledgments
    (pp. xi-xii)
    Richard Stewart, Benedict Kingsbury and Bryce Rudyk
  4. Foreword: NYU Abu Dhabi and the Sustainable Environment
    (pp. xiii-xiv)
    Mariët Westermann and Philip Kennedy

    This book is the first volume of policy papers issuing from the NYU Abu Dhabi Institute. It demonstrates NYU Abu Dhabi’s commitment to scholarship on matters that have critical significance in the world today. And we consider it fitting, with the selection of Abu Dhabi as home for the International Renewable Energy Agency and the ground-breaking work of Masdar, that this volume tackles one of the most pressing global issues: climate change.

    Climate change mitigation and adaptation requires complex thinking across a wide range of fields: science, economics, finance, public policy, and law. Effective action demands the collaboration of institutions...

  5. Summary of Key Findings and Recommendations
    (pp. xv-xvi)
  6. About the Contributors
    (pp. xvii-xxii)
  7. PART I Climate Change and Mitigation:: Overview and Key Themes

    • Chapter 1 Climate Finance for Limiting Emissions and Promoting Green Development: Mechanisms, Regulation, and Governance
      (pp. 3-34)
      Richard B. Stewart, Benedict Kingsbury and Bryce Rudyk

      Climate finance is a critical element of global climate policy that has received far less attention than emissions limitations and climate regulatory architectures. This book redresses this deficit. It focuses on what is required to meet the need for vastly increased funding for climate mitigation and green development in developing countries. It presents new proposals to generate climate financing from both private and public sources and to deliver funds through means that will engage developing countries, build mutual trust, and secure effective long-term emissions reductions. The book also examines the vital but often neglected regulatory, trade, tax, and governance elements...

    • Chapter 2 Understanding the Causes and Implications of Climate Change
      (pp. 35-41)
      Michael Oppenheimer

      The basic scientific framework of the climate change issue is well understood: greenhouse gases (GHG) emitted in the process of electricity generation, transport, agriculture, and forestry are accumulating in the atmosphere, gradually altering the heat balance of the Earth and inevitably changing its climate. The greatest concern arises from long-lived gases (carbon dioxide, methane, halocarbons, and nitrous oxide) because they persist in the atmosphere for a period ranging from decades to longer than a millennium after release. Of these, carbon dioxide is the most important because it accounts for about four-fifths of the warming effect of current emissions of the...

    • Chapter 3 The Climate Financing Problem: Funds Needed for Global Climate Change Mitigation Vastly Exceed Funds Currently Available
      (pp. 42-47)
      Bert Metz

      The latest assessment of the Intergovernmental Panel on Climate Change (IPCC) clearly shows that climate change risks will be manageable if global mean temperatures do not increase more than 2°C above the preindustrial period. This requires a global trajectory towards stabilization of greenhouse gas (GHG) concentrations in the atmosphere of 450 ppmv CO2 equivalent (CO2e) to give us even a 40–60% chance of meeting the 2°C target. This requires global GHG emissions to start declining no later than 2015 and fall to 50% below 1990 levels by 2050. For the period ending in 2020, this translates into a global...

    • Chapter 4 The Future of Climate Governance: Creating a More Flexible Architecture
      (pp. 48-52)
      Daniel Bodansky

      Everyone wants to learn from history, so as not to repeat it. But what are the lessons of the Kyoto Protocol? Although opinions differ widely, a growing consensus accepts the need for greater flexibility in a new climate change agreement. The Kyoto Protocol targets cover only about one quarter of global emissions. Perhaps the central challenge for a new climate agreement is to broaden this coverage by getting the United States, China, and other major emerging economies on board. Although giving states greater flexibility in their choice of commitments will not, by itself, be enough. However, it could make a...

  8. PART II Proposals for Climate Finance:: Regulatory and Market Mechanisms and Incentives

    • A. Trading or Taxes?

      • Chapter 5 Cap-and-Trade Is Preferable to a Carbon Tax
        (pp. 57-64)
        Nathaniel O. Keohane

        First proposed in 1968, cap-and-trade came into its own in 1990 with the passage of the US Clean Air Act Amendments, which created an emissions trading system for sulfur dioxide emissions from electric power plants. That program has cut emissions in half at less than a third of the predicted cost, with overwhelming benefits to human health and ecosystems.¹ Since then, the European Union has established its Emission Trading Scheme (ETS) for carbon dioxide (CO2) to achieve itemissions targets under the Kyoto Protocol. And cap-and-trade is the centerpiece of climate legislation under consideration in the US Congress. Despite these successes,...

    • B. Reforming the Clean Development Mechanism (CDM)

      • Chapter 6 Expectations and Reality of the Clean Development Mechanism: A Climate Finance Instrument between Accusation and Aspirations
        (pp. 67-76)
        Charlotte Streck

        Born in the last hour of the Kyoto Protocol negotiations with modest expectations, the Clean Development Mechanism (CDM) offers a story of unprecedented success. By June 2009, the CDM Executive Board (EB) registered more than 1,500 projects that are expected to create 1.6 billion tons of greenhouse gas (GHG) emission reductions by 2013. The CDM has attracted the interest of the private sector in industrialized and developing countries alike and built a global carbon market.

        The CDM initiated a paradigm shift in support of developing country action under multilateral environmental treaties. In its design, negotiators relied heavily on experience from...

    • C. Sectoral Programs for Emissions Control and Crediting

      • Chapter 7 Why a Successful Climate Change Agreement Needs Sectoral Elements
        (pp. 79-84)
        Murray Ward

        Sectoral elements are a necessary part of any international climate mitigation agreement that seriously engages developing countries. Although there is great variety among sectoral proposals, they all seek to encourage mitigation across a sector of the economy, rather than just on a project-byproject basis. There have been some early missteps along the way regarding what is meant by a sectoral approach, and it is notable that proposals for sectoral elements initially came mainly from developed countries. This has raised suspicions and clouded inclusion of sectoral elements in the global regime for the post-2012 period. But the case for them is...

      • Chapter 8 Sectoral Crediting: Getting the Incentives Right for Private Investors
        (pp. 85-89)
        Rubén Kraiem

        One important and innovative proposal in current climate policy discussions is to abandon the project-based Clean Development Mechanism (CDM) in favor of sectoral targets and crediting, at least for certain carbon-intensive sectors in countries that meet a variety of other criteria. Under this approach, no carbon credits would be issued for individual mitigation projects or activities unless the entire sector managed to meet the sectoral target. This approach has the potential both to scale up mitigation investment in developing countries and to drastically streamline the monitoring and verification process for crediting emissions reductions. This approach, however, also raises an important...

      • Chapter 9 Forest and Land Use Programs Must Be Given Financial Credit in Any Climate Change Agreement
        (pp. 90-95)
        Eric C. Bettelheim

        In light of the increasing understanding of the timing and depth of emissions reductions required to achieve a 2°C target and the relative costs of doing so, the next global climate change agreement will need to create incentives for substantial global mitigation actions to occur by 2020. That timeline is dependent on significant changes in forestry, agriculture, and land use practices in the tropics and sub-tropics. However, these changes will only occur if we create the right incentives for developing countries and their rural poor.

        The next 10 years are crucial to success in stabilizing atmospheric greenhouse gases (GHG) at...

      • Chapter 10 Stock-and-Flow Mechanisms to Reduce Land Use, Land Use Change, and Forestry Emissions: A Proposal from Brazil
        (pp. 96-102)
        Israel Klabin

        One major limitation of the 1997 Kyoto Protocol is that it does not do enough to reduce greenhouse gas (GHG) emissions from developing nations. In particular, it does not do enough to create incentives for countries to reduce emissions caused by agriculture, land use, and deforestation. Recognizing this, there is strong support for emissions targets for the major emerging economies, significant finance and technology transfer from Annex I nations, and a stock-and-fl ow mechanism to create incentives to reduce land use, agriculture, and deforestation emissions.

        Roughly 75% of Brazil’s CO2 emissions arise from changes in land use, in particular the...

    • D. Leveraging Trading to Maximize Climate Benefits

      • Chapter 11 Mitigating Climate Change at Manageable Cost: The Catalyst Proposal
        (pp. 105-110)
        Bert Metz

        Realistic estimates for the funding needed to finance mitigation and adaptation activities in the developing world are in the range of €65–100 billion annually on average over the 2010–2020 period. This takes into account the range of abatement activities with moderate and large positive costs and the barriers to finance that will have to be dismantled or overcome.

        There are, in principle, two sources where the money can be found: public funds and the carbon market. The first question is: what would be a realistic number for the amount that can be obtained from public funds? Increasing of...

      • Chapter 12 Engaging Developing Countries by Incentivizing Early Action
        (pp. 111-122)
        Annie Petsonk, Dan Dudek, Alexander Golub, Nathaniel Keohane, James Wang, Gernot Wagner and Luke Winston

        The world’s collective effort to curb climate change will rely heavily upon the global marketplace—the only force large and strong enough to drive the needed innovation and carry through the necessary reductions in greenhouse gases (GHG). This approach is being taken seriously around the world, as evidenced by the success of the European Union Emissions Trading System (EU ETS), the passage of the American Clean Energy Security Act (ACES) through the House of Representatives in June 2009, and proposals under development in a number of industrialized and emerging economies such as Australia, New Zealand, the Republic of Korea, and...

    • E. Linking Trading Systems

      • Chapter 13 Carbon Market Design: Beyond the EU Emissions Trading Scheme
        (pp. 125-132)
        Henry Derwent

        Much has been written about the European Union Emissions Trading System (EU ETS) and what it has demonstrated about the potential of carbon trading. It is generally acknowledged that the allocation process in the first period, pre-Kyoto, was uncoordinated, and as a result issued too many emissions allowances, giving rise to an embarrassing price collapse.Yet recent econometric analysis suggests that when allowance prices were high, significant carbon reduction did occur. It is also acknowledged that the second phase, though demonstrating the ability of the European Commission to get to grips with excessive national allocations, has been flawed by continuationof conditions...

    • F. Investor Perspectives

      • Chapter 14 Incentivizing Private Investment in Climate Change Mitigation
        (pp. 135-142)
        Marcel Brinkman

        Leaders in many countries are seeking ways to reduce greenhouse gas (GHG) emissions; ever increasing attention is being focused on how the necessary reductions will be achieved. The challenge is significant; if the proposed cuts are to be achieved, the power sector must find new, clean ways of generating electricity; automobile fleets must be replaced with more fuel efficient or electric alternatives; and old and inefficient buildings must be phased out and replaced with new, energy efficient ones.

        The global scientific community asserts that the world needs to reduce its carbon emissions to limit global warming to 2°C above 1990...

      • Chapter 15 Investment Opportunities and Catalysts: Analysis and Proposals from the Climate Finance Industry on Funding Climate Mitigation
        (pp. 143-152)
        Nick Robins and Mark Fulton

        It is clear significant support from private finance will have to be mobilized in order to meet the world’s mitigation and adaptation needs in the coming years. As matters currently stand, the right incentives are not in place for this to occur in sufficient volume to have the desired effect.A hospitable climate for low-carbon investment rests on two main pillars: certainty on mid-and long-term targets and a comprehensive policy framework to implement these targets. This paper focuses on the second of these, examining how to both reduce financing barriers and intensify capacity building and knowledge transfer from the developed to...

  9. PART III Bringing Developed and Developing Countries Together in Climate Finance Bargains:: Trust, Governance, and Mutual Conditionality

    • A. Meeting Developing Country Climate Finance Priorities

      • Chapter 16 Developing Country Concerns about Climate Finance Proposals: Priorities, Trust, and the Credible Donor Problem
        (pp. 157-164)
        Arunabha Ghosh and Ngaire Woods

        While there is much variation among different developing and developed countries, overall there is a real North-South gap in climate negotiations.Current proposals on climate financing do not do enough to overcome the lack of trust and mutual credibility between developing and developed countries. This essay analyses the priorities and concerns of developing countries and proposes three planks for a bridge across the gap.

        The lack of trust between developed and developing countries reflects not only a lack of appreciation of each other’s domestic political commitments and constraints, but also a history of bad faith in the making and implementation of...

      • Chapter 17 Developing Countries and a Proposal for Architecture and Governance of a Reformed UNFCCC Financial Mechanism
        (pp. 165-171)
        Luis Gomez-Echeverri

        As has been highlighted in a number of chapters in this book, the engagement of developing countries is fundamental to the success of any post-2012 climate regime. Developing country engagement is inextricably linked to issues of governance and institutions. This link is an issue both legal as well as practical. It is a legal issue, because developing country engagement is based on the principle of common but differentiated responsibilities, as well as on the obligations and commitments spelled out Article 4 of the United Nations Framework Convention on Climate Change (UNFCCC). This Article spells out the commitment of developed countries...

      • Chapter 18 Climate Change and Development: A Bottom-Up Approach to Mitigation for Developing Countries?
        (pp. 172-178)
        Navroz K. Dubash

        A top-down approach—specifically internationally specified and binding national targets and timetables—has long been the preferred position of environmental advocates. But bottom-up approaches, such as policy measures to be devised on a country-by-country basis, have also been part of the policy grammar of the climate negotiations. In the process of fleshing out the Bali Action Plan, one articulation of a bottom-up approach, nationally appropriate mitigation actions for developing countries, is attracting renewed support. What should we think of such bottom-up proposals?

        For those who put climate change mitigation first (as opposed to those who seek to preserve sovereignty or...

      • Chapter 19 Operationalizing a Bottom-Up Regime: Registering and Crediting NAMAs
        (pp. 179-186)
        Rae Kwon Chung

        Although the historical burden of climate change rests with Annex I countries, non-Annex I countries are assisting—in their own ways—with mitigating climate change. However, the current structure of the United Nations Framework Convention on Climate Change (UNFCCC) and Kyoto Protocol allows these contributions to be neither recognized nor coordinated. South Korea has proposed that Nationally Appropriate Mitigation Actions (NAMAs) undertaken by governments be registered with an international NAMA registry, and for appropriate countries and NAMAs, carbon credit or development assistance might be given.

        This paper outlines the South Korean NAMA proposal, and in doing so, it aims to...

    • B. Conditionality and Its Governance

      • Chapter 20 From Coercive Conditionality to Agreed Conditions: The Only Future for Future Climate Finance
        (pp. 189-196)
        Jacob Werksman

        A global deal on climate change will depend upon closing the gap in expectations between developed and developing countries on climate finance. Most multilateral environmental agreements (MEAs) provide for the transfer of financial and technical resources from richer countries to poorer countries. These transfers serve the practical purpose of financing developing country capacity to implement projects and policy, and the political purpose of providing incentives for developing country participation in responses to global environmental challenges.

        However, financial transfers rarely come without strings attached, i.e., conditionalities imposed by contributor or lending institutions on recipient countries. Conditionalities are thought to be particularly...

      • Chapter 21 Getting Climate-Related Conditionality Right
        (pp. 197-205)
        Kevin E. Davis and Sarah Dadush

        Conditionality has gotten a bad name in development finance. But it may be rehabilitated by the emerging climate change regime. Mitigating climate change by reducing emissions of greenhouse gases (GHGs) from developing countries will require substantial amounts of capital. Some of that capital will come from individuals or organizations who insist that their funds be used in ways that tend to promote mitigation. In other words, they will insist on conditionality. This raises a number of policy 198 kevin e. davis and sarah dadush concerns, including several that are reminiscent of debates about conditionality in other contexts.

        The first part...

      • Chapter 22 Making Climate Financing Work: What Might Climate Change Experts Learn from the Experience of Development Assistance?
        (pp. 206-210)
        Ngaire Woods

        At the heart of any global deal on climate change lies a compact between wealthy and less wealthy countries. The vast majority of industrialized countries have already accepted binding commitments to reduce their greenhouse gas (GHG) emissions (although few have made any progress to reducing emissions in practice). Future progress in limiting emissions relies upon wealthy countries meeting their commitments and—equally importantly—upon major emerging economies agreeing to accept limits on their future emissions. No such deal has yet been forged. At the same time industrialized countries and emerging economies have agreed that support must be offered to poorer...

  10. PART IV National Policies:: Implications for the Future Global Climate Finance Regime

    • Chapter 23 Climate Legislation in the United States: Potential Framework and Prospects for International Carbon Finance
      (pp. 213-220)
      Nathaniel O. Keohane

      On June 26, 2009, the US House of Representatives passed a sweeping bill that would reduce US greenhouse gas (GHG) emissions by 17% below 2005 levels by 2020, and 83% below 2005 levels by 2050. If the momentum from the House bill can be carried on through the Senate,the United States may at last be taking on meaningful domestic action, on the eve of the international negotiations in Copenhagen in December 2009. This chapter sketches the key features of the House bill, focusing on the provisions that would allow linkages between the US carbon market and emissions reduction efforts in...

    • Chapter 24 The EU ETS: Experience to Date and Lessons for the Future
      (pp. 221-227)
      James Chapman

      Operating from 2005 to 2007, Phase I had a cap of 2.4 billion allowances per year. This first period was highly effective in making boardrooms aware of carbon risks and opportunities and stimulating the search for abatement opportunities. Further, the infrastructure of a functional, liquid market was successfully created. Phase I did, however, encounter problems. Allocations were not based on verified emissions. Also, companies were able to achieve steep initial reductions by exploiting cheap abatement opportunities previously overlooked. The result was a deep drop in allowance prices. The European Union(EU) responded by palcing a fire-wall between phases I and II...

    • Chapter 25 Greenhouse Gas Emissions and Mitigation Measures in China
      (pp. 228-233)
      Jie Yu

      While China is currently responsible for 20% of global greenhouse gas (GHG) emissions, its per capita emissions levels are relatively low. As a result of its share of global emissions, industrialized nations have been pressuring China to adopt binding emissions caps. However, China has so far refused. Many may interpret China’s reluctance to commit to a binding cap as a reluctance to confront the challenges of global warming. This is not the case. In fact, China is already heavily investing in major emissions reductions across a wide variety of sectors, in spite of the challenges these measures present to China’s...

    • Chapter 26 Cities and GHG Emissions Reductions: An Opportunity We Cannot Afford to Miss
      (pp. 234-240)
      Partha Mukhopadhyay

      Urban areas consumed about two-thirds of the world’s energy in 2006. This is expected to increase to three-fourths by 2030. However, even in cities at similar levels of development, per capita urban energy use, and thus GHG emissions per capita, varies considerably. In light of this variation, would it be possible for governments to enact policies to promote less carbon-intensive cities? If so, what role could such policies play in a new climate change agreement?

      The average urban American consumes more than twice as much energy as the average urban European. Cities like Hong Kong, Tokyo, Singapore, and Amsterdam less...

    • Chapter 27 A Prototype for Strategy Change in Oil-Exporting MENA States? The Masdar Initiative in Abu Dhabi
      (pp. 241-244)
      Sam Nader

      The debate around climate change and energy security is by now well known. A key issue facing our world today is how to tackle these challenges in a way that can sustain human progress and economic development, while at the same time safeguarding our environment and the future of our planet. It is clear there is no single answer to these challenges. Rather, the solution lies in the diversification of technologies, including clean fossil fuel energy, as we transition towards a low-carbon future. It is with this in mind that Abu Dhabi launched the Masdar initiative in 2006, taking the...

  11. PART V Climate Finance and World Trade Organization (WTO) Law and Policy

    • Chapter 28 The WTO and Climate Finance: Overview of the Key Issues
      (pp. 247-253)
      Gabrielle Marceau

      Climate change, being such a broad issue, intersects with a number of areas of World Trade Organization (WTO) work, although the WTO’s primary focus is to fight distorting trade restrictions. It is often suggested that WTO rules will be in conflict with domestic actions taken under the United Nations Framework Convention on Climate Change (UNFCCC) or other similar multilateral environmental agreements (MEAs), but this need not be the case. The WTO, like the UNFCCC, strives to ensure sustainable development. This brief essay first outlines climate change issues within WTO law, including the Doha Development Agenda (DDA), and Gabrielle Marceau then...

    • Chapter 29 Carbon Trading and the CDM in WTO Law
      (pp. 254-258)
      Robert Howse and Antonia Eliason

      The Kyoto Protocol authorizes three flexibility mechanisms to reduce the cost of compliance with its emissions targets. The first to be considered of these is a system of emissions trading among Annex I nations provided under Article 17, where countries with caps (calculated in assigned amount units, or AAUs) can reallocate the burden of abatement between them. Although the Protocol contains some general language regarding this system, including a requirement that Annex I Parties “strive to implement policies and measures . . . in such a way as to minimize adverse effects . . . on international trade . . . [and]...

    • Chapter 30 Countervailing Duties and Subsidies for Climate Mitigation: What Is, and What Is Not, WTO-Compatible?
      (pp. 259-265)
      Robert Howse and Antonia Eliason

      The United Nations Framework Convention and Climate Change (UNFCCC) and the Kyoto Protocol adopt an approach to mitigation of climate change based on states binding themselves to reduce greenhouse gas (GHG) emissions to agreed levels, based on the notion of “common but differentiated responsibilities” for developed and developing countries. The Kyoto Protocol, however, does not specify the policies that states must use to achieve the bound emissions reductions, or the relevant desirability of different policy instruments. The Protocol merely provides a list of policies that states may use to achieve emissions reductions.

      Many of these policies can be pursued either...

    • Chapter 31 Border Climate Adjustment as Climate Policy
      (pp. 266-271)
      Alexandra Khrebtukova

      Distributing the global greenhouse gas (GHG) abatement effort (and the costs of that effort) necessary in light of Intergovernmental Panel on Climate Change (IPCC) findings is a daunting problem. It appears essential to regulate GHG emissions by putting a price, through a carbon tax or a cap-and-trade scheme, on tons of GHG emitted. Doing this through national regulation has the potential to cause “carbon leakage,” shifting GHG-intensive production (such as iron, steel, aluminum, pulp and paper, and cement) towards jurisdictions with less stringent or no regulation. Globalized markets for these products make such shifts more possible, undercutting emissions control regimes....

    • Chapter 32 Enforcing Climate Rules with Trade Measures: Five Recommendations for Trade Policy Monitoring
      (pp. 272-280)
      Arunabha Ghosh

      Laws being drafted or proposed in developed countries envisage the use of trade sanctions to induce participation by other countries in a global climate regime, or to level the playing field for businesses and avoid relocation and carbon leakage, or to punish non-compliant countries. It is possible that an international climate agreement may eventually authorize certain trade sanctions, as was done in the Montreal Protocol on the stratospheric ozone layer and for other environmental aims. New rules and definitions are being developed on issues such as liberalization of trade in environmental goods and services, and on specifications for measurement of...

    • Chapter 33 Carbon Footprint Labeling in Climate Finance: Governance and Trade Challenges of Calculating Products’ Carbon Content
      (pp. 281-288)
      Sandra G. Mayson

      Yesterday, it was trans-fat; today, carbon footprint labels are proliferating on grocery store shelves. Carbon footprint labels purport to quantify the embodied carbon of a given product: the total quantity of carbon dioxide and (in some cases) other greenhouse gases (GHG) for which a single product—a pear, a cell phone, a t-shirt—is responsible over the course of its life cycle, from creation through use and disposal. Carbon footprint labeling (CFL) is a new phenomenon but has already staked a place in the climate regulatory landscape. Viewed most optimistically, CFL harnesses consumer demand for low-carbon products to encourage emissions...

  12. PART VI Taxation of Carbon Markets

    • Chapter 34 Fiscal Considerations in Curbing Climate Change
      (pp. 291-299)
      Lily Batchelder

      Climate change abounds with fiscal issues. At a macro level, the debate between a carbon tax, cap-and-trade system, and command-and-control regulation is about the extent to which the tax system is the best vehicle to address climate policy objectives. At a micro level, energy-related fiscal incentives and the tax treatment of carbon taxes, carbon permits, and climate markets can have important implications for a regime’s effectiveness. The question of how to address the distributional impacts of carbon mitigation, both domestically and internationally, is also a fiscal issue.

      This chapter provides a brief summary of the fiscal, administrative, and political considerations...

    • Chapter 35 Tax and Efficiency under Global Cap-and-Trade
      (pp. 300-304)
      Mitchell A. Kane

      A cap-and-trade regime relies on the price of permits to signal which abatement opportunities are cost-effective, in light of the overall cap. Just like any market where we use price signals to achieve allocative efficiency, taxation is a looming problem. To the extent that taxes distort prices, the market will not function optimally, impairing the efficiency of the regulatory system. The very fact that one requires a market to achieve efficient abatement in the first place only arises because there are firm-specific lowcost abatement opportunities. Such firm-specific opportunities can take one of two forms. First, some firms may have low-cost...

    • Chapter 36 Tax Consequences of Carbon Cap-and-Trade Schemes: Free Permits and Auctioned Permits
      (pp. 305-310)
      Yoram Margalioth

      The cap-and-trade system creates a new asset—the permit. The tax treatment can potentially distort the tradeoffs that sources make or holding permits to cover their emissions, and thereby impair the efficiency of the regulatory system. This chapter first outlines general income tax treatment of permits. It then addresses with the intensified lock-in effects and inefficiencies created tax system’s treatment of gratis permit allocations—by management practices in the face of permit price fluctuations and by asymmetric tax treatment of permit gains and losses. It also addresses transfer pricing problems arising out of multinational firms’ arbitrage among differences in the...

  13. Afterword: Reflections on a Path to Effective Climate Change Mitigation
    (pp. 311-316)
    Thomas Heller

    There are many challenges along the path to a meaningful climate policy framework, but two stand out as particularly threatening. The first is uncertainty. More specifically, there is a serious risk that nations will not under take meaningful action because of the persistence of uncertainty surrounding the relative cost and effectiveness of policies designed to mitigate climate change.

    The second major challenge is the tension between the belief that a global cap-and-trade program is the best policy instrument to limit global greenhouse gas (GHG) emissions and the demand for fairness in allocating carbon caps among states, especially among developing nations....

  14. Abbreviations
    (pp. 317-320)
  15. Index
    (pp. 321-323)