Dóra Fazekas Carbon Market Implications for new EU - UniCredit ...

(1) Command and control measures are those activities imposed on industry through government
legislation, particularly for pollution abatement purposes. In command and control measures
authorities establish the behavior that should be adopted by the actors, by making it mandatory,
allowing for little flexibility in the means of achieving policy goals. Command-and-control
regulations tend to force firms to take on similar shares of the pollution-control burden, regardless
of the cost. They often do this by setting uniform standards for firms, the most prevalent of which
are performance- and technology-based standards.
(2) Market based instruments allow more freedom for actors to respond in ways they deem most
beneficial to themselves. Robert Stavins (2001) defines market-based instruments as ”regulations
that encourage behavior through market signals rather than through explicit directives regarding
pollution control levels or methods (p. 358.). Economic instruments encourage behavior through
price signals rather than through explicit directives regarding pollution control levels or methods.
These instruments are based on the correction of prices in existing markets, which present
distortions, or in the creation of new markets that enable the internalization of environmental
externalities. In theory, if properly designed and implemented, market-based instruments allow any
desired level of pollution cleanup to be realized at the lowest overall cost to society, by providing
incentives for the greatest reductions in pollution by those firms that can achieve reductions with
least cost (Stavins, 2003).
Two main groups of these instruments are quantity-based instruments, like standards and tradable
permits on the one hand, and price-based instruments, like taxes or subsidies and fees, on the other
hand. Both types of instruments are cost effective, but they differ in what is fixed and what is
variable. For permits, the quantitative target is fixed, which provides a straightforward measure of
environmental progress as well as compliance, and the price of the permits is variable. For price-
based instruments the monetary incentive is fixed for a certain period of time, reducing uncertainty
for investors, but taxes/subsidies offer no guarantee that the environmental impact will be limited to
a certain level or a certain amount of permits used.
Market based instruments are of vital importance from the point of view of this dissertation as the
European Union is aiming at reducing GHG emissions by establishing a market for emissions
allowances. There has been an important shift in policy towards the use of market mechanisms, the
key argument for the use of market mechanisms is now widely recognized, namely that in
comparison with conventional C&C regulation, they have the potential to reduce the economic
costs associated with a given level of environmental protection (OECD, 1999).
(3) Decentralized approaches rely on policies that allow the individuals involved in environmental
pollution to work it out. This category of instruments includes mainly the so-called voluntary
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