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

approaches, activities that are not previously mandated by government through legislation, or are
not the result of market forces (O'Brien, 1998). In other words agents voluntarily adopt a
commitment of improving their environmental performance, going beyond simple compliance with
existing regulations. Voluntary agreements are politically attractive, raise awareness among
stakeholders, and have played a role in the evolution of many national policies. Voluntary
agreements can vary significantly from one another in terms of their design, legally binding or not,
include sanctions for non-compliance, or allow companies to use offsets.
Among emissions reduction policy aims the most important is mitigating climate change by
reducing carbon dioxide emissions. According to the IPCC report, Climate change 2007: Mitigation
the following policy instruments are suitable to combat climate change:
Regulations and standards specify abatement technologies (technology standard) or minimum
requirements for pollution output (performance standard) to reduce emissions. They generally
provide some certainty of emissions levels, but their environmental effectiveness depends on their
stringency. They may be preferable when information or other barriers prevent firms and consumers
from responding to price signals.
Taxes and charges impose a levy on each unit of undesirable activity by a source. They are
generally cost effective, but they cannot guarantee a particular level of emissions, they may be
politically difficult to implement and, if necessary, adjust. As with regulations, their environmental
effectiveness depends on stringency.
Tradable permits, also know as marketable permits or cap-and-trade systems, establish a limit on
aggregate emissions by specified sources, require each source to hold permits equal to its actual
emissions, and allows permits to be traded among sources. The volume of allowed emissions
determines carbon price and the environmental effectiveness of this instrument, while the
distribution of allowances can affect cost effectiveness and competitiveness. Experience has shown
that banking provisions can provide significant temporal flexibility. Uncertainty in the price of
carbon makes it difficult to estimate the total cost of meeting emission reduction targets.
Subsidies and incentives are direct payments, tax reductions, price supports, or the equivalent from
a government to an entity for implementing a practice or performing a specified action. Direct and
indirect subsidies for fossil fuel use and agriculture remain common practice, although those for
coal have declined over the past decade in many OECD and in some developing countries.
Information instruments require public disclosure of environmentally related information,
generally by industry to consumers. Includes labeling programs, rating, and certification; may affect
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