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Public Policy: Using Market-Based Approaches Protocol) is an international agreement signed in 1997 under this framework. The signatories to the Protocol committed themselves to reduce emissions of greenhouse gasses. Under the Protocol, developed countries agreed to reduce their total emissions of greenhouse gases to 5.2 per cent below 1990 levels over the period 2008 to 2012 (different countries have different individual obligations). The Protocol also encouraged its signatory members to implement policies and measures in accordance with their national circumstances, that promote the: [p]rogressive reduction or phasing out of market imperfections, fiscal incentives, tax and duty exemptions and subsidies in all greenhouse gas emitting sectors that run counter to the objective of the Convention (UNFCCC) and application of market instruments. 155 The Protocol envisages that that there should in future be international trading in greenhouse gas emission allowances, so that emissions reductions are achieved in a cost-effective way. The UK’s obligation under the Protocol is to reduce its greenhouse gas emissions to 12.5 per cent below 1990 levels over the period 2008 to 2012. However, the UK has committed itself to go beyond its obligations under the Protocol, and reduce its greenhouse gas emissions to 20 per cent below 1990 levels by 2010. Introduction of a market mechanism Emissions of greenhouse gases are an example of a negative externality. When one person engages in an activity which leads to the emission of pollutants into the atmosphere, the cost of that pollution is borne largely by others, rather than by the person who created the pollution. Because individual people or firms do not personally bear the full cost of the pollution they generate, they tend to produce more pollution than society as a whole would consider desirable. This market failure creates a role for governments to intervene in order to reduce levels of pollution to a socially desirable level. Traditionally, this intervention has involved the government setting individual limits on the level of pollution which each economic agent can produce. For example, various Clean Air Acts introduced in the UK in the 20th Century restricted the burning of coal in urban areas. However, alternative, market-based approaches, can also be used to limit pollution. There are two main alternative market-based approaches. The first is to impose a tax on pollution emissions and the second is to set a cap on the level of emissions, allocating rights to produce this set level of emissions and then allowing individuals to trade those rights. In the UK, both of these mechanisms 155 Kyoto Protocol (1997) Article 2, Paragraph 1, part a. 148
Section 11 – Emissions Trading coexist under a set of integrated policies 156 aimed at meeting climate change targets, set out in the CCP, published in November 2000. Under the CCP there is a tax called the climate change levy, which was introduced on 1 April 2001. The levy is a tax on the use of energy in industry, commerce and the public sector. 157 Revenues raised through this tax were used to reduce employers’ National Insurance Contributions and provide additional support for energy efficiency schemes and renewable sources of energy. The levy is complemented by the UK-ETS, which was launched in April 2002. In this case study we consider the UK-ETS but not the climate change levy. A further emissions trading scheme is now being introduced at the European level, which is also beyond the scope of this case study. DIFFERENT MARKET-BASED MECHANISMS THAT WERE CONSIDERED The decision to implement the UK-ETS and climate change levy result from the recommendations of a task force led by Lord Marshall. 158 In 1998 the Chancellor of the Exchequer commissioned this task force to explore how best to use economic instruments to improve the industrial and commercial use of energy and help reduce emissions of greenhouse gases. The task force examined two potential economic instruments: (i) a system of tradable emissions permits and (ii) a tax on emissions. The report recommended the use of a tradable-permits scheme as a way to encourage emissions reductions in a cost-effective way. The report, nevertheless, considered that it would not have been sensible at that stage to introduce a fully-fledged statutory scheme and therefore recommended that a pilot scheme should be introduced first. The report also considered that it might be impractical for small- and mediumsized enterprises (SMEs) to participate in an international trading scheme. Thus, the task force concluded that there could be a role for a tax if businesses in all sectors and of all sizes were to contribute to improving energy efficiency and reducing greenhouse gas emissions – especially given that SMEs account for around 60 percent of total carbon dioxide emissions. This recommendation became the basis for the Climate Change Levy. In summary, the two instruments considered and recommended in the task force’s report were implemented in the CCP in the form of the UK-ETS and the Climate Change Levy. 156 For instance, the Renewables Obligation, which is also a part of the CCP. 157 Emissions of carbon dioxide, which is produced when fossil fuels (coal, oil and natural gas) are burnt to release energy, is an important contributor to climate change. Improving energy efficiency, so that less fossil fuel is burnt to provide the same level of output, is therefore one way to reduce greenhouse gas emissions. 158 Lord Marshall (November 1998), Economic Instruments and the business use of energy, a study for the Government Taskforce on the Industrial Use of Energy. 149
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DTI ECONOMICS PAPER NO.14 Public Po
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DTI ECONOMICS PAPER NO.14 Public Po
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Contents Acknowledgements vi Forewo
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Contents Section 11 Emissions Tradi
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Foreword There is increasing intere
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SECTION 1 Introduction and summary
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Public Policy: Using Market-Based A
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SECTION 2 Using market mechanisms U
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SECTION 3 Lessons for the design an
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SECTION 4 Introduction This part of
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SECTION 7 Market-Based Mechanisms W
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SECTION 8 Framework for assessing m
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Part IV Case Studies 73
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● the Green and White papers behi
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A prison failing to deliver on its
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Table 9.3 Companies providing priso
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Section 9 - Competitive Tendering o
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detect any deviation from a collusi
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at HMPS began as an equal mix of th
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(e.g. lighting). This impact could
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MARKET POWER The full benefits of c
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However, it should be noted that te
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on competition is uncertain. The ab
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Controlling for problems of asymmet
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Page 107 and 108: however, financial deductions are m
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Page 111 and 112: The Independent Monitoring Board at
Page 113 and 114: Figure 9.1: Difference between the
Page 115 and 116: ‘While there were staff in the pu
Page 117 and 118: design the invitation to tender and
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Page 121 and 122: and demand conditions. Second, we d
Page 123 and 124: DEMAND Anyone can apply to a local
Page 125 and 126: ● Rent deposit guarantee by the l
Page 127 and 128: The Green Paper stated the Governme
Page 129 and 130: It was not an objective of ODPM or
Page 131 and 132: DESCRIPTION OF MARKET MECHANISM The
Page 133 and 134: Once the outcome is determined, fee
Page 135 and 136: DEVELOPMENTS OVER TIME The major mo
Page 137 and 138: Concerns about capacity constraints
Page 139 and 140: from those already located within t
Page 141 and 142: In several areas, registrations by
Page 143 and 144: Controlling for information problem
Page 145 and 146: extent though, it was competition b
Page 147 and 148: Section 10 - Choice-Based Letting i
Page 149 and 150: levels are reducing and new tenants
Page 151 and 152: desired effect of limiting points-c
Page 153 and 154: efficiency savings in some areas. T
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Page 161 and 162: A more detailed and diagrammatic de
Page 163 and 164: The costs of monitoring and reporti
Page 165 and 166: INITIAL ALLOCATION OF PROPERTY RIGH
Page 167 and 168: only 242 in the second year. The di
Page 169 and 170: COST-EFFICIENT EMISSIONS REDUCTIONS
Page 171 and 172: consultants to Defra of £11 per to
Page 173 and 174: Participation has helped us to rais
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Page 178 and 179: SECTION 12 Issues in the implementa
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