Policy Instruments to Address Global Climate Change

There continues to be great debate about the desirability of taking actions to limit carbon dioxide (CO2) and other greenhouse gas emissions, but it is important to consider policy instruments that can be employed to meet targets that may eventually be forthcoming. The purpose of this paper is to examine the relative merits of the available instruments. The theoretical advantages of market-based instruments, such as carbon taxes and systems of tradeable carbon rights, are striking. In the U.S. domestic context, grandfathered tradeable permits will probably be the preferred approach (if any) in the short run, although revenue-neutral carbon taxes will hold greater promise in the long run. In the international context, a system of international tradeable permits could provide important advantages over alternative approaches, but it is difficult to imagine what existing international institution would administer such a system. Despite the great theoretical advantages of market-based approaches to addressing global climate change, neither domestic political barriers nor international institutional impediments to implementing these and other instruments should be underestimated