International Agreements and Cooperation Design Considerations: Choice of Instrument

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In the international context, instrument choice must account for the unique challenges of a wide-ranging multilateral agreement.  The primary choice is between market and non-market (regulatory) mechanisms.  Market mechanisms are often credited with being more flexible, more efficient, and more palatable to businesses.  But regulatory instruments—hard caps on emissions, mandated technology investments, subsidies for investments, or performance standards—are often promoted as being more likely to deliver the desired environmental outcomes.  And even among market mechanisms, some—like cap-and-trade—potentially offer environmental certainty at the expense of efficiency, whereas a carbon tax is usually promoted as the most efficient mechanism.  Proponents of regulatory measures argue that market mechanisms are destined to be too lenient (and so ineffective), and that the transformational change required to abate climate change would be more easily accomplished via a mandate.  Proponents of market measures argue that command-and-control policies require omniscient bureaucrats who can outthink the market (which, they argue, is impossible).  Market measures are also potentially less prone to capture by interest groups, although it depends critically on the way permits are distributed (for cap-and-trade systems) and whether the emissions target can be consistently ratcheted down over time.

Other issues involved in choosing an implementation instrument include: (1) how the scope of the agreement determines which instrument is appropriate; (2) how multiple instruments can be combined to address different aspects of the climate change problem; (3) the role and activism of citizens, and the influence of social norms and ideology in choosing between the basic market/non-market distinction; (4) the linkages between various national and regional climate policies, and how different mechanisms (or even the same instruments being used in different places) interact with each other; (5) how different instruments interact with existing international law, and trade rules in particular; (6) the extent to which greater flexibility is a useful countermeasure for environmental and economic uncertainty; and (7) whether uniformity in taxes, permits, or caps is desirable, or if the instrument should be tailored to abatements costs (or climate risks, or historical contribution) of individual countries.