Editing IPCC:AR6/WGIII/Chapter-13 (section)

=== Box 13.14 | Policy Interactions of Carbon Pricing and Other Instruments ===

<div id="h2-22-siblings" class="h2-siblings"></div>

The economics literature provides insights on policy interactions among the multiple overlapping policies that directly or indirectly affect GHG emissions, including when different levels of government are involved. Multiple mitigation policies can be theoretically justified if there are multiple objectives or market failures or to achieve distributional objectives and increase policy effectiveness ( [[#Stiglitz--2019|Stiglitz 2019]] ). Examples include the coexistence of the EU ETS with vehicle emission standards and energy efficiency standards ( [[#Rey--2013|Rey et al. 2013]] ), and the fact that 85% of the emissions covered by California’s ETS are also subject to other policies ( [[#Bang--2017|Bang et al. 2017]] ; [[#Mazmanian--2020|Mazmanian et al. 2020]] ). Policy interactions are also widespread among energy efficiency policies ( [[#Wiese--2018|Wiese et al. 2018]] ).

Interactive effects can influence the costs of policy outcomes. With multiple overlapping and possibly non-optimal policies, the effect on total cost is not clear. A modelling study of USA mitigation policy finds the costs of using heterogeneous sub-national policies to achieve decarbonisation targets is 10% higher than national uniform policies ( [[#Peng--2021|Peng et al. 2021]] ). When multiple policy goals are sought, such as mitigation and R&amp;D, a portfolio of optimal policies achieves the goals at significantly lower cost ( [[#Fischer--2008|Fischer and Newell 2008]] ). In some cases, overlapping mitigation policies can raise the cost of mitigation ( [[#Böhringer--2016|Böhringer et al. 2016]] ) while lowering the cost of achieving other goals, such as energy efficiency improvements and expansion of renewable energy ( [[#Rosenow--2016|Rosenow et al. 2016]] ; [[#Lecuyer--2019|Lecuyer and Quirion 2019]] ). It is possible that one or more of the policies is made redundant ( [[#Aune--2021|Aune and Golombek 2021]] ).

While overlapping policies may raise the cost of mitigation, they increase the likelihood of achieving an emission reduction goal. Policy overlap will lead to different optimal carbon prices across jurisdictions ( [[#Bataille--2018b|Bataille et al. 2018b]] ). The existence of overlapping policies will usually increase administrative and compliance costs. However, ''ex post'' analysis shows that transaction costs of mitigation policies are low and are not a decisive factor in policy choice ( [[#Joas--2016|Joas and Flachsland 2016]] ).

The effectiveness, as well as economic and distributional effects, of a given mitigation policy will depend on the interactions among all the policies that affect the targeted emissions. Because a market instrument interacts with every other policy that affects the targeted emissions, interactions tend to be more complex for market instruments than for regulations that mandate specific emission reduction actions by targeted sources independent of other policies.

An ETS scheme implemented with existing mitigation policies may be subject to the ‘waterbed effect’ – emission reductions undertaken by some emitters may be offset by higher emissions by other ETS participants due to overlapping mitigation policies ( [[#Schatzki--2012|Schatzki and Stavins 2012]] ). This reduces the impact of the ETS and lowers carbon trading prices ( [[#Perino--2018|Perino 2018]] ). However ''ex post'' assessments find net emissions reductions. ETS design features such as a price floor and ‘market stability reserve’ can limit the waterbed effect ( [[#Edenhofer--2017|Edenhofer et al. 2017]] ; [[#Kollenberg--2019|Kollenberg and Taschini 2019]] ; [[#Narassimhan--2018|Narassimhan et al. 2018]] ; [[#FSR%20Climate--2019|FSR Climate 2019]] ).

A carbon tax, unlike the allowance price, does not change in response to the effect of overlapping policies but those policies may reduce emissions by sources subject to the tax and so lower the emission reductions achieved by the tax ( [[#Goulder--2011|Goulder and Stavins 2011]] ).

Box 13.14

Policy interactions often occur with the introduction of new mitigation policy instruments. For example, in China several sub-national ETSs exist alongside policies to reduce emission intensity, increase energy efficiency and expand renewable energy supplies ( [[#Zhang--2015|Zhang 2015]] ). These quantity-based ETSs interact with many other policies ( [[#Duan--2017|Duan et al. 2017]] ), for example price-based provincial carbon intensity targets ( [[#Qian--2017|Qian et al. 2017]] ). They also interact with the level of market regulation; for example, full effectiveness of emissions pricing would require electricity market reform in China ( [[#Teng--2017|Teng et al. 2017]] ).

Policy packages aimed at low-carbon transitions are more effective when they include elements to enhance the phase out of carbon-intensive technologies and practices – often called exnovation – in addition to supporting low-carbon niches ( [[#Kivimaa--2016|Kivimaa and Kern 2016]] ; [[#David--2017|David 2017]] ). Such policies include stringent carbon pricing; changes in regime rules such as design of electricity markets; reduced support for dominant regime technologies such as removing tax deductions for private motor transport based on internal combustion engines; and changes in the balance of representation of incumbents versus new entrants in deliberation and advisory bodies. For example, CGE modelling for China’s fossil fuel subsidy reform found that integrating both creation and destabilisation policies is able to reduce rebound effects and make the policy mix more effective ( [[#Li--2017|Li et al. 2017]] ). Sweden’s pulp and paper industry shows that destabilisation policies including deregulation of the electricity market and a carbon tax were an important complement to support policies ( [[#Scordato--2018|Scordato et al. 2018]] ), and other studies show complementary results for Finland’s building sector ( [[#Kivimaa--2017b|Kivimaa et al. 2017b]] ) and Norway’s transport and energy sector ( [[#Ćetković--2019|Ćetković and Skjærseth 2019]] ).

Policy packages for low-carbon transitions are more successful if they take into account the potential for political contestation and resistance from incumbents who benefit from high-carbon systems ( ''medium evidence'' , ''high agreement'' ) ( [[#Geels--2014|Geels 2014]] ; [[#Roberts--2018|Roberts et al. 2018]] ; [[#Kern--2018|Kern and Rogge 2018]] ; [[#Rosenbloom--2018|Rosenbloom 2018]] ). To do so, policies can be sequenced so as to address political obstacles, for example, by initially starting with policies to facilitate the entry of new firms engaged in low-carbon technologies ( [[#Pahle--2018|Pahle et al. 2018]] ). Such policies can generate positive feedbacks by creating constituencies for continuation of those policies, but need to be designed to do so from the outset ( [[#Edmondson--2019|Edmondson et al. 2019]] , 2020). For example, supporting renewable energies through feed-in tariffs can buttress coalitions for more ambitious climate policy, such as through carbon pricing ( [[#Meckling--2015|Meckling et al. 2015]] ). However, negative policy feedback may also arise from ineffective policy instruments that lose public support, or create concentrated losses that arouse oppositional coalitions ( [[#Edmondson--2019|Edmondson et al. 2019]] ). Feedback loops can operate through changes in resources available to actors; changes in expectations; and changes in government capacities ( [[#Edmondson--2019|Edmondson et al. 2019]] ).

Another promising strategy is to design short-term policies which might help to provide later entry points for more ambitious climate policy ( [[#Kriegler--2018|Kriegler et al. 2018]] ) and supportive institutions. The sequencing of policies can build coalitions for climate policy, starting with green industrial policy (e.g. supporting renewable energies through feed-in tariffs) and introducing or making carbon pricing more stringent when supportive coalitions of stringent climate policy have been formed ( [[#Meckling--2015|Meckling et al. 2015]] ). Similarly, investing in supportive institutions, with competencies compatible with low-carbon futures, are a necessary supportive element of transitions ( [[#Pahle--2018|Pahle et al. 2018]] ; [[#Rosenbloom--2019|Rosenbloom et al. 2019]] ; [[#Domorenok--2021|Domorenok et al. 2021]] ).

<div id="13.7.2" class="h2-container"></div>

<span id="policy-integration-for-multiple-objectives-and-shifting-development-pathways"></span>