Editing IPCC:AR6/WGIII/Chapter-9 (section)

===== 2. Market-based instruments =====

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'''Carbon allowances.''' A number of authors ( [[#Raux--2015|Raux et al. 2015]] ; [[#Fan--2016|Fan et al. 2016]] ; [[#Fawcett--2017|Fawcett and Parag 2017]] ; [[#Li--2015|Li et al. 2015]] , 2018; [[#Marek--2018|Marek et al. 2018]] ; [[#Wadud--2019|Wadud and Chintakayala 2019]] ) have investigated personal carbon allowances introduced previously ( [[#Ayres--1995|Ayres 1995]] ; [[#Fleming--1997|Fleming 1997]] ; [[#Raux--2005|Raux and Marlot 2005]] ; [[#Bristow--2010|Bristow et al. 2010]] ; [[#Fawcett--2010|Fawcett 2010]] ; [[#Starkey--2012|Starkey 2012]] ). Although there is not yet any practical implementation of this policy, it offers an alternative to carbon taxes, although there are some practical issues to be solved before it could be rolled out. Recently the city of Lahti in Finland has introduced a personal carbon allowance in the transport sector ( [[#Kuokkanen--2020|Kuokkanen et al. 2020]] ). Under this policy instrument governments allocate (free allocation, but allowances could also be auctioned) allowances to cover the carbon emission for one year, associated with energy consumption. Trade of allowances between people can be organised. Personal carbon allowances can also foster renewable energies (energy consumption without carbon emissions) both in the grid and in buildings (e.g., solar thermal). Personal carbon allowances can make the carbon price more explicit to consumers, allowing them to know from the market value of each allowance (e.g., 1 kg of CO 2 ). This policy instrument will shift the responsibility to the individual. Some categories may have limited ability to change their carbon budget or to be engaged by this policy instruments. In addition, in common with many other environmental policies the distributional effects have to be assessed carefully as this policy instrument may favour well off people able to purchase additional carbon allowances or install technologies that reduce their carbon emissions ( [[#Burgess--2016|Burgess 2016]] ; [[#Wang--2017|Wang et al. 2017]] ).

The concept of carbon allowances or carbon budget can also be applied to buildings, by assigning a yearly CO 2 emissions budget to each building. This policy would be a less complex than personal allowances as buildings have metered or billed energy sources (e.g., gas, electricity, delivered heat, heating oil, etc.). The scheme stimulates investments in energy efficiency and on-site renewable energies and energy savings resulting from behaviour by buildings occupant. For commercial buildings, similar schemes were implemented in the UK CRC Energy Efficiency Scheme (closed in 2019) or the Tokyo Metropolitan Carbon and Trade Scheme ( [[#Nishida--2011|Nishida and Hua 2011]] ; [[#Bertoldi--2013a|Bertoldi et al. 2013a]] ). Since 2015 the Republic of Korea implemented an Emission Trading Scheme, covering buildings ( [[#Park--2014|Park and Hong 2014]] ; [[#Lee--2017|Lee and]] [[#Yu--2017|Yu 2017]] ; [[#Narassimhan--2018|Narassimhan et al. 2018]] ). More recently under the New York Climate Mobilization Act enacted in 2019 New York City Local Law 97 established ‘Carbon Allowances’ for large buildings ( [[#Spiegel-Feld--2019|Spiegel-Feld 2019]] ; [[#Lee--2020|Lee 2020]] ).

Public money can be used to reward and give incentives to energy saved, as a result of technology implementation, and/or as a result of energy conservation and sufficiency ( [[#Eyre--2013|Eyre 2013]] ; [[#Bertoldi--2013b|Bertoldi et al. 2013b]] ; [[#Prasanna--2018|Prasanna et al. 2018]] ). This can be seen as a core feature of the Energy Savings Feed-in Tariff (ES-FiT). The ES-FiT is a performance-based subsidy, whereby actions undertaken by end-users – for example, investments in energy efficiency technology measures – are awarded based on the real energy savings achieved.

'''Utilities programmes, energy efficiency resource standard and energy efficiency obligations.''' Ratepayer-funded efficiency programmes, energy efficiency obligations, energy efficiency resource standards and white certificates have been introduced in some EU Member States, in several US States, Australia, South Korea and Brazil ( [[#Bertoldi--2013a|Bertoldi et al. 2013a]] ; [[#Palmer--2013|Palmer et al. 2013]] ; [[#Brennan--2013|Brennan and Palmer 2013]] ; [[#Giraudet--2015|Giraudet and Finon 2015]] ; [[#Wirl--2015|Wirl 2015]] ; [[#Rosenow--2017|Rosenow and Bayer 2017]] ; [[#Aldrich--2018|Aldrich and Koerner 2018]] ; [[#Choi--2018a|Choi et al. 2018a]] ; Fawcett and Darby 2018; [[#Fawcett--2019|Fawcett et al. 2019]] ; [[#Nadel--2019|Nadel, 2019]] ; [[#Sliger--2019|Sliger and Colburn, 2019]] ; [[#Goldman--2020|Goldman et al. 2020]] ). This policy instrument helps in improving energy efficiency in buildings, but there is no evidence that it can foster deep renovations of existing buildings. Recently this policy instrument has been investigated is some non-OECD countries such as Turkey, where white certificates could deliver energy savings with some limitations ( [[#Duzgun--2014|Duzgun and Komurgoz 2014]] ) and UAE, as a useful instrument to foster energy efficiency in buildings ( [[#Friedrich--2015|Friedrich and Afshari 2015]] ). Another similar market based instrument is the energy saving auction mechanism implemented in some US states, Switzerland, and in Germany ( [[#Langreder--2019|Langreder et al. 2019]] ; [[#Rosenow--2019|Rosenow et al. 2019]] ; [[#Thomas--2020|Thomas and Rosenow 2020]] ). Energy efficiency projects participate in auctions for energy savings based on the cost of the energy saved and receive a financial incentive, if successful.

'''Energy or carbon taxes.''' Energy and/or carbon taxes are a climate policy, which can help in reducing energy consumption ( [[#Sen--2018|Sen and Vollebergh 2018]] ) and manage the rebound effect ( [[#Font%20Vivanco--2016|Font Vivanco et al. 2016]] ; [[#Peng--2019|Peng et al. 2019]] ; [[#Freire-González--2020|Freire-González 2020]] ; [[#Bertoldi--2020|Bertoldi 2020]] ). The carbon tax has been adopted mainly in OECD countries and in particular in EU Member States ( [[#Sen--2018|Sen and Vollebergh 2018]] ; [[#Hájek--2019|Hájek et al. 2019]] ; [[#Bertoldi--2020|Bertoldi 2020]] ). There is high agreement that carbon taxes can be effective in reducing CO 2 emissions ( [[#Andersson--2017|Andersson 2017]] ; [[#IPCC--2018|IPCC 2018]] ; [[#Hájek--2019|Hájek et al. 2019]] ). It is hard to define the optimum level of taxation in order to achieve the desired level of energy consumption or CO 2 emission reduction (Weisbach et al. 2009). As for other energy efficiency policy distributional effect and equity considerations have to be carefully considered and mitigated ( [[#Borozan--2019|Borozan 2019]] ). High energy prices tend to reduce the energy consumption particularly in less affluent households, and thus attention is needed in order to avoid unintended effects such as energy poverty. Bourgeois et al. (2021) showed that using carbon tax revenue to finance energy efficiency investment reduces fuel poverty and increases cost-effectiveness. ( [[#Giraudet--2021|Giraudet et al. 2021]] ) assessed the cost-effectiveness of various energy efficiency policies in France, concluding that a carbon tax is the most effective. In particular, revenues could be invested in frontline services that can provide a range of support – including advising householders on how to improve their homes. Hence, the introduction of a carbon tax can be neutral or even positive to the economy, as investments in clean technologies generate additional revenues. In addition, in the long term, a carbon/energy tax could gradually replace the tax on labour reducing labour cost (e.g., the example of the German Eco-tax), thus helping to create additional jobs in the economy. In literature, this is known as double dividend ( [[#Murtagh--2013|Murtagh et al. 2013]] ; [[#Freire-González--2019|Freire-González and Ho 2019]] ). Urban economic researches ( [[#Creutzig--2014|Creutzig 2014]] ; [[#Borck--2018|Borck and Brueckner 2018]] ; [[#Rafaj--2018|Rafaj et al. 2018]] ) have highlighted that higher carbon price would translate in incentives for citizens to live closer to the city centre, which often means less floor space, less commuting distance and thus reduced emissions. [[#Xiang--2019|Xiang and Lawley (2019)]] indicated that the carbon tax in British Columbia substantially reduced residential natural gas consumption. [[#Saelim--2019|Saelim (2019)]] showed that simulated carbon tax on residential consumption in Thailand will have a low impact on welfare and it will be slightly progressive. [[#Lin--2011|Lin and Li (2011)]] indicate that a carbon tax could reduce the energy consumption and boost the uptake of energy efficiency and renewable energies, while at the same time may impact social welfare and the competitiveness of industry. [[#Solaymani--2017|Solaymani (2017)]] showed that in Malaysia a tax with revenue recycling increases inthe welfare of rural and urban households. Van Heerden et al. (2016) explored economic and environmental effects of the CO 2 tax in South Africa highlighting the negative impact on GDP. This negative impact of the carbon tax on GDP is, however, greatly reduced by the manner in which the tax revenue is recycled. National circumstances shall be taken into consideration in introducing energy taxes, considering the local taxation and energy prices context with regard to sustainable development, justice and equity.

A policy, which can have similar impact to a carbon tax and is the energy price/subsidy reform, which also involves raising energy prices. Energy price/subsidy reform reduces energy consumption and greenhouse gas emissions and encourages investment in energy efficiency ( [[#Coady--2018|Coady et al. 2018]] ; [[#Aldubyan--2021|Aldubyan and Gasim, 2021]] ). In a similar manner, government revenues from subsidies reforms can be used to mitigate the distributional impact on vulnerable population groups, including direct cash transfer programmes (Rentschler and Brazilian 2017; [[#Schaffitzel--2020|Schaffitzel et al. 2020]] ).

Taxes could also be used to penalise inefficient behaviour and favour the adoption of efficient behaviour and technologies. Taxes are used in some jurisdictions to promote energy efficient appliances with lower VAT. Similarly, the annual building/property tax (and also the purchase tax) could be based on the CO 2 emissions of the buildings, rather than on the value of the building. Tax credits are also an important subsidy for the renovation of buildings in France ( [[#Giraudet--2020|Giraudet 2020]] ), Italy ( [[#Alberini--2015|Alberini and Bigano 2015]] ) and other countries.

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