Addis Ababa University School of Commerce Department of Development Economics

ADDIS ABABA UNIVERSITY
SCHOOL OF COMMERCE
DEPARTMENT OF DEVELOPMENT ECONOMICS
Market-based Climate Policy Instruments

Contents
 INTRODUCTION
 TYPES OF MARKET-BASED CLIMATE POLICY INSTRUMENTS
 Tradable permits
 Environmental charges
 Environmental taxes
 Environmental subsidies and incentives
 Liability and compensation schemes
 HOW WELL DO MARKET-BASED CLIMATE POLICY
INSTRUMENTS WORK
 CONCLUSION
Introduction
 Environmental policies usually combine the
identification of an environmental goal to be
achieved with some means to accomplish that goal.
 Much of the depletion of natural resource and
environmental pollution from greenhouse gases arises

from improper pricing of the services and goods
people consume and produce.
 Market-based policy instruments are regulations that
reassure behavior towards environmental protection

via market indicators.
Types of Market-based Climate Policy Instruments
 Market-based climate policy instruments can be

classified in to:
 Tradable permits
 Environmental charges
 Environmental taxes
 Environmental subsidies and incentives, and
 Liability and compensation schemes
Tradable permits
 An acceptable level of environmental pollution is set

and distributed among firms in the form of tradable
permits.
 Firms that hold onto their environmental pollution
emission levels below their prearranged level may

trade their leftover permits
 Cost-effective in reduction of emissions of carbon
dioxide or in use of resources of the environment

such as fish quotas.
Environmental charges
 Environmental charges are basically payments made

in exchange for an environmental service.
 Designed to cover the partial or full costs of
environmental services and also include abatement

procedures such as waste disposal and waste water
treatment.
 Environmental charges can be based on inputs,
emission and outputs.

Environmental taxes
 It includes state fees, excise and all environment-

related taxes and can be either explicit such as taxes
on emissions or implicit like taxes on goods or
inputs.
 Intended to change production decisions and the
amount by which producers decrease their

environmental pollution level depends on the chosen
tax rate. E.g. Car production, chemical fertilizer use
 One of the challenges of environmental taxes is
choosing the appropriate level of taxation.

Environmental subsidies and incentives
 Aimed to create new markets for environment
friendly goods and services. E.g. transport and energy
 The use of subsidies and incentives to tackle
environmental problems is a more recent

phenomenon, although they are currently commonly
used by governments.
 Some environmental subsidies and incentives are
environmentally harmful such as subsidies or tax

exemptions, which confer an advantage on certain
producers.
Liability and compensation schemes
 Designed to achieve sufficient compensation for
environmental damage due to activities hazardous to
the environment and provide for means of prevention
and restoration.
 Such environmental damages include nuclear
damage, marine oil spills, groundwater contagion and

damage of ecosystems
 Germany and Denmark, for instance, have liability
laws for non-genetically modified crops being

contaminated by genetically modified organisms.
How well do Market-based Climate Policy
Instruments Work
 Evidence suggests that market-based climate policy
instruments where they have been implemented work
better if they are well-designed.
 Denmark, the Netherlands, and Austria are using
different policy packages to decrease carbon dioxide

emission such as taxes and subsidies.
 Progressively graduated water prices have also been
effective in countries like Hungary and Denmark.

 The effect of environmental tax is generally positive
and works better when the tax rate is sufficiently high

Conclusion
 Eradicate negative environmental externalities and
enhance the natural environment via price, markets
and other financial incentive.
 When joined within a regulatory framework, these
instruments have shown great success.

 Effective and efficient for environmental protection
when utilized appropriately.

 Attention needs to be paid to detail when developing
a market-based instrument initiative.

Thank you!

Addis Ababa University School of Commerce Department of Development Economics

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ADDIS ABABA UNIVERSITY

Market-based Climate Policy Instruments

environmental pollution from greenhouse gases arises

reassure behavior towards environmental protection

 Market-based climate policy instruments can be

 An acceptable level of environmental pollution is set

emission levels below their prearranged level may

dioxide or in use of resources of the environment

 Environmental charges are basically payments made

environmental services and also include abatement

emission and outputs.

 It includes state fees, excise and all environment-

amount by which producers decrease their

choosing the appropriate level of taxation.

environmental problems is a more recent

environmentally harmful such as subsidies or tax

damage, marine oil spills, groundwater contagion and

laws for non-genetically modified crops being

different policy packages to decrease carbon dioxide

effective in countries like Hungary and Denmark.

and works better when the tax rate is sufficiently high

instruments have shown great success.

when utilized appropriately.

a market-based instrument initiative.

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