The limits of economic instruments for international greenhouse gas control

As interest grows in an international agreement to limit greenhouse gases, attention increasingly is focusing on the use of economic incentives -- taxes and tradeable emission permits -- in the hope of achieving greenhouse gas limitations cost-effectively. The potential cost savings of international incentive-based approaches may be substantial. However, practical implementation problems are likely to reduce cost savings relative to the theoretical potential. Tax programs would be hampered by undesirable side effects if tax rates are not uniform and difficulties in structuring redistribution if tax rates are uniform. Permit programs would be hampered by inefficiencies if governments play a large role in the trading and by practical difficulties in constructing a more decentralized trading regime. Both approaches face serious challenges in monitoring, challenges which are likely to be larger than monitoring problems under simple national-quota agreements. To achieve success in using economic incentives to limit greenhouse gases, the best initial steps may sacrifice some cost-effectiveness for ease of acceptance and implementation