EPRG 0627

Karsten Neuhoff —

Where can international cooperation support domestic climate policy?

EPRG 0627 Non-Technical Summary | PDF

Abstract: A move to a low Carbon economy involves (1) internalisation of CO2 externalities, (2) advancement of technologies and (3) removal of barriers and evolution of institutions. National governments that want to realise these goals can choose from a menu of instruments the best suitable policy mix for their specific circumstances. The paper identifies five objectives for international cooperation on climate policy that can support such national implementation. The Kyoto framework addresses all these objectives and provides a long-term perspective. In the mid-term the evolution of low carbon economies might be accelerated if countries or regions temporarily take leadership in climate policy. Governments might be prepared to accept more stringent emission reduction targets, if the penalty for missing the target is not defined in direct financial transfers to other governments via emission trading. While this creates some flexibility for international cooperation, countries do need to commit to instruments that result in price internalisation. As CO2 costs are reflected globally in product prices, substitution effects to low Carbon products are facilitated and competitive disadvantages and emission spill-over is avoided.

Keywords: Climate policy, international coordination, CO2 internalisation