Political Economy Aspects of Climate Change Mitigation Efforts

Abstract; Regardless of the policies used to mitigate climate change, a positive and relatively high price of carbon will have to be established, with slow convergence across regions, leading to huge rents up to capture, way beyond those that have been fought over in the General Agreement on Tariffs and Trade (GATT)-based international trading system.

The paper explores the political-economy, feasibility and desirability implications of the two main alternatives, a carbon tax and a cap-and-trade (CAT) system. Having the same concerns, CAT systems in the EU and the US have accounted for different outcomes in each case. Likely leakages under foreseeable carbon prices are estimated to be small and not of an order of magnitude justifying the special allowances sought across a wide spectrum of industries.

The experience of the EU and US reviewed here suggests that mitigation is likely to continue to be carried out under a CAT, provided permits are distributed for free to the lobbies whose support is necessary to get adoption of mitigation policies. This quota mechanism, long-used to allocate scarcity in the international trading system both nationally and internationally, would end up with the most powerful receiving the quotas rents, giving them the leverage and resources to maintain allocation schemes favourable to them.