From practical instrument development to strategic design

Developing instrumentation by necessity starts at current instrumentation, with the short term, medium term and long term domains leading to different approaches for development, with satisficing, optimizing and transformation as main lines of change. Satisficing and optimizing take the current situation as a prime basis. However, also long term transformations, though possibly guided by overarching and new considerations, cannot avoid the constraints of current instrumentation. It is not possible to have a tabula rasa in instrumentation design, starting from scratch. This is the case for several reasons. Instruments as have been implemented give rights to those regulated, though usually limited in time. Feed-in tariffs have a time to expiration. ETS and Fleet Standards have a fixed period towards revision. Revising instruments takes time both for procedural and political reasons. Different instrumentation may require different organizations and rules for their implementation. However, such constraints are never fully rigid and are softer in the long term. An analogy with innovation is the Schumpeterian creative destruction (Schumpeter 1947 (1942)): overruling existing instrumentation by novel instruments. In the electricity sector renewables are destroying the existing market structure creating losses for fossil producers, based on novel instruments like feed-in tariffs and fossil electricity emission standards, these overruling the pure cap-and-trade system of the ETS. Destruction will not always be required if the old instrument can remain in a niche application, as with 19^th century regulations still apply to steam engines in many countries.

By adapting, replacing or destructing the old instrumentation, fundamental changes are well possible in the long term. Such changes will however not come about by incrementalist piecemeal decision making alone as seen and advocated by (Dahl and Lindblom 1953, Lindblom 1959) as the

main mode of policy development. A strategic guiding element then has to be added here, as strategic governance views for climate policy. These in turn will be based on the broader views on societal governance of which they are part. The bottom up strategy starting from now will therefore be matched somehow with long term strategies, top down. The bottom up strategy also has an element of specificity as to domains of application: fleet standards apply to the road transport sector and feed-in tariffs to electricity production. In the longer term transformative development such sectoral domains may be a starting point. However, it is overall effectiveness of climate policy determining choices substantially, not necessarily linked to any sectoral delineation.

The instrument development process starting from now and passing by short term satisficing and medium term optimizing is basically different from the strategic approach to long term instrument development starting from general views and principles, condensed in strategies. In a most general way the long term analysis has a focus on coherency and simplicity. Why have two instruments if one can cover the actions involved adequately already? Certainly multiplicity is to be avoided if instruments are not mutually supportive, as with long term feed-in tariffs functioning in a pure cap-an-trade domain. That means distributing subsidies without climate effect, which may at best be useful for non-climate reasons. The discussion on improving the ETS functioning by temporary reducing the amount of permits brought in the market as by the Strategic Market Reserve typically is satisficing, not strategic, focused at one instrument only. The pure cap-and-trade system then is abandoned a bit, in order to create a higher, more relevant emission price. In a strategic approach the reasoning is reversed. How can a relevant emission price be brought about, to guide long term decision making? How can emissions be reduced predictably? What is the role of emission permit trading? What is the role of price fluctuations in a trading system? What is the role of a mixed quantity-and-price based system, relative to their pure extremes, the pure cap-and-trade and the pure emission tax? Might it that the mix has disadvantages only, with the volume of emissions not specified anymore and the price not predictable yet? Can the variants of emission pricing be implemented effectively? Already at this level answers cannot be given in proven way: they depend on strategic views and priorities. With emphasis on predictable results, the answer goes towards the pure cap-and-trade system, with permits to control total volume of emissions and permit trade to help reduce cost of the specified emission reduction, accepting the reduced long predictability of the emission price and hence reduced dynamic efficiency. Adjoining instruments then should also focus at creating dynamic incentives. With emphasis on also long term incentivizing, the fixed price system comes up as a predictably rising emission tax, accepting uncertainty in emission reductions but focusing on dynamics, with maybe some price adaptation long term. Adjoining instruments would be directed mainly at domains not guided by markets or where markets are limited and deficient, first improving them where possible. The in-between options seem not to be part of a strategic design.

Why have trade if price stabilization is the goal and why have price variability? They don’t have a function themselves but were functional in the pure cap-and-trade system. Strategically therefore only two types of emission pricing remain, linked to two more general strategic choices. Also in expanding emission pricing with other instruments towards a full set of instruments, the more general strategic choice is guiding. With a cap system domain expanded, it does not seem logical in a strategy sense to add economic instruments in the same domain, like carbon taxes on fuels.

Again, there may be non-climate reasons for such taxes. With an emission tax in place, it does not

seem logical in a strategy sense to reduce emission of fossil power stations by CO2 emission standards for climate reasons. There might be non-climate reasons again like air quality issues, though these might be better served with more focused instruments. The central methodology issue to keep in mind in developing long term climate instrumentation is that is strategy driven, top down, and only then linked to the practical question on what to do now.

Table 2 Dimensions and layers in governance, after (Voss and Bornemann 2011) Dimensions:

Levels:

Policy

problems and solutions

Polity

rules and structure

Politics

interaction and process Micro

focal interaction

Problems and goals of a specific governance process

Rules of procedure for a specific governance process

Struggle for dominance among participants of a governance process

Meso policy domain

Problem definitions and policy approaches dominant within a policy domain

Institutional arrangements within a policy domain

Struggle of organized political actors for dominant positions within a policy domain

Macro political system

Discourse on fundamental political values and beliefs

Constitutional rules and political culture

Struggle for dominance among broad social groups, sectors, classes, or regions

The strategy domain can be viewed specifically for climate policy instrumentation but is unavoidably part of broader views on governance. A recent analytic approach to governance directions is in (Voss and Bornemann 2011). The political policy domain is analyzed by distinguishing between levels of generality in the discourse, ranging from micro, to meso and macro, and the subject of discourse related to: policy domains; the polity with its procedures; and politics with power elements, all three connected to the three levels of domains. The climate governance discussion does not touch the Politics domain directly (but decisions are based on power) and it is connected to the meso and macro level only, not the micro level of governance, see the four emphasized cells in the table. Of course the micro level plays a role in filling in daily operations of public policy. However, a long term strategy development reckoning with all possible details will falter in complexity. This is contrary to the view that all options have to be taken into account in detail; that focus on one level without consideration of the others leads to inconsistency, friction, inefficiency and / or deadlock. This links to the optimization ideal of the medium term. In the economics domain this passion for control has been linked to reality by (Cyert and March 1963) long time ago. Even the best efforts to optimization fall short of the information required for doing so. Of course the development of generic approaches has to deal with micro options in a general sense, building on administrative experience. So strategic development of long term policy instrumentation deals with governance at the meso and macro level, filled in at the micro level in due time. The strategies chosen depend on inclusion of political values and beliefs here implies that the strategy development is a legitimate subject of public discourse, a major starting point. For which class of vehicles which test norms will be applied and when is a matter of micro level politics, not for strategic policy development. However, reckoning with administrative problems of test procedures is part of generic considerations.

3.3. Planning & Control and Institutionalist Strategies for long term