Main entries to instrumentation, over all sectors

The methodology for strategic instrumentation design first starts from now, and looks into developments required. That step has been gone through in the previous chapter 5, for the four main sectors distinguished there. The second line of reasoning is instrument-technical and based on more abstract reasoning. Instruments can be ordered as to generality of application and with more technology specific instruments as to their bindingness, see type 1 to type 4c in Table 3.

Instrumentation design then is to refer to Sparseness, Completeness and Non-Overlap, see Chapter 4 and specifically Section 4.2.5. Consider the most generic options first and then add towards full coverage while avoiding overlap. The third entry to design relates to desired modes

30 His analysis shows that deep innovations, if successful, get to their fullest speed of market development typically after 35 years, slowing down to full saturation thereafter.

of governance, in general, and specifically for climate policy instrumentation. Two main strategic governance directions are distinguished, a Planning & Control Strategy and an Intuitionalist Strategy, see Section 3.3. Planning & Control links to a direct public task in technology and market development, with substantial use of technology specific instrumentation, but still: as sparse as possible. There is a close public-private relation for fast and controlled development, also of infrastructure. The Institutionalist mode links to the institutional framework primarily, creating long term incentives, and leaving more concrete developments mostly to lower administrative levels, private parties and civil society in general. There is a sharper delineation between public and private responsibilities. Strategic design is not about details of instruments and their implementation but about the main structure and set-up. Is emission pricing uniform over all sectors? And if not why not, as economic and administrative advantages are clear? Such strategic choices precede the detailing of instrumentation, which will always be substantially on-the-go.

The why question is basic. Why go for the price stabilized cap-and-trade, as compared to the pure cap and the pure emission tax? In the final design strategy governance takes a prime role, reckoning with bottom up developments and with the logic and tactics of developing instruments and instrument mixes.

The bottom up line of reasoning builds on the four instrument mixes per sector of the previous chapter. Starting at the four basic options of emission pricing, four instrument mixes resulted per sector based on the prime choice on carbon pricing: No emission pricing; pure cap-and-trade;

price stabilized cap-and-trade; and pure emission tax. In principle the four instrument mixes linked to each pricing system can be added over all sectors, with not well fitting overlaps resolved.

For example, the four sector sets with emission tax can be added. This results in: one uniform and upstream administered emission tax; a single real priced EU electricity market; public infrastructure for long distance transport of electricity and hydrogen; RD&D focused at research;

and some more technology specific additions for speeding up transformations. This is a bottom-up and instrument-technical approach to instrumentation, with only a sniff of governance in it.

The open real price electricity market fits to the emission tax in a governance sense, but was also argued on pure efficiency considerations, as for reducing the costs in industry in reducing emissions.

In the development per sector the abstract design principles were followed, starting generically in the institutions domain. However, the bottom-up approach with instrumentation theory then also included: no carbon pricing, for governance reasons. A strong focus on Planning & Control requires technology specific instrumentation, making the pure cap-and-trade system which was starting point superfluous. The instrument mixes as developed for the four main sectors are here combined into full sets of climate policy instruments. As there are four variants per sector sixteen combinations could result. This would assume independence of all elements, like having four different options for emission pricing in the four different sectors. However this seems to lack governance logic and is cumbersome administratively. It would imply to treat emission from natural gas, from coal, and from oil and oil products differently according to their sector of use, like natural gas for industrial furnaces treated differently from gas used in electricity production, for room heating, and for transport. So the four different options for emission pricing (no pricing;

pure cap; price stabilized cap; emission tax) first link to four overall sets of climate policy instruments. Upstream applied emission pricing covering all emissions avoids boundary complexity and reduces administrative requirements substantially as compared to within-system

application. So, to start with, in any strategy there is only one type of emission pricing, cap or tax, equal in all sectors, or there is none.

In the second step of the design methodology the instrument typology next main instruments have to match consistently. In a pure cap-and-trade system restrictive standards for coal fired power stations and subsidized renewables violate the sparseness and non-overlap criteria. They just don’t make long term sense: they are wasted policy effort and wasted public money. Coal will lose out anyway and renewables receive an indirect subsidy by having their competitors’

emissions priced. From some strategy point of view one might choose for the standards and subsidies instruments; but then the cap system would be superfluous. Similarly, having electricity markets dominated by swing producers with contractual relations with energy users does not fit well with an emission tax, as the price signal of the tax is not translated into the market price at times when fossils still are the marginal producers. A relation with governance strategies certainly exists but the reasoning here is purely theoretical as yet. A final issue in instrument-technical reasoning goes against sparseness in instrumentation: Add instruments to be sure that the climate target is reached even if they overlap. This is different from reasoning out of encompassingness, which may also lead to some overlap. The example is again technology-specific instruments as for bringing renewables and secondary electricity production in the market, and many more, in parallel to a pure cap-and-trade system. Would it be feasible to have two fully overlapping sets of instruments available, each capable of reaching the climate targets in its domain effectively in principle? The consequences for further instrumentation are mind boggling. What is the public role in developing infrastructure; which type of electricity market is to be developed; how to deal with public-private partnerships and with technology demonstration? This to-be-sure argument also is a dangerous one however as chances are that neither instrument set is effectively developed as the other one can take over. Would it be feasible to have and keep the highly complex cap system operational and updated if the technology specific instruments effectively do the job? And conversely; with cap high priced and causing hardship, as it should in reducing emissions, would additional technology-specific hardship be accepted? With neither system being really operational there is the danger of instrumentation collapse. More specific reasoning for choosing instruments into an instrument mix seems required, avoiding overlap as much as possible.

The third element in the design methodology refers to governance strategies. It may technically be possible to have technology specific instrumentation matched with an open real time electricity market. But why choose this combination? The reasoning involved would have to link to some idea on governance, as the technical logic would link technology specific instrumentation to technology specific support on renewables and secondary electricity production, making open markets difficult if not impossible. This combination would however not fit in either of the governance strategies distinguished here. The Planning & Control strategy would not put main effort in building up an open real time electricity market, which would reduce instrument options for technology specific policy. The Institutionalist strategy would put emphasis on electricity markets and other institutions so as to have a most generic incentive effect, avoiding technology specific instrumentation as much as possible. Mixing just cannot lead to clear instrument development.

In the next chapter the governance oriented approach is developed, screening from the sector mixes what is technically possible, from the perspectives of the two governance directions. This

screening process results in only two sets of instruments in the long term: a Planning & Control Mix and Institutionalist Mix.