The appearance of markets where they have not previously existed can be an agent of profound societal change. Economists have developed an extensive understanding of how markets can produce an efficient allocation of resources and spawned an array of tools that policy analysts use to assess the welfare enhancements of alternative policies.
But policy analysts lack any similar, integrated understanding of the not-uncommon transformational effects new markets can have on values, incentives, and institutions, all most often assumed to be invariant in standard economic analyses.
For example, limiting climate change requires a transformation of energy and transportation systems. To hold global atmospheric concentrations of greenhouse gases within what appear to be acceptably safe levels will require the carbon intensity of these systems to drop much faster over the coming decades than any relevant historical experience. But attempting to force too fast a decline could impose unnecessary costs to the economy.
In addition, costs and benefits will not be equally distributed during any transformation to low carbon intensity, so that any policy must contend with differing pressures from various groups within society. The question is, would market-based policy instruments help or hinder this transformation?
At the request of the National Science Foundation, RAND researchers designed a policy simulation tool and supporting decision framework to examine how alternative designs of market-based policy instruments might or might not facilitate transformations in human societies.
The theme of market-induced transformations encompasses many of the most pressing policies issues facing the United States today at home and abroad. Through initial inquiries and extensive interaction with policy makers and the policy community by the project team, this project sought to help disseminate decision tools and concepts that can improve the U.S. government’s ability to more effectively exploit and manage market transformations as a policy tool in a wide variety of areas.
This project integrated and advanced the understanding of market-induced transformations, thereby developing a set of policy analytic tools to compare and assess the effects of alternative policies that seek to achieve their goals by fostering market transformations.
In particular, the researchers demonstrated:
- how the potential for market-induced transformations — that is, changes in actors, incentives and institutions owing to the presence of markets — can lead to different outcomes (some beneficial, some perhaps less so) than might be expected when considering only the most narrowly defined efficiency-enhancing potential of markets; and
- to what extent it might be possible to account for this potential for dynamic market-induced economic change systematically in the calculations of policy analysts and planners.
Sarah Polborn (University of Aarhus)
Barry Ickes (Penn State)
Edward Parson (UCLA Law School)
To compare the long-term sustainability of alternative carbon emission reduction policies, an agent-based simulation explores the co-evolution of an industry sector, its technology base, and political coalitions that influence government policy.
Environmental market instruments are policies that pursue environmental or conservation goals by modifying conditions in existing markets or creating new ones, thereby providing flexibility and incentives for decentralized responses. The authors review these instruments' theoretical basis, historical development, major current enactments and proposals, and empirical studies of their effects.
Carbon securities entitle their owners to a fixed proportion of ex ante unknown total emissions. The total level of carbon emissions is set by the political process after the carbon securities have been sold. The advantages over existing policy tools include an equilibrium carbon price closer to the level preferred by voters and a more predictable environmental policy in the presence of either climate or political uncertainty.
Examining carbon abatement policy instruments from a political economy perspective illustrates some problems with both traditional cap and trade systems and carbon taxation. An alternative policy instrument, carbon securities, has signifi
cant advantages over these systems.
Long-term emissions reduction goals at best only highlight the magnitude of the climate change challenge, without contributing much to a solution. Congress might craft a robust, long-term greenhouse gas reductions strategy by taking near-term actions designed to shape the options available to future decision makers and the incentives influencing their choices.
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