[MUSIC] Welcome to the second week of our book which is devoted in particular the discussion of decarbonization policies. We begin today with introducing the very important distinction between market based and administrative policies. We'll explain what that means. In order to understand what is the issue of decarbonization, we must accept that greenhouse gas emissions are a classic example of market failure due to negative externalities. What does this economies jargon mean? Negative externalities mean that our consequences, side consequences to what you do to your production process, to your consumption pattern that you do not pay for, you are not called to remedy immediately. So this will lead to a market failure because not being responsible for all the costs that you actually goes with your behavior, means that the market will not generate the optimal solution. This is the approach of standard economic theory. There is a solution in theory, and that is to internalize the cost of, negative externalities. Internalizing the cost of negative externalities means making sure that whoever closes this negative externalities is going to pay for them. So that he will have to take them into account. So the question is, we need to impose price high enough to convince all players, all relevant players to eliminate emissions. What is the problem? The problem is that, there are literally billions of decision makers that are relevant because it's not just the producers, the power plants, all the industries that are involved, not just the energy industry. But it's also all the consumers that need to change their behavior in such a way that we are able to eliminate greenhouse gas emissions. And that is something which is very difficult to achieve except on the basis of market price signals. If we try and do it with some other tool, then it is possible that we may fail to choose the most effective or cheapest solution. It may not be optimal while if it is down through the market, we have a reasonable expectation that it might be optimal or very good. Now, there are two approaches based on market mechanism. The first one is a carbon tax and the second one is a so called cap and trade system. A carbon tax is simple to understand. You just impose a tax on all carbon emissions, which means that there is a price for emitting carbon for emitting greenhouse gases and you will have to pay this price. The advantage of a carbon tax is that the price is fixed. The government fixes a price. But you don't know whether this price is sufficient or not, or maybe too high. So you fix the price, you are not guaranteed the outcome. In contrast, a cap and trade system is based on fixing the outcome. You establish a ceiling, beyond which you are not allowed or we pledge not to emit above that ceiling. Within this ceiling, companies, consumers are allowed to emit and they must buy the permit to emit from the government and the price of that permit will depend on demand and supply. So the difference in between these two systems is that in one, you have certainty of price but uncertainty of outcome, that's a carbon tax. And the other, you have, if you wish, certainty of outcome, which is the cap, but you have uncertainty of prices. You cannot have certainty of both at the same time. Now, most economies are rather in favor of a carbon tax. And that is the case, for example, of William Nordhaus, who received the Nobel Prize in Economics in 2018 and has been a prominent economist working on the issues of this kind. But there are certain advantages of the carbon tax, they're easy to understand. First of all, a carbon tax can be imposed on all sources of emissions and emission trading system will only affect major sources of emissions but will not be applied to smaller sources which are, nevertheless, important. Second, a carbon tax is easier to harmonize internationally because you immediately see whether country A has carbon tax that is lower than country B and country B can therefore complain with country A and push for it to increase its tax rate. And finally, when you have differences in the level of carbon taxes, it is easy to impose a countervailing duties at the border. So if a country has a higher carbon tax and another one a lower, the country with a higher carbon tax can impose a duty to cover the difference and prevent the second country from having an undue competitive advantage. So, this is the major reasons why a carbon tax is favored by economists. However, governments do not very much like carbon taxes because they are a tax and generally the public doesn't like to see the government add a tax to the long list of taxes that they already pay. So there is considerable preference for an emission trading system among politicians in governments. In this map, you can see which countries have implemented an emission trading system, either at the national, supranational, or provincial level. In the case of European Union, we have supranational European Trading System which applies to all European Union member countries. In other cases, you have nationally designed and chosen and implemented European emission trading systems. And finally, there are countries in which the national government is not in favor of emission trading system but some local governments are. This is a case of some provinces in Canada, in California, in the United States, and also some of the other Western countries, Western states in the United States. So the federal government is against it but local governments are resorting to similar schemes. The next slide shows you all the countries that have implemented either an emission trading system or a carbon tax or both. In some cases, they have both. The number of countries that are doing this is growing rapidly. And by 2020, it is expected that such schemes will cover at least 20% of global emissions. The rate of taxation or the price which is generated by the emission trading system are widely different, which is shown on the left side. You will see that some countries have very high rates of carbon tax. The champion, if you wish, is Sweden, that has a carbon tax of worth of $140 per ton of CO2 emitted. You can see a combination of the price which is imposed and the total revenue which is raised through the taxes or the emission trading system. And there you see that the highest revenue, which is measured by the size of the circles. The highest revenue is found in from the carbon tax in France, the blue dot in the middle of the chart, and by the emission trading system of the European Union, the large green dot towards the bottom. In contrast to such marketplace, governments frequently rely on initiative regulatory tools. This means either subsidies, encouragements of various sort or prohibitions, discouragements. So you may favor a specific technology, you may favor a specific solution and push against others. In this case, we have some examples that all of you probably are familiar with. For example, the transition from incandescent light bulbs to light-emitting diodes, LEDs, this is something that is a major technological advance. But in some parts of the word, notably in the European Union, the traditional incandescent light bulbs are simply forbidden now. They cannot be sold elsewhere in the world. They are allowed and they exist side by side with more advanced solutions such as LEDs. The problem with administrative and regulatory tools is that they seldom allow to choose the cheapest or most efficient solution. They generally end up favoring some people, some parts of the population and damaging others. They generally impose a cost on some section of the population and this is not always a fair outcome. So there is, a lot of criticism can be raised against administrative and regulatory tools. However, generally, the people who are benefiting from the imposition of these tools, of these policies are able to support them, create lobbies, while the people that are damaged, are perhaps, not capable of coalescing a resisting effectively. So we also have a history whereby, administrative and selective support policies may have backfired. A case in point has been the policy of European governments towards diesel. For many years, European governments have favored diesel cars because diesel cars have all other things being equal, better mileage. But then, we discovered that their emissions in urban environment are dangerous. And so now, the policy is being reversed and governments are against these ill-some cities are even forbidding diesel from circulating diesel cars from circulating in the cities. And so, the public is not happy about such changes because they have been encouraged to buy a diesel car and now they're told that they cannot circulate in the cities. And the energy transition policies of Germany, the so called [FOREIGN], has greatly succeeded in promoting solar and wind, energy, but it has failed to reach the target for reducing emissions. So, there has been preferred technology but this technology has not delivered the outcome that was expected. So there is also other possibilities. For example, the improvement in the efficiency of internal combustion engine may encourage the the consumer to buy larger, heavier cars. And that is not positive from the point of view of emissions and the environment, and so on. So there are many such cases that show that administrative policies may fail or backfire. In contrast, market-based policies may be guaranteed to deliver the outcome they are designed for, that is reduce emissions.