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There is a growing consensus that climate change presents grave threat to the future of humanity and the global environment (Aldy and Stavins, 2007). In the absence of a robust international climate policy to curb global warming, increasing recognition of potential adverse impacts of climate change from emissions of greenhouse gases (GHGs) has led some countries to introduce national or regional climate policies and measures to reduce their emissions (B?hringer et al., 2012). Climate policy instruments represent a portfolio of policy measures and actions intended to enable individual nations or regions achieve specific emission goals (Schmalensee and Stavins, 2014).

These instruments may include taxes and tradable permits, regulations and standards, subsidies, financial incentives or other forms of government support. But, not all policies are effective and appealing to reduce CO2 emissions of a nation. As such, designing appropraite domestic climate policy entails careful tailoring of the instruments to fit to the specific national contexts (Gupta et al., 2007). This discussion note attempts to shed light on some of the potential domestic climate policy instruments and measures for an emerging economy (country) that has decided to reduce its CO2 emissions by 40% in 2030 compared to the current level.

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1.1. Criteria for choice of domestic climate policy instrument

Four main criteria are used to evaluate and select domestic climate policy instruments: i) environmental effectiveness (emission reduction), ii) cost-efficiency, iii) distributional effects and equity, and iv) political and institutional feasibility (Gupta et al., 2007, p. 747). From an economic standpoint, the main criterion for a climate policy choice is the degree to which the instrument is capable of maximizing net benefits and minimizing costs (Aldy and Stavins, 2007). This criterion tackles the question of “what is the most economically efficient way to reduce GHGs emissions?” (Gillingham and Stock, 2018, p. 53). The answer, according to environemntal economic theories, is to reduce GHGs emissions to the point where the marginal benefits (MB) of emissions reduction equals its marginal costs (MC) (Gillingham and Stock, 2018). However, Gillingham and Stock (2018) strongly emphasise that calculations of total cost of GHGs emissions reduction today must embrace a dynamic perspective such that both the static (direct emissions reduction costs in the short-run) and future costs of emissions reduction are accounted.

The economic efficiency criterion alone does not guarantee successful abatement, as the latter requires that policies are actually effective in curbing the emissions. And, hence the climate policy instruments and measures also need to bring down the actual emissions of the country to its target goal, 40% in this case, and minimze environmental damages. The other major criterion in comparing policy instruments is the issue of distributional effects and equity considerations. Climate policies can have very different distributional effects such that they can put higher financial burden on the poor than on the rich households; or on households than on firms (Aldy and Stavins, 2007). This can significantly impair the adoption of even the most effective mitigation policies. According to Zachmann (et al., 2018), measures to counteract the unjust distributional effects of climate policies include: i) offsetting the negative effects of the climate policies on low-income households through compensations; ii) designing the policy instruments in such a way that the distributional effects are diluted; and ii) adopting climate policies that have inclusive features.

The choice and feasibility of a given climate policy option also depends on the prevailing political landscape, and institutional frameworks and capacity of the country. Given the influence of various interest groups (from within and outside) on the policy outcome, it is crucial that policy instruments are formulated through rigorous political debates and technical scrutiny by participating all relevant stakeholders in the decision making and choice of the climate policy options (Somanathan et al., 2014). Moreover, the government also needs to first put the necessary institutional frameworks and capacity in place before taking steps to adopting the climate policy measures. This is because the political will and institutional structures in the country affect not only the feasibility and effectiveness of the policy instruments but also their sustainable financing. Other reevant criteria may include, considerations such as the effects of the policy instrument on carbon leakage and competitiveness of industries in the international market (Gupta et al., 2007); which will be briefly discussed later in this note.

2. Domestic policy instruments to reduce CO2 emissions

Domestic climate policy instruments to reduce CO2 emissions can be broadly grouped into two categories: market-based, and non-market-based (G?rlach, 2013). This section discusses potential instruments from both categories that we consider to be taken by the country that has decided to reduce its emissions by 40% by 2030.

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