Cost effectiveness of a combination of instruments for global warming: a quantitative approach for Spain

Abstract

There is a considerable body of research about the use and design of market instruments for mitigating greenhouse gas emissions. However, discussion of the combination of instruments and their possible interactions is in its infancy. This paper proposes a specific combination of instruments (an emission allowance market such as the one already in place in Europe for energy-intensive sectors and a tax on CO2 for the rest) and analyses the effects of four possible distributions of mitigation objectives. We also analyse what happens if the tax on CO2 is replaced by other closely related taxes. Our findings suggest that a combination of market instruments is needed if emissions are to be reduced cost-effectively. However, it is essential to design the right combination of instruments to prevent costs from becoming excessively high.