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Designing Policy Instruments and Institutions to Address Energy-Related Environmental Problems

Global climate change and other global and regional environmental changes are intimately tied to energy use, particularly the combustion of fossil fuels, in ways that hardly need elaboration. A significant effort to study energy and global change is already under way within the USGCRP, and we believe this is important work. We also believe, however, that it should be supplemented by work focusing on questions of institutional design, including design of policy instruments, because institutional issues are critical to mitigation and adaptation in the energy system, essential to policy analysis, and underrepresented in the current research effort. Institutional design issues are critical as well to other important global change issues, such as water management in response to global change and understanding of the rapid increase in nitrogen fixation by human activities. Thus, knowledge gained in the study of institutions, including policy instruments, to address energy-related environmental problems will have value when transferred to other environmental problems.

RELATION TO USGCRP PRIORITIES

The importance of a focused effort on energy use is already well recognized within the USGCRP. A focus on institutional design is critical to the new USGCRP emphases on analysis of mitigation and adaptation options and integrated assessment because response options must be evaluated in the light of institutional and cultural barriers and opportunities affecting their feasibility and mediating their effectiveness. Various policy instruments designed to produce simi-



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Science Priorities for the Human Dimensions of Global Change 4 Designing Policy Instruments and Institutions to Address Energy-Related Environmental Problems Global climate change and other global and regional environmental changes are intimately tied to energy use, particularly the combustion of fossil fuels, in ways that hardly need elaboration. A significant effort to study energy and global change is already under way within the USGCRP, and we believe this is important work. We also believe, however, that it should be supplemented by work focusing on questions of institutional design, including design of policy instruments, because institutional issues are critical to mitigation and adaptation in the energy system, essential to policy analysis, and underrepresented in the current research effort. Institutional design issues are critical as well to other important global change issues, such as water management in response to global change and understanding of the rapid increase in nitrogen fixation by human activities. Thus, knowledge gained in the study of institutions, including policy instruments, to address energy-related environmental problems will have value when transferred to other environmental problems. RELATION TO USGCRP PRIORITIES The importance of a focused effort on energy use is already well recognized within the USGCRP. A focus on institutional design is critical to the new USGCRP emphases on analysis of mitigation and adaptation options and integrated assessment because response options must be evaluated in the light of institutional and cultural barriers and opportunities affecting their feasibility and mediating their effectiveness. Various policy instruments designed to produce simi-

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Science Priorities for the Human Dimensions of Global Change lar mitigation or adaptation patterns may in fact lead to quite different ancillary impacts and quite different patterns of uncertainty in responses. Economic and regulatory interventions, for example, rarely operate in practice as well as is suggested by institution-free theories. Their effects depend on the cultural and institutional context of their implementation. Similarly, technological innovations are not readily adopted by all those who would benefit, and rates of adoption are sensitive to institutional variations. Thus, a research effort focused on institutional design issues can: improve estimates of the costs and benefits (including those associated with nonmarket goods and services) of the various options for mitigating and adapting to climate change through interventions in the energy system; improve integrated assessments of climate change by improving understanding of the likely outcomes of policy options; and identify response options that might not otherwise be considered. Such a research focus would also gather basic knowledge about the operation of environmental management institutions affecting the energy sector that might be transferable to the analysis of options for managing nonenergy environmental problems. TIMELINESS OF EFFORT Focused research on institutional design for managing energy-related environmental problems is timely now for at least these reasons: the U.S. commitment to greenhouse gas reduction requires careful analysis of a full range of energy policy options; the USGCRP is moving ahead with economic analyses of some types of policy instruments, analyses that should be supplemented by institutional studies for greatest practical value; analysts are increasingly recommending institutional approaches to managing these problems (e.g., creation of emissions trading permit regimes), making institutional analysis particularly timely; and growing international communities of researchers who work on marketlike and other institutions for the management of common-pool resources can now be drawn into the analytical effort. RESEARCH GOALS Research would address questions in the following areas: What is the potential for mitigating or adapting to global environmental

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Science Priorities for the Human Dimensions of Global Change changes that result from energy use by adopting policies aimed at different kinds of actors or at different levels in the energy system? Analysis would address such units of action and levels of analysis as governments, business firms, individuals/households, networks and coalitions, local communities, and collectivities of resource users. What social dilemmas and other constraints act as barriers to appropriate individual, firm, collective, community, and government action? How can improved response options be selected taking this knowledge into account? Who pays the costs of mitigation or adaptation under the various policy instruments and institutions? What are the effects of various response options on income distribution and other distributional considerations? Under what conditions can various policy instruments be viable for mitigation or adaptation? Examples of instruments to be investigated include: emissions permits or other market-like instruments; price and tax setting; joint, bilateral/multilateral implementation of agreements; multilateral quantity restrictions; governmental suasion programs; technology demonstrations; dissemination of information; changes in property rights and governance systems; international commissions; markets for contingent claims; full liability for harm, enforced using legal systems; decentralized institutional approaches; educational, legal, and other supports for cultural paradigms affecting personal lifestyles and behavior; and combinations of market-like or other centralized instruments with decentralized, community, and culturally based systems of response. How will different policy instruments influence the uncertainty about the various policy-relevant impacts? For example, emissions permits may greatly reduce uncertainty about the total quantities of emissions but increase uncertainty about the final costs of emissions reductions; “green taxes” may not greatly change the uncertainty about quantities, prices, or costs. What effective roles can be played in energy management by decentralized, community-level institutions and grassroots action? What are the characteristics of policies that effectively elicit innovations in energy technology and management within public- and private-sector institutions? For instance, what forms of public-private partnerships are most effective for this purpose? What policy approaches improve on prescriptive standards when these have slowed innovation? Under what conditions are inducements, such as promises of government contracts for the first innovator across an efficiency threshold, an effective stimulus to innovation? How is the effectiveness of policies influenced by market structures in energy industries? What mechanisms can overcome the inhibitions to transfer of efficient energy technologies to developing and formerly Communist countries? One issue here concerns the risk-averse policy strategies of international lending institutions that favor investments in well-proven technologies over those that have not been proven in new settings. Another is that of designing something like an emissions permit trading regime that can work internationally.

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Science Priorities for the Human Dimensions of Global Change How might cultural shifts affect the future viability and effectiveness of institutional design options (e.g., shifts in values and behavior at the individual and household level, shifting cultural paradigms of reference groups, the interaction of personal and cultural changes)? How might institutional changes (e.g., changes in property rights and governance) affect cultural and value shifts? RELATION TO INTERNATIONAL RESEARCH The HDP has identified two research programs related to this issue: (1) Impacts of Structures and Institutions and (2) Energy Production and Consumption. Both programs are in very early stages of development. A U.S. effort in this area would help the international programs define their directions. There are international research communities that could participate in such programs. IMPLEMENTATION ISSUES At this time, institutional studies of energy-environment issues are probably best conducted in multiple, low-cost, research projects. They require interdisciplinary groups that include (at a minimum) experts in policy analysis, the relevant energy technologies, and the relevant energy users and management institutions. The mix of disciplines should be dictated by the problem. Although the Department of Energy (DOE) and the Environmental Protection Agency (EPA) manage programs of economic research on global change, they will need to make special efforts to broaden their portfolios to include institutional research and to identify appropriate project managers for institutional studies. It is worth noting that some such studies have been done in DOE national laboratories. Although it makes sense for much of the research on this focused topic to be managed by EPA and DOE, management should not be limited to these agencies because important progress may come from researchers who begin from more basic theoretical questions about community resource management, property rights institutions, and the like. Other agencies, particularly the National Science Foundation, should support research on this topic.