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date: 07 March 2021

Abstract and Keywords

Economic instruments have played a major role in policies and proposals to address climate change in many countries and regions, with the European Union Emissions Trading Scheme (EU ETS) the most prominent example. This article considers the use of economic instruments to address climate change, including lessons from previous experience as well as a list of the key design elements. It focuses on the cap-and-trade approach and complementary credit-based programs because they have been most prominent in existing policies and proposals. It begins with an overview of the conceptual similarities and differences between cap-and-trade programs and carbon taxes. It then summarizes experiences with emissions trading and taxes that provide lessons on how the programs work in practice. Furthermore, it describes key policy issues that arise in designing a GHG cap-and-program, many of which apply to carbon taxes as well.

Keywords: economic policy, greenhouse gas emission, cap-and-trade approach, credit-based programs, European Union Emissions Trading Scheme

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