Political Responses To Counteract Market Failures: Case Study

1.2. Political Responses to counteract Market Failures The internalization of negative external effects describes the act through which social costs, arising from negative externalities, are at least partly included in private calculations and thus partly compensated (Fritsch et al: 2005, 85). Even though the incorporation of such externalities is often a financial burden for economic agents, it is a necessary act in order to guarantee optimal result allocation for current and future generations. For this reason, Pigou, an English economist, elaborated the Pigovian tax in 1920. The Pigovian tax is an economic tax politically imposed on economic agents engaged in environmentally harmful activities incentivizing them to change their behavior
According to this approach, a control system is to be built on determined environmental standards. With the help of this control system, prices for the private use of resources, such as the atmosphere, are then adjusted in order to meet the set environmental standard (177). Contrary to the Pigovian tax system, this approach does not take into account unknown negative effects when determining the amount of taxes, but imposes a standardized price on a given unit of emission and/or subsidies avoided. As mentioned, the environmental pricing and standard procedure requires a control system built on determined environmental standards. This control system can take two forms: it can either be in form of price controls1 or in form of environmental certificates, also known as transferable emission permits. Given this paper’s focus on the CDM, a flexible market mechanism allowing for the trade of emission permits and emission reduction credits, environmental certificates will be dealt with in
Since the United States declined to ratify the Kyoto Protocol in 2001, its implementation was only possible thanks to Russia (Gardiner: 2004, 25). On February 16th, 2005 the Kyoto Protocol came into force. Ever since increasing scepticism with regard to the Protocol and to climate control became evident. It is questioned whether the signed agreements and measures taken really are effective and reach their objective of balancing global greenhouse gas emissions. The general consensus is that little has been achieved for several reasons of decisive importance. The foremost is that all individual nation-states are sovereign actors and thus have the ultimate right to decide whether to ratify a protocol. In the climate change arena, the most striking example was provided by the United States. Being the largest greenhouse gas emitter until recently, the decision of the country not to ratify the Kyoto Protocol has far reaching effects on its functioning. As mentioned previously, it only makes sense for individual countries to agree to an international agreement if all other countries do the same. This is also true for developing countries. Under the Kyoto Protocol only industrialized countries are required to reduce their greenhouse gas emissions. China, being the