Placing a tax on CO2 emissions seems to be, at first glance, the most effective way of encouraging industries to emit less CO2 in order to avoid an increased fiscal burden.
"Most economists believe a carbon tax would be a superior policy alternative to an emissions-trading regime", say Kenneth P. Green, Steven F. Hayward and Kevin A. Hassett of the American Enterprise Institute in Washington, DC.
But imposing new taxes on industries is politically unpopular, and few politicians appear willing to risk their careers over the matter. In addition, coordinating a harmonised tax on carbon would be difficult in the EU alone, never mind at global level.
Establishing a carbon market similar to the EU Emissions Trading Scheme (EU ETS) with binding caps on CO2 output appears to be more palatable to industries and governments alike.
If established correctly, carbon markets can in theory stimulate the development of clean technologies both in developed and developing nations, as industries compete to become 'carbon competitive' while reaping a profit from the sale of CO2 emission credits to those industries that are unable to significantly reduce their carbon footprints.
Despite disagreements over which option is more feasible, most experts would likely agree with environmental economist Charles Komanoff of the Carbon Tax Center, who argues that "making the price predictable is the most significant move you can make to control global warming".
Without reliable signals from the market, including a predictable carbon price tag, companies and states are reluctant to invest the necessary sums to facilitate the transformation towards low-carbon economic growth.
A global carbon market embryo?
A collapse of the carbon price is precisely the problem that plagued the first round (2005-2007) of CO2 trading under the EU ETS.
But the Commission is tightening the system, non-EU European countries like Norway are signing up to the EU ETS and the Union is determined to pursue its flagship initiative for fighting climate change (EURACTIV 29/10/07), despite pressure from a number of new EU member states who say the carbon constraints are hampering the development of their post-Soviet economies.
The US is expected to launch its own carbon trading system before the end of 2009 after the arrival of a new US administration, with global carbon market linkages, including between US states and the EU ETS, possible in the post-2012 period.
Other states are also entering the carbon market arena, with Australia announcing a plan to launch a cap-and-trade plan in June (EURACTIV 07/06/07). Moreover, a new International Climate Action Partnership (ICAP) including New Zealand and two Canadian provinces was launched in October.
But even with a functioning carbon market governed by the 'right' carbon price, energy intensive industries, particularly in the EU, are concerned about how they would fare if emitting CO2 and other greenhouse gases (GHGs) became highly expensive.
The iron and steel sector, for example, have pushed for separate arrangements to reduce emissions, with less stringent CO2 reduction requirements than those imposed on textiles, services, electronics and other less carbon-intensive industrial sectors.
Ultimately, the Commission decided in its 23 January climate and energy proposals to expand its ETS to more sectors while allowing certain sectors to continue to receive free pollution permits for a limited time. Some sectors may even be indefinitely shielded from having to buy emission rights at auction, pending a Commission review of the situation (see EURACTIV's related coverage for details).
A further possible concession to the EU's energy-intensive sector would be to impose a tax on imports of foreign goods produced by energy-intensive industries operating in countries that do not have tough restrictions on CO2 emissions.
The idea, supported by French President Nicolas Sarkozy among others, has received scant support in EU circles, however, and was apparently dropped in the 23 January plans.
But the Commission may still decide, in 2011, to oblige foreign firms with high CO2 emissions to participate in the EU ETS in order to access the EU market.
On 30 November, the EU and the US announced what they termed "a ground-breaking proposal" for a WTO-wide deal on the full elimination of tariffs on 43 products identified by the World Bank as environmentally friendly. The deal would come under the current "Doha" negotiations on trade liberalisation.
Much like the notion of a carbon import tax, however, the idea has not received wider international support. Bali conference delegates from developing countries in particular questioned the effectiveness and fairness of the plans.
Technology, adaptation and development
Improvements in clean technologies are seen as an efficient means to reduce the CO2 intensity of economic growth. But a debate on how such technologies would be financed is far from over, and the question remains a central concern for EU leaders, who have delayed difficult decisions on how 'strategic energy technologies' will be paid for.
In a July 2007 position paper, the EU industry group BusinessEurope argues that even if the EU ETS produces a stable, predictable and high carbon price, this alone "is likely to be insufficient" to stimulate the necessary investments in carbon capture and storage (CCS) and other technologies.
Technology financing problems are even more acute in developing states, and Bali provided for a special transfer mechanism to facilitate an increase in the use of environmentally friendly technologies.
Efforts to adapt to the unpreventable effects of climate change were also given a boost when negotiators in Bali agreed to allocate 2% of the proceeds from Kyoto Clean Development Mechanism projects into a fund designed to help developing nations deal with threats such as rising sea levels, desertification and biodiversity loss.
Using less energy: the low-hanging fruit
One option that is often neglected in high level negotiations on climate change but championed by industry is improving energy efficiency at all points in the life cycle of goods, services and energy production and consumption.
McKinsey, the business consulting firm, estimates that the growth of global energy demand can be slashed by 50% over 15 years without compromising economic growth. This would, however, occur under the condition that policy makers "terminate distorted policies, make the price and use of energy more transparent, create new market-clearing and financing mechanisms, and selectively implement demand-side energy policies (such as new building codes and appliance standards) while also encouraging demand-side innovation by companies", the company argues.
Trees and other flora, particularly in high-density concentrations such as rainforests, sequester carbon and are thus crucial for reducing atmospheric concentrations of GHGs.
Deforestation is therefore considered to be an important (indirect) source of CO2 emissions, a fact that was highlighted at Bali, where delegates agreed to expand on existing mechanisms under the Kyoto Protocol that provide incentives for developing countries to prevent deforestation on their territories.