Objectives: In this paper we will critically review the reliability of Market-Based Instruments (Tradable permits and Pollution tax, and Hybrid Policies) to counter the problem of global climate change.
Methods/Statistical Analysis: By doing a survey of literature, graphical analysis of the carbon footprint of countries and studying past experiences at global and regional level, we will try to find the basic prerequisites needed for a market-based policy to work. We will then see whether or not these prerequisites conform at the global level.
Findings: We find that though MBIs have shown positive results at the regional level, the governments of those regions played an indispensable role behind the success of these policy instruments. At the same time, MBIs at the global level implemented after Kyoto Protocol failed in their aim to curb the emissions. In fact the data suggests that the carbon emission of the world actually increased after the Kyoto Protocol was implemented. The World Bank data on CO2 emissions also points towards carbon leakage from developed to developing countries. Hence, we agree with the general economic consensus that tradable permits and pollution tax can be powerful tools to curb emission at regional level. But, as the evidence suggest, we cannot rely on them to counter global climate change.
Application/Improvements: We propose that instead of relying on a single global policy, governments of regional trading blocs should establish their own MBI across the globe. Also, instead of carbon emissions, we must monitor the carbon footprint of nations so that leakages can be accounted for.