Negative effects of the interaction will be blamed on taxes---that prevents mainstreaming.

The interactions summarized in Table 1 lead to a series of examples of double regulation and double counting (Sorrell, 2003c). Unless resolved, these interactions could lead to substantial economic impacts for the affected groups, and/or threaten the overall environmental integrity of the policy mix. For example:

organizations eligible for the energy tax will also face electricity price increases as a consequence of the generators participating in the EU ETS. Under a number of simplifying assumptions, 8 an EU ETS allowance price of €€7/ tCO2 could increase average electricity prices by some 0.7c€€ /kWh, which is approximately equivalent to the current level of the tax.

the UK trading scheme allows a project to be awarded carbon credits for improving downstream electricity efficiency. But this action also ‘frees up’ allowances held by the electricity generators participating in the EU ETS. If the project credits are subsequently traded into the EU ETS, the cap will be breached and the environmental integrity of the scheme will be undermined.

To avoid these problems, the existing UK policy mix will need to be rationalized. But such changes are likely to create administrative costs for both government and industry. They are also likely to encounter resistance from a range of sources—particularly since none of the above instruments is more than 3 years old.

In the UK, as elsewhere, policy instruments resist replacement even when a more viable alternative is available. This inertia may derive from a number of sources. For example: a legislative framework will have been established which may be difficult to change; regulatory institutions will have been established, or responsibilities assigned to existing institutions; procedures and standards will have been established for functions such as monitoring, reporting, and verification; a network of private organizations will have become involved in implementation; and the target groups themselves will have invested substantial time and money in gaining familiarity with the policy instruments and putting the appropriate procedures in place. All these activities are separate from investment in abatement, but each will cultivate vested interests and encourage resistance to change. As a result, there is a strong possibility that many of these instruments will continue after the ETS has been introduced, whether or not this is helpful to overall government objectives. In the case of the UK, the government is reviewing the policy mix in the light of the EU ETS and is anticipated to make some small changes—such as exempting EU ETS participants from a portion of the energy tax. But a major overhaul of the policy mix does not appear likely, at least not before 2008. This means that policy interaction could have a determinate impact on the success of the EU ETS in the UK.

V. Summary and Conclusions

Policy interaction has been neglected within the economics literature, but is of central importance in determining the success of individual instruments and of the overall policy mix. This is particularly true within climate policy, where the introduction of a carbon ETS into an already overcrowded ‘policy space’ poses a particularly difficult challenge. In theory, cap-and-trade schemes should provide assurance of meeting an overall emissions target at least cost. It follows that, if we assume a perfect economy with no market failures, any instruments which directly or indirectly interact with a carbon ETS will raise overall abatement costs while providing no additional contribution to emission reductions. Hence, once a cap is in place, the rationale for introducing or retaining such instruments must rely upon either their contribution to overcoming market failures other than carbon externalities, or in delivering social objectives other than efficiency. Their contribution to emission reductions can no longer form part of their rationale.

Independently, the perm wrecks the COST BASIS: