Market-Based Instruments: Efficiency and Challenges

This lecture discusses market-based instruments for reducing emissions, such as subsidies and tradable emissions allowances. It explores how these instruments impact the cost per tonne of CO₂ avoided and the overall reduction in emissions. The instructor explains the concept of windfall gains, the effect of price changes on emissions, and the dynamic perspective of emission reduction measures. The lecture concludes by highlighting the efficiency of market-based instruments in achieving emission reductions at the lowest overall cost, while also addressing challenges such as discrepancies in cost calculations and the need for continuous increase in CO₂ prices for total decarbonisation.