Market Instruments and CO2 Mitigation: A General Equilibrium Analysis for Spain

The study compares different market instruments for CO2 mitigation in Spain, finding that cost-effectiveness depends heavily on the scope of the instrument and the specific sectors or fuels targeted. Using an AGE model, the author demonstrates that a 'complete market' for emission permits or a direct CO2 tax are the most cost-effective options. In contrast, narrow instruments—such as a tax on electricity or a permit market excluding energy-intensive industries—significantly increase the cost of achieving emission reductions in terms of GDP and utility loss. The results indicate that as CO2 reduction targets increase, the costs rise disproportionately, with some inefficient instruments costing up to 13 times more than the cost-effective benchmark.

• The most cost-effective instruments for CO2 mitigation are the 'complete market' for tradeable emission permits and the 'CO2 Tax', both of which ensure the marginal cost of mitigation is equal across all agents.
• Mitigation costs increase as the scope of the emission permit market narrows; for example, a 25% reduction in emissions results in a 0.6% GDP drop with a complete market, but a 0.96% drop when restricted to Energy Intensive Industries (EII).
• Excluding energy-intensive industries from a permit market significantly raises costs; a 'Non-EII' market would result in a 2.84% GDP drop for a 25% emission reduction because the cheapest mitigation options are ignored.
• Among price instruments, a tax on electricity is the most expensive option, as it fails to account for low-carbon electricity production technologies; for a 25% reduction, it can be up to 13 times more costly than a CO2 tax.
• The efficiency of an instrument is reflected in the resulting energy mix; cost-effective instruments reduce fuel consumption proportionally to carbon content, whereas a tax on oil increases the consumption of coal and gas.
• Mitigation policies generally trigger a structural economic shift toward the service sector, which is less CO2-intensive and helps offset overall macroeconomic losses.
• The study concludes that a hybrid approach—combining an emission permit market for energy-intensive industries with a CO2 tax for residential and transport sectors—may be an effective solution.

APA

González-Eguino, M. (2009). Market Instruments and CO2 Mitigation: A General Equilibrium Analysis for Spain. Basque Centre for Climate Change. https://www.bc3research.org/h6T8Uy8Nm4gFs0O/200910200203211861845978.pdf

Chicago

González-Eguino, Mikel. Market Instruments and CO2 Mitigation: A General Equilibrium Analysis for Spain. Basque Centre for Climate Change, 2009. https://www.bc3research.org/h6T8Uy8Nm4gFs0O/200910200203211861845978.pdf.

Wikipedia

{{cite report |last1=González-Eguino |first1=Mikel |title=Market Instruments and CO2 Mitigation: A General Equilibrium Analysis for Spain |publisher=Basque Centre for Climate Change |date=June 2009 |url=https://www.bc3research.org/h6T8Uy8Nm4gFs0O/200910200203211861845978.pdf |access-date=23 October 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{gonzlezeguino2009market, author = {González-Eguino, Mikel}, title = {{Market Instruments and CO2 Mitigation: A General Equilibrium Analysis for Spain}}, institution = {Basque Centre for Climate Change}, year = {2009}, month = jun, url = {https://www.bc3research.org/h6T8Uy8Nm4gFs0O/200910200203211861845978.pdf}, urldate = {2026-10-23}, note = {Indexed by Climate Insights Directory} }