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Global tradable carbon permits, participation incentives, and transfers

By Bjorn Larsen and Anwar Shah

Abstract

Most OECD countries have committed themselves to stabilizing their carbon emission at 1990 levels by the year 2000, and some to reducing emissions to 80-90 percent of 1990 levels by the years 2005 and 2010. Most non-OECD countries are reluctant to reduce emissions to combat global climate change. They argue that such policies would forestall their development, that the stock of greenhouse gases in the air is primarily from historical emissions from OECD countries and the former Soviet Union, and that those countries should be made to bear the cost of such abatement policies. The authors evaluate alternative permit allocations for a global tradeable permit regime designed to minimize the cost of stabilizing world carbon emissions from fossil fuel combustion at 1987 levels by the year 2000. They find that an important cross-section of countries would have little incentive to participate in a treaty based on such widely discussed forms of permit allocations as permit allocations by Gross Domestic Product, by population, or by some combination of the two. To encourage participation, it is proposed that each non-OECD country be allocated permits equivalent to its projected baseline emissions - and that OECD countries be allocated permits equivalent to the world emissions target minus the permit allocation to the non-OECD countries. Such a scheme recognizes that OECD countries have a higher willingness to pay for increasing reduction and that non-OECD countries have a smaller historical"global emissions debt."Under the proposed regime, the authors find that the cost of emissions reduction for OECD countries would be about 50 percent lower than unilateral reductions would be, and that non-OECD countries would also realize substantial net gains from participating in such a global treaty. Moreover, that global treaty would be 68 percent less costly worldwide than would realizing the same target through unilateral reductions by the OECD countries.Carbon Policy and Trading,Environmental Economics&Policies,Energy and Environment,Climate Change,Montreal Protocol

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