Global Climate Change and the Equity-Efficiency Puzzle

There is a broad consensus that the costs of abatement of global climate change can be reduced efficiently through the assignment of quota rights, and through international trade in these rights. But there is no consensus on whether the initial assignment of emission permits can affect the Pareto-optimal global level of abatement. This paper provides some insight into the equity-efficiency puzzle. Qualitative results are obtained from a small-scale model, and then quantitative evidence of separability is obtained from MERGE, a multi-region integrated assessment model. It is shown that if all the costs of climate change can be expressed in terms of GDP losses, Pareto-efficient abatement strategies are independent of the initial allocation of emission rights. This is the case sometimes described as "market damages". If, however, different regions assign different values to non-market damages such as species losses, different sharing rules may affect the Pareto-optimal level of greenhouse gas abatement. Separability may then be demonstrated only in specific cases (e.g. identical welfare functions or quasi-linearity of preferences or small shares of wealth devoted to abatement)International climate policy; Global climate change

US Rejection of the Kyoto Protocol: The Impact on Compliance Costs and CO 2 Emissions

Despite the US rejection of the Kyoto Protocol, the meeting of the parties to the UN Framework Convention on Climate Change in July 2001 has increased the likelihood that the Protocol will be ratified. This raises a number of issues concerning mitigation costs, particularly for the buyers and sellers of emission permits. In this paper, we examine how the US decision is likely to affect compliance costs for other Annex B countries during the first commitment period. We also explore the implications for US emissions. Key findings include: 1. Participating OECD countries may experience a decline in mitigation costs, but because of the banking provision contained in the Protocol, the decline may not be as great as some would suggest. 2. If the majority of 'hot air' is concentrated in a small number of countries in Eastern Europe and the former Soviet Union, these countries may be able to organize a sellers' cartel and extract sizable economic rents; and 3. Even in the absence of mandatory emission reduction requirements, US emissions in 2010 may be lower than their business-as-usual baseline because of expectations regarding future regulatory requirements.