Does Distribution Matter? When Flexibility, Equity and Efficiency in Greenhouse Gas Abatement

Abstract

This paper analyses banking and borrowing of carbon emission rights within the framework of a simple, integrated assessment model. Breaking the world economy in just two regions it will be shown: (1) Increasing when-flexibility in greenhouse gas abatement through banking and borrowing of carbon emission permits has a positive effect on welfare for regions with a poor endowment in carbon emission rights, but negatively affects rich-endowed regions. (2) Intergenerational fairness advocates intertemporal flexibility in greenhouse gas abatement, irrespectively of the initial allocation of carbon rights. (3) Optimal carbon accumulation is not independent of the initial allocation of carbon rights. Different initial sharing rules clearly influence the development of atmospheric carbon concentration.Carbon rights; climate policy; integrated assessment; banking and trade