Global Refunding and Climate Change

Abstract

We design a global refunding scheme as a new international approach to address climate change. Participating in the global refunding system requires an initial payment. It allows each country to set its carbon emission tax, while aggregate tax revenues are partially refunded to member countries in proportion to the relative emission reductions they achieve within a given period. The refunding scheme reduces the intertemporal climate change problem into a static public goods problem. In a simple model we show that a suitably designed global refunding scheme achieves the social global optimum, provided that all countries participate. We discuss several procedures to achieve initial participation.

Keywords: climate change mitigation, global refunding scheme, international agreements, incentive-compatible mechanisms

JEL Classification: H23, Q54, H41