Efficient Emissions Reduction

Abstract

We propose a simple mechanism capable of achieving international agreement on the reduction of harmful emissions to their efficient level. It employs a contest creating incentives among participating nations to simultaneously exert efficient productive and efficient abatement efforts. Participation in the most stylised formulation of the scheme is voluntary and individually rational. All rules are mutually agreeable and are unanimously adopted if proposed. The scheme balances its budget and requires no principal. The mechanism provides a benchmark result for the cost of the implementation of these desirable properties. In a more realistic setup which could potentially inform policy decisions, we discuss participation enforcement through punishment clauses, exclusive trade agreements and environmental standards as effective means to discourage free-riding.

Keywords: Climate policy, Contests, Efficiency

JEL Classification: C7, D7, H4, Q5