Regional Variation, Holdouts, and Climate Treaty Negotiations

Abstract

We develop a model of international agreements to price a transboundry externality and provide a new heuristic to aid in interpreting negotiation behavior. Under conservative assumptions a country's net benefits will be positive under an efficient pollution price if its share of global damages is less than half its share of world-wide abatement costs. We solve for a permit allocation scheme consistent with that heuristic such that every region will have positive net benefits in an agreement to price the pollution externality at the globally efficient level. We then apply this framework to climate change using regional data from Integrated Assessment Models and test the feasibility of a global climate change treaty. The results indicate that several regions have positive net benefits from a globally efficient price on carbon, including Western Europe, South Asia (including India) and Latin America. We then solve for a permit allocation scheme that should produce worldwide agreement on a climate treaty and show that allowing differential carbon taxes would produce tax rate differences of an order of magnitude. We argue that shares of global GDP might be an appropriate proxy for exposure to climate damages and a global climate treaty would be cost-benefit justified without transfers when viewed through that prism.

Keywords: Transboundry Pollution, Climate Change, International Climate Policy, Developing Countries

JEL Classification: Q54, F51, H23