Can Equity Enhance Efficiency? Lessons from the Kyoto Protocol

Abstract

This paper analyses the relationship between different equity rules and the incentives to sign and ratify a climate agreement. A widespread conjecture suggests that a more equitable ex-ante distribution of the burden of reducing emissions would provide the right incentives for more countries - particularly big emitters - to accept an emission reduction scheme defined within an international climate agreement. This paper shows that this conjecture is only partly supported by the empirical evidence that can be derived from the Kyoto Protocol. Even though more equitable burden sharing rules provide better incentives to sign and ratify a climate agreement than the burden-sharing rule implicit in the Kyoto Protocol, a stable global agreement cannot be achieved. A possible strategy to achieve a global agreement without free-riding incentives is a policy mix in which global emission trading is coupled with a transfer mechanism designed to offset ex-post incentives to free ride.

Keywords: Agreements, climate, incentives, negotiations, equity, policy, transfers

JEL Classification: H0, H2, H3