Designing Global Climate Policy: Efficient Markets vs. Political Markets
Center for the Study of American Business Policy Study No. 143
60 Pages Posted: 15 Mar 1998
Date Written: December 1997
This paper addresses the choice of regulatory instrument for international control of global climate change. First, it examines the efficiency attributes of options including harmonized policy measures, international emissions taxes, and quantitative emissions reductions with internationally tradeable allowances. The paper argues that in the international context of voluntary assent, regulatory instruments not only must promote cost-effectiveness, but also must be designed to attract participation in the cooperative regime and to prevent emissions leakage. The paper suggests that a system of international allowance trading could best fulfill these objectives in concert.
Second, the paper addresses the international politics of climate policy. Individual countries and interest groups may favor globally inefficient policy in order to capture parochial rents. The interests arrayed against international allowance trading may include, among others, environmentalists who favor a high-cost policy on moral or social engineering grounds, and industrialized countries who would benefit from a high-cost policy that hurts them a little while it much more substantially raises their trade rivals' costs. Thus, global climate policy may confront a coalition of environmental baptists and predatory bootleggers. Meanwhile, some developing country diplomats may oppose international allowance trading because they feel their political status at home threatened by the empowerment of markets and the growth of the merchant class. Efficient global climate policy therefore requires both the selection of an efficient regulatory instrument and the cultivation of a political coalition for efficiency.
JEL Classification: F02, K32, K33, L51, Q00
Suggested Citation: Suggested Citation