The Polluter Pays Principle and Cost-Benefit Analysis of Climate Change: An Application of Fund

23 Pages Posted: 13 Jun 2006

See all articles by Richard S. J. Tol

Richard S. J. Tol

VU University Amsterdam - Institute for Environmental Studies (IVM); Carnegie Mellon University - Center for Integrated Study of the Human Dimensions of Global Change; University of Hamburg - Centre for Marine and Climate Research (ZMK); Princeton University

Date Written: June 2006

Abstract

I compare and contrast five climate scenarios: (1) no climate policy; (2) non-cooperative cost-benefit analysis (NC CBA); (3) NC CBA with international permit trade; (4) NC CBA with joint and several liability for climate change damages; and (5) NC CBA with liability proportional to a country's share in cumulative emissions. As estimates of the marginal damage costs are low, standard NC CBA implies only limited emission abatement. With international permit trade, emission abatement is even less, as the carbon tax is reduced in countries with fast-growing emissions, and because a permit market ignores the positive, dynamic externalities of abatement. Proportional liability shifts abatement effort towards the richer countries, but away from the fast-growing economies; again, long-term, global emission abatement is reduced. Joint and several liability would lead to more stringent climate policy. These findings are qualitatively robust to the size and accounting of climate change impacts, to the definition of liability, and to the baseline scenario.

Keywords: Climate Change, Cost-benefit Analysis, Liability, Permit Trade

JEL Classification: Q540

Suggested Citation

Tol, Richard S. J., The Polluter Pays Principle and Cost-Benefit Analysis of Climate Change: An Application of Fund (June 2006). FEEM Working Paper No. 88.2006, Available at SSRN: https://ssrn.com/abstract=907456 or http://dx.doi.org/10.2139/ssrn.907456

Richard S. J. Tol (Contact Author)

VU University Amsterdam - Institute for Environmental Studies (IVM) ( email )

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Amsterdam, 1081 HV
Netherlands
+31 20 444 9555 (Phone)
+31 20 444 9553 (Fax)

Carnegie Mellon University - Center for Integrated Study of the Human Dimensions of Global Change

Pittsburgh, PA 15213-3890
United States

University of Hamburg - Centre for Marine and Climate Research (ZMK)

Troplowitzstrasse 7
D-22529 Hamburg
Germany

Princeton University ( email )

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Princeton, NJ 08544-0708
United States

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