a proposal to increase developing country participation in international climate policy 2004...

Environmental Science & Policy 7 (2004) 195–204

A proposal to increase developing country participationin international climate policy�

Laurent L. Viguiera,b,∗a Faculty of Economics and Social Sciences, University of Geneva, 1211 Geneva 4, Switzerland

b Swiss Federal Institute of Technology in Lausanne, Batiment Polyvalent, 1015 Lausanne, Switzerland

Abstract

The benefits from reducing greenhouse gases (GHG) emissions are not limited to a single consumer or group of consumers but areavailable to a large set of countries and populations across generations. Underprovision and free-riding are thus to be expected in the climatechange issue. Optimal provision of this type of public good requires creating incentives for international cooperation. Game theorists haveproposed to restructure incentives throughissues linkages consisting in exchanging concessions across different policy dimensions. In thispaper we discuss the opportunity to link climate change to international trade, technology R&D and diffusion, and greening developmentassistance. We propose another option, called the “rent-sharing” approach, that would guarantee meaningful participation of developingcountries (DCs) without challenging their economic development. Developing countries would have the opportunity to enter the emissionmarkets, and benefit from financial transfers, only if their agree with a rule that would guarantee a gainful domestic participation. Ournumerical example shows that China may be better off, while accepting a significant CO2 emission reduction effort.© 2004 Elsevier Ltd. All rights reserved.

Keywords: Climate policy; International cooperation; Issue linkage; Developing countries; Rent-sharing; Marginal abatement costs; International emissiontrading; CGE modeling

1. Introduction

Climate change mitigation tends to be undersupplied sincebenefits from reducing greenhouse gases (GHG) emissionsare not limited to a single consumer or group of consumersbut are available to all countries, people, and generations.Climate change depends on the total greenhouse gases in theatmosphere, not the releases of individual countries. Eventhough all countries would be better off if every countryparticipated to a global accord, each country has a unilat-eral incentive to supply only a limited quantity of emissionreductions. Free-riding problems are thus crucial in the cli-mate change negotiations (Barrett, 1990, 1994; Carraro andSiniscalco, 1992; Hoel, 1994). First, they put the stabilityof the Kyoto coalition at risk. The US withdrawal from theKyoto Protocol, and also the obstacles to ratification in Rus-sia or Australia, shows that the agreement is not quite sta-ble (Viguier, 2002). Second, they challenge the extension of

� Expanded version of a talk presented at the RFF/IFRI Meeting on“How to make progress post-Kyoto?”, Paris, March 2003.

∗ Tel.: +41-22-705-88-29; fax:+41-22-705-81-04.E-mail addresses: [email protected], [email protected]

(L.L. Viguier).

the existing coalition to developing countries (DCs)1 in thefuture.

The enlargement of the coalition to DCs in the next com-mitment periods will be a difficult task. Model-based anal-yses show that the most adverse effects of climate changeare likely to appear in developing countries (IPCC, 2001).Studies also show that we cannot expect to stabilize globalemissions and concentration of GHGs without DCs partici-pation; DCs emissions might rise from 31% of global emis-sions in 1990 to 60% in 2030 if nothing is done to departfrom business-as-usual scenarios (Blanchard et al., 2003).Moreover, our capacity to find a solution to DCs participa-tion will also play a key role in the stability of the Kyotoagreement. As an example, President Bush considers thatthe Kyoto Protocol is “fatally flawed” partly because it ex-cludes developing countries (Viguier, 2002). According tohim, Kyoto Protocol’s emission reduction requirements ap-ply only to industrialized countries whereas global warming

1 We refer to non-Annex I Parties to the United National FrameworkConvention on Climate change as opposed to Annex I Parties which arecommitted to reducing GHG emissions. We do not consider the fact thatdeveloping countries are not a homogenous group and their position inthe negotiations may greatly differ.

1462-9011/$ – see front matter © 2004 Elsevier Ltd. All rights reserved.doi:10.1016/j.envsci.2004.02.002

196 L.L. Viguier / Environmental Science & Policy 7 (2004) 195–204

is “a challenge that requires a 100 percent effort; ours, andthe rest of the world’s.” As far as the reduction of globalgreenhouse gases emissions is concerned, large emitters, likeChina or India, should not be exempted from any participa-tion.

But most of DCs are opposed to any commitment regard-ing absolute emission caps as long as industrialized coun-tries do not make real progress toward the actual goal ofcutting their GHG emissions. They legitimately refer to theprinciple of common but differentiated responsibility, as setout in Principle 7 of the Rio Declaration and reaffirmed inthe Kyoto Protocol (Article 10). This principle establishes acommon responsibility of all States to preserve, protect andrestore the health and integrity of the earth’s ecosystems;but it differentiates that common task by acknowledging theresponsibility of developed countries to support developingcountries in the pursuit of sustainable development. Climatechange does not feature prominently within the environmen-tal or economic policy agendas of developing countries (Beget al., 2002). Economic growth and reduction of poverty areof course the main priorities for DCs’ policy-makers. Set-ting legally binding emission targets for DCs is thus largelyexcluded from the negotiations. As an example, the recentDelhi Ministerial declaration says nothing on DCs partici-pation and insists on Annex I commitments and assistanceto the developing world.2

In that context, it is necessary to define cost-effectivestrategies for reducing global GHG emissions. Cost-efficiencyis a key element for the US, but not only them. The newinterest for emission trading within the European Unionshows that costs also matter in the old continent. The effi-cient production of climate change mitigation is importantfor the stability of the coalition itself. But DCs participationin climate change mitigation will also be easier if abatementcosts stay low. However, the desire for global productionefficiency must be tempered by considerations of equity.As said by AgnarSandmo (2003), “the production of pub-lic goods should be allocated among countries so as tominimize the global opportunity cost, though taking intoaccount distributional considerations.”

It is well-known that the absence of world governmentwith the authority to coerce States into implementing cli-mate change policies imposes to create incentives for coop-eration (e.g.Barrett, 1994). Provision of transnational pub-lic goods must be voluntary since States can be pressuredbut not forced to contribute to the supply of a transnational

2 For example, the ultimate statement of the Ministers and other heads ofdelegation present at the eighth session of the Conference of the Parties tothe United Nations Framework Convention on Climate Change (in Delhi)says that “Annex I Parties should further implement their commitmentsunder the Convention, including, for Annex II Parties, those relating to theprovision of financial resources, technology transfer and capacity-building,and demonstrate that they are taking the lead in modifying long-termtrends in anthropogenic greenhouse gas emissions, consistent with theultimate objective of the Convention, through the adoption of nationalpolicies and corresponding measures for the mitigation of climate change”.

public good (e.g.Barrett, 2003). In other words, interna-tional environmental agreements must beself-enforcing.3

Founded on the insights from the game theory, economistshave proposed to restructure incentives throughissues link-ages consisting in exchanging concessions across differentpolicy dimensions. Multilateral cooperation across differentissues gives the possibility to form agreements and to en-force them. Several authors have proposed to link interna-tional environmental agreements to international trade (e.g.Barrett, 1997, 1999), technology R&D and technology diffu-sion (e.g.Carraro and Siniscalco, 1996; Katsoulacos, 1996;Tol et al., 2000) or sustainable development and greeningdevelopment assistance (e.g.Beg et al., 2002; Toman, 2002).

In this paper, we propose a new approach that could guar-antee a meaningful participation of key developing coun-tries in the international effort to mitigate global climatechange. DCs participation in markets for tradable emissionpermits is linked with a voluntary domestic emissions re-duction. Flexibility mechanisms are not used as a “carrot”but rather as a tool for financial transfers and voluntaryparticipation. The conventional wisdom, saying that targetsmust come first, and that emission trading require targets,is thus challenged. This proposal departs from a traditional“cap-and-trade” regime since it is not based on the impo-sition of absolute emission caps. It is also different fromthe strict “baseline-and-credit” approach involving no realdomestic effort from DCs, and creating few incentives forparticipation of the host country.

In Section 2, climate change mitigation is characterizedas a pure-summation global public good.Section 3presentsand discusses existing proposals to restructure incentives forcooperation on climate change. InSection 4, we propose analternative option to facilitate cooperation of DCs. A numer-ical example is given in that section. The concluding sectionsummarizes the main features of the proposed institutionalarchitecture and introduces important caveats.

2. Climate stability as a global public good

2.1. The concept of global public good

The concept of public good is defined bySamuelson(1954)as goods which “all enjoy in common in the sensethat each individual’s consumption of such a good leads tono substraction for any other individual’s consumption ofthat good”. Contrary to private goods, benefits from provid-ing the public good are not limited to a single consumer orgroup of consumers but are available to all.

A taxonomy is now established in the literature on publicgood. A distinction is made between pure public goods, im-

3 The argument is that if the players reach an agreement about how toact against global warming, then a necessary condition for the agreementto hold up is that no player can benefit by changing his strategy whilethe other players keep their strategies unchanged (Nash equilibrium).

L.L. Viguier / Environmental Science & Policy 7 (2004) 195–204 197

pure public goods, club goods, and joint products (Cornesand Sandler, 1996; Sandler, 2003). Classically, publicgoods are defined as “pure” if they possess the propertiesof non-rivality and non-excludability. Non-rivalty meansthat benefits available to an individual consumer are alsoavailable to all other members of the group. Benefits froma public good are non-excludable if the provider of thegood cannot keep a non-payer from consuming the good’sbenefits.

The concept of public good has been recently extendedto the global level. A strict definition has been proposed byKaul et al. (1999): global public goods are goods whosebenefits extend to all countries, people, and generations. Ina broader sense, a public good is global when it benefitsto more than one group of countries and does not discrimi-nates against any population group or generation (Kaul andMendoza, 2003).

Another useful dimension of public goods concernsthe relationship between individual contributions and thegood’s overall supply level. Known as the “aggregationtechnology”, this property of public goods allows one todistinguish summation and weighted-sum technologies,weakest-link and weaker-link technologies, and best-shotand better-shot technologies (Sandler, 2003). The mostcommon way is to use summation technology, as for mea-suring CFCs, since the total reduction is simply the sumof each nation’s reduced emissions, with the gains equallyshared by all. In the case of summation technologies, pro-vision efforts are perfect substitutes: each unit contributedto the public good adds identically and additively to theoverall level available to all.

2.2. Climate change mitigation: a pure-summationglobal public good

Climate change mitigation is clearly a global public goodsince benefits from reducing GHG emissions are not limitedto a single consumer or group of consumers but are availableto a large set of countries and populations across generations.But one should refer to the “soft” definition of global publicgoods in the case of climate change. Indeed, it is shownin cost-benefit analysis that climate policies may have anegative welfare impact in some countries or regions (suchas Russia, Eastern Europe, India, China, and Africa) withhigh carbon intensities and/or high discount rates (Nordhausand Boyer, 1999).

Climate stability belongs to the category of pure globalpublic goods as benefits from GHG emissions reduction arenon-rival and non-excludable. All populations in the worldhave the ability to enjoy the improvement of the climate in-duced by a reduction effort in one country or region. Coun-tries and regions committed to reducing their emissions can-not keep the other from benefiting of it.

However, one should note that the environmental effi-ciency of one country effort to reducing GHG emissionswill ultimately depend on others’ behavior. As an exam-

ple, a “leakage effect” can occur when carbon restrictions(1) raise the production costs of energy-intensive goods andencourage firms to relocate, thus increasing emissions innon-participating regions, and (2) reduce energy demandswithin abating regions and induce a significant drop in worldenergy prices, which in turn could stimulate energy demandin non-abating regions. Several studies have shown that theleakage rate4 associated with implementation of the KyotoProtocol in 2010 might range from 5 to 30% (Viguier, 2001).It is also shown that US emissions of greenhouse gases in-crease under the Marrakech agreement (with the US out)compared to the business-as-usual scenario in 2010 becauseof the leakage effect (Babiker et al., 2002; Den Elzen andde Moor, 2001).

From this example, we might say that a public good is purewhen it is not only non-rival and non-excludable but alsonon-contingent: The stream of benefits from individual’s ac-tions to provide the global public good depends on other’sprovision. According to this definition, climate change mit-igation is a contingent global public good. The benefits ofa given country to mitigate climate change will depend onothers’ efforts and the size of the coalition.

Climate change mitigation is also a summation publicgood. Each ton of additional GHG emissions, and a fortioriemissions reduction, has the same impact on the climate,whatever the emitter and its localization. Because of thisproperty, the provision of this global public good is com-patible with the implementation of “Kyoto mechanisms”,namely emission trading, joint implementation (JI) and theclean development mechanism (CDM), used to lower eco-nomic costs of the agreements, and to increase the chanceof participation.

To conclude, underprovision and free-riding are thus to beexpected in the climate change issue for three main reasons:(1) nothing can be done to exclude non-payers from the ben-efits of one’s reduction effort (non-excludable); (2) units ofemissions reduction are perfectly substitutable (summationtechnology); and (3) the benefits from individual efforts maybe eroded by other’s behavior (contingents). Optimal provi-sion of this type of public good requires creating incentivesfor international cooperation.

3. Proposals for restructuring incentives

In theory, a global agreement could be reached by di-rect side payments that would provide incentive toward DCsparticipation (Carraro and Siniscalco, 1993; Germain et al.,1998; Germain and van Ypersele, 1999). But explicit sidepayments are usually very difficult to make in internationalpolitical decision making. One alternative solution is to com-bine the issue with another area of negotiations so that allparticipants gain from the agreement. As said beTollison

4 Leakage rate is the increase in emissions in non-Annex I countriesdivided by emission reductions in Annex I countries.


and Willett (1979), “by linking the two negotiations so thathigh benefits go to A in one area and high benefits go to Bin the other, there may be a possibility to secure agreementin both negotiations in a way that brings benefits to bothcountries and brings the outcome much closer to the aggre-gate efficiency or potential welfare frontier.” In other words,issue linkage is helpful when adding issues function as sidepayments. But the game is not trivial.Sebenius (1983)showsthat combining issues may also reduce or destroy a zone ofpossible agreement when the added issue is very conflicting,creates negative interactions, benefits only a subset of nego-tiators, or stimulates the formation of opposing coalitions.

3.1. Linking climate and trade

One option to create incentives for international coopera-tion on climate change could be to link this issue with inter-national trade. As shown byBarrett (1997), a credible threatto impose trade sanctions might be enough to sustain fullcooperation in international environmental agreements. Buttrade sanctions (e.g. import ban, restriction, or border taxmeasures) must be included through a minimum participa-tion clause if they are to be incentive compatible: the coali-tion has to be large enough to make accession attractive toevery country. Since the punishment strategy is credible, inequilibrium, no party deviates from the agreement and tradeis never restricted.

Trade sanctions might be intended to deter free-riding andto enforce compliance with the agreement (Barrett, 1999).The two problems are related but different: making coun-tries to comply with the agreement is one thing, incitingthem to enter in an agreement is another thing. However,Barrett (1999)demonstrates that punishment strategies, suchas trade sanctions, capable of deterring a unilateral defec-tion are hardly credible. The main reason for that is that thelarger the number of countries involved,N, the greater willbe the harm suffered by the (N − 1) countries called uponto enforce the agreement.

Can we imagine a threat of trade sanctions to enforcecompliance with the Kyoto agreement? First, one shouldconsider that neither the Framework Convention on ClimateChange (FCCC) nor the Kyoto Protocol contain a provisionon the imposition of trade sanctions against non-compliantParties. Trade sanctions against unilateral abandonment, i.e.the United States, are not likely since they are not authorizedby the agreement. Moreover, they would be challenged bythe defector for being in violation with the WTO trade treatyprovisions. Last but not least, a big “stick” is needed toenforce compliance of the climate change agreement. It isdemonstrated that such punishment strategies are generallynot credible as they are very costly for signatories who try toimpose full cooperation for a large environmental problem.

Is it appropriate to use trade sanctions to get DCs’ par-ticipation in climate change mitigation strategies? Can weimagine to harm developing countries that would not decideto mitigate their GHG emissions? We do not see how this

type of punishment strategies might be helpful in the con-flict resolution, and how it could facilitate a convergence ofindividuals’ perceptions. It would probably have a devastat-ing impact on the climate negotiations by creating very con-flicting and negative interactions. A more appropriate wayto proceed would be to use “carrots” rather than “sticks”.One could imagine to combine climate change with interna-tional negotiations over trade liberalization, or internationaldebt renegotiation, rather than imposing trade sanctions.

3.2. Linking climate and technology R&D

Several studies have considered the possibility to createlinkages between international environmental agreementsand R&D cooperation (Carraro and Siniscalco, 1996;Katsoulacos, 1996; Kemfert, 2002; Tol et al., 2000). Thebasic idea is to say that, if new technologies induced by thecooperation on R&D within the coalition can only be usedby members of the coalition, any country that leaves thecoalition suffers a welfare loss for not having the technologyavailable. These studies show that linking environmentalprotection and technology diffusion might help stabilizelarge coalitions, and create incentives for non-signatoriesto join the environmental agreement. However, these gametheoretic approaches clearly state that the threat is not cred-ible. The reason is the same as for trade sanctions: it hurtsthe coalition to exercise the threat; the larger the coalitionthe larger the costs of the punishment strategy.5

The main question in the climate context is the follow-ing: Are the benefits from R&D cooperation large enoughto deter free-riding? Can we count on this type of incen-tives to get the participation of DCs? As shown byTol et al.(2000), there are two limitations of using induced techno-logical change to stabilize and enlarge climate coalitions.First, game models investigating technological linkages as-sume that countries are interested by the new technologiespromoted by the coalition. But countries are mainly inter-ested in carbon-saving technology if they are committed toreducing climate change. It is generally not the case for DCs.Of course this conclusion might be tempered if one consid-ers that developing countries could be interested by increas-ing energy efficiency and by the secondary benefits of GHGpolicies (e.g. reduction of conventional air pollution).

Game models also assume that technology diffusion canbe restricted and that non-members can be excluded fromthe benefits of R&D cooperation. Is this assumption real-istic? It is really possible to implement such a punishmentstrategy in our globalized world? As highlighted byTol et al.(2000), there are four caveats to this: “Firstly, patents areroutinely pirated. Secondly, not governments but companieshold the patents. Thirdly, the USA is both reluctant to reducegreenhouse gas emissions and a major developer of technol-ogy. Developing countries, which would gain most of emis-

5 It is shown inTol et al. (2000)that incredibility may decrease if thecoalition is large compared to the size of the potential defector.


sion abatement, have the least technology to offer. Fourthly,the threat of excluding defectors from the technology poolshould be exercised automatically.”

3.3. Linking climate and sustainable development

Another option to enlarge the Kyoto agreement might beto exploit potential linkages between climate change andsustainable development in developing countries (Beg et al.,2002): synergies exist between climate change policies andthe sustainable development agenda in DCs, such as en-ergy efficiency, renewable energy, transport and sustainableland-use policies. If DCs are really interested to go for sus-tainable pathways, one should insist on the indirect bene-fits of climate change mitigation strategies. Climate changepolicies may contribute to DCs’ sustainable developmentthrough two main channels: ancillary benefits of GHG abate-ment and technology transfers obtained with project-basedinstruments such as the clean development mechanism.

Several studies (e.g.Burtraw et al., 2001; Krupnick et al.,2000; Pearce, 2000) have shown that climate change policymay have a number of other effects, called ancillary benefits,than reducing GHG emissions, including:

• benefits on health (e.g. morbidity and mortality) andecosystems (e.g. waste residuals and physical restructur-ing) due to the reduction of air pollution (e.g. nitrogenoxides, particulate and sulphur dioxides);

• social benefits associated with the reduction of otherharmful impacts such as traffic noise, traffic accidents,and congestion;

• possibly economic benefits such as employment changesand stimulation of technological change.

Case studies have shown a broad range of ancillary effectsinduced by climate change policies. Across countries, thevalue of these benefits ranges from around 2 dollars to morethan 500 dollars per tonnes of carbon abated (Beg et al.,2002). This wide range reflects a great diversity of estima-tion methods. It shows how difficult it might be to define afair baseline. As said byBurtraw et al. (2001), ancillary ben-efits are generally overstated since estimations are foundedon historical standards that ignore expected changes in thestandards (e.g. other environmental policies). One might alsochallenge the relevance of using health and economic stud-ies obtained in developed countries (Beg et al., 2002).

Beyond the methodological issues and the large uncer-tainty regarding ancillary effects, one should ask if linkagesbetween climate change and sustainable development in DCsreally creates positive incentives for action in the two area.First, climate policies may not be the most effective way toaddress health concern (Beg et al., 2002): raising the per-spective of ancillary effects of climate policies can reducethe incentive to implement more efficient domestic policiesto pursue sustainable development more broadly; policy de-cision are far more likely to be driven by health concern thanby climate change. Second, quantitative cost-benefits shows

that ancillary benefits may not be large enough to compen-sate all GHG abatement costs. Consequently, the linkagewith sustainable development would probably create posi-tive interactions and help negotiations with decision-makersfrom DCs but would hardly give enough incentive for com-mitment on climate change.

A transfer of resources is needed to finance GHG abate-ment projects with ancillary benefits. Experts have thus pro-posed to use the clean development mechanism, that allowsdeveloped countries to invest in projects that reduce emis-sions in developing countries to lower compliance costs, as atool for financial and technology transfers (Beg et al., 2002;Philibert, 2000). Do CDM projects create enough incentivefor DCs cooperation on climate change?

The first problem with CDM is that DCs do not get therent associated with the emissions reductions.6 The basicprinciple of the CDM is quite simple. It allows developedcountries to invest in low-cost abatement opportunities in de-veloping countries and receive credit for the resulting emis-sions reductions. Developing countries benefit from the in-creased investment flows, and possibly from ancillary ben-efits, but not from financial transfers. The transaction doesnot create trading gains as it is the case for emission per-mits. The investing country owns the emissions rights andpays only for the marginal costs. The fungibility betweencredits from the three Kyoto mechanisms would not makethings easier. It would give the investing country the op-portunity to sell emission rights from a CDM project in theinternational market for emission permits. Thus, developedcountries would get the trading gains, or the scarcity rent(Ellerman, 1998), that developing countries could have le-gitimately extracted. Consequently, the CDM would createfew incentive for cooperation. This tool is really helpful onlyif developing countries are committed to reducing air pollu-tion and stimulating technological change.

A second critical issue is the assumed link between CDMand technology transfers. As stated byParikh (2000), in mostcases, current practices on technology transfers do not allowthe recipient enterprises to accumulate new technology ca-pacities. Technology transactions are different from technol-ogy transfers. To increase the technology capacity of DCs,CDM projects should also enhance their capability to assess,select, import, assimilate, adapt and develop the appropriatetechnologies (Parikh, 2000). To ensure that the CDM hasan impact on technology transfer, each project should havetraining and capacity building components in order to getthe credit for each emission reduction (Parikh, 2000).

Finally, policy-makers from DCs are legitimately con-cerned by the risk of “giving up the low fruit” (Toman, 2002):having low-cost CDM projects undertaken early with inter-national partners and then not having these options avail-able later when or if binding commitments are undertaken

6 As explained byEllerman (1998), meeting the Kyoto targets createsa scarcity, and deciding who gets the associated rent to be allocated is afamiliar problem obstacle.


by DCs. This concern might limit the interest for linkingclimate change mitigation with CDM.

4. The “Rent-Sharing” proposal

The main problem with existing proposals is that thequantity, or “target and timetable” approach, is not chal-lenged. Linkages are proposed to increase DCs incentiveto accept absolute emission caps. Unfortunately, the equityissue is difficult to solve in the quantity approach adoptedin the Kyoto Protocol. The ethical dimension of climatechange mitigation is embedded in the question of emis-sions rights allocation. Continuing Kyoto would require aworldwide allocation of emissions allowances in the nextcommitment periods. Different allocation schemes are pro-posed in the literature (Blanchard et al., 1998; Grubb, 1995;Muller, 2001), but there is no possibility of identifyingjust one fair solution (Blanchard et al., 2003; Burtraw andToman, 1995; Cooper, 1998).

Considering this difficulty, some experts are supportinga more gradual approach where parties would negotiateand implement an “institutional architecture” rather thancommitments and targets (Schmalensee, 1996; Victor, 2001;Toman, 2002). According toSchmalensee (1996), the pol-icy architecture implicit in the alternative “broad then deep”approach “would place less stress on near-term emissionsreductions, which are of relatively little importance over thelong haul, and would concentrate instead on developing in-stitutions to ensure broad international participation in emis-sions abatement, which is essential to any serious effort.“Deepening” would involve later tightening constraints onglobal emissions and, perhaps, developing the institutionsnecessary to give teeth to “legally binding” emissions con-straints, when and if participating nations make a collectivedecision to do this.” As said byToman (2002), one shouldlook for aprocess rather than a formula right now.

Fig. 1. The rent-sharing approach.

4.1. The policy architecture

To sum up, the cap-and-trade (C&T) approach requiringto negotiate absolute emissions targets for DCs is probably adead end because of the equity issues. A baseline-and-credit(B&C) approach founded on the clean development mecha-nism would be easier to negotiate. But one needs to considerthat this option would have a poor environmental efficiencydue to high transaction costs, and low incentives for DCsparticipation because of the rent problem. Our alternativeapproach consists in creating “internal” linkages rather than“external” linkages. The challenge is to combine differentissues inside the climate area so that the climate treaty be-comes self-enforced.

Called the rent-sharing approach, it consists in linkingparticipation in emission trading with voluntary reductionof GHG emissions. Under this approach, DCs would havethe opportunity to enter the markets for emission permits,and benefit from financial transfers,only if their agree witha rule that would guarantee (1) a voluntary domestic partici-pation and (2) that the agreement will be welfare improvingfor them. The operational rule would be the following: Adeveloping country would have to make a domestic emis-sions reduction effort for every emission permit sold in themarket. The reduction effort would not be based on an abso-lute cap, but defined as a percentage,δ, of each ton exportedthrough emission trading. In other words, a fraction of theemission permits would have to be “banked” and definitelyremoved. The main point to negotiate would be the valueof δ, knowing that the corresponding emission rights wouldnever be sold;δ would be between 0 and 1.

In Fig. 1, we plot a marginal abatement cost (MAC) curveof a given developing country. To simplify the demonstra-tion, the MAC curve is linear. Given the international car-bon priceP, the DC may efficiently reduce its emissionsby Qt. Assume that the country is obliged to bank as muchas the quantity of permits sold in the market: the supply of


permits, Qs, is thus equal to the domestic reduction ef-fort, Qb. The direct gains from permits selling (area A) arealso equal to the total cost of the domestic reduction effort(area B). In that case, DCs participation has no effect on itswelfare.7 However, we show inFig. 1 that it exists a set ofPareto superior situations: it is beneficial for the developingcountry to enter the agreement as long as area A is superiorto area B; developed countries are also better off when theycan buy emission permits from DCs, whatever their domes-tic efforts. In other words, it is rational for a DC to accept adomestic effort if it is the only way to enter the emission trad-ing market, and if the direct gains from emission trading out-weigh the abatement costs associated with the permits thathave to be ripped out. The rent-sharing approach is designedto guarantee that developing countries will not be worse offby cooperating and that the agreement will be self-enforced.

The rent-sharing approach supposes emission caps in An-nex I countries in the next commitment periods in order toget a demand for tradable emission permits. A methodology,and an institutional framework, is also needed to determinenational and sectoral emissions baselines in DCs. Since DCswould produce and sell emission permits themselves in orderto get the gains from emission trading, it would be neces-sary to create an international fund that would provide loansand credits to support GHG reduction projects in DCs. DCswould be free to participate in the climate regime. But therule saying that “a fraction (δ) of each permit sold has tobe banked and definitely removed” would be applied if theydecide to participate. The negotiation would be concernedwith the value ofδ. Mathematically, this simple approachcan be expressed as below:

Qb = δQs (1)

whereQb represents the emission reduction effort of the de-veloping country,Qs the quantity of permits supplied by theDCs in the market, andδ the negotiated effort rate (0< δ <

1). According to this approach, the total emissions reduc-tion realized in the developing country,Qt, can be definedas follows:

Qt = (1 + δ)Qs (2)

This proposal is different from the “non-binding targetoption” (IEA, 2002; Philibert, 2000; Philibert and Pershing,2001). In the latter approach, DCs emissions budgets areequal to their reference emissions. Emissions allowancescan be sold if their actual emissions are less than their bud-get, but DCs do not have the obligation to buy allowancesif their emissions exceed their budget. The rent-sharing ap-proach corresponds to the “non-binding target option” onlywhenδ = 0. This approach is consistent with the Rawl’s ar-gument for maximin: it would maximize income gains of theworst-off group. Whenδ = 1, one is mainly concerned with

7 The result is true if we assume that the MAC curve is linear. If onesuppose an increasing convex cost curve, the gains from participationmay increase and could be positive whenQs = Qb.

minimizing the global cost of compliance for industrializedcountries. Between the two extreme points, the rent-sharingapproach offers a wide range of possibilities to reduce costswhile increasing DCs welfare. One could imagine that theclimate regime might pass from a transition period basedon the NBT option and move to the rent-sharing approach.

The rent-sharing approach is a policy option that couldlimit uncertainty faced by DCs. Emissions reductions wouldnot be based on an absolute cap defined ex ante, but wouldresult from agent’s decisions during the commitment pe-riod. Given the international carbon price and their marginalabatement costs, DCs would determine their level of permitssupply and consequently their level of domestic effort (ac-cording to their commitment regardingδ). It means that therent-sharing approach deals with uncertainty on costs butnot with uncertainty on the environmental outcome of thepolicy (Pizer, 1998; Weitzman, 1974).

One should note that this proposal might be a solution toget the participation from countries which are likely to sellpermits on the emission market but not for the others. Thus,it is a proposal to enlarge the coalition but certainly not toobtain a worldwide agreement.

4.2. A numerical example

In this section, we provide a numerical estimation of therent-sharing scenario. As inBernard et al. (2002)andHaurieand Viguier (2002), demand function for emission permitsfrom Annex B countries and the marginal abatement costcurves8 for Russia and the Ukraine are from GEMINI-E3, acomputable general equilibrium (CGE) model of the worldeconomy.9 The marginal abatement cost curves of China arefrom the POLES model, a partial equilibrium model of theworld energy system.10

8 Marginal abatement cost (MAC) curves are derived from economicmodels by setting progressively tighter abatement levels and recording theresulting shadow price of carbon or by introducing progressively highercarbon taxes and recording the quantity of abated emissions. A MACcurve plots the shadow prices corresponding to different level of emissionsreduction. MAC curves are upward-sloping curve: the shadow price ofemissions reduction rise as an increasing function of emissions reduction.

9 GEMINI-E3 is a recursive dynamic multi-regional general equilibriummodel of the world economy that has been designed to estimate marginalabatement costs, welfare costs of climate policies, and to simulate inter-national GHG emission trading. The model have been used extensivelyfor this purpose (e.g.Bernard and Vielle, 2003; Viguier et al., 2004).10 Since GEMINI-E3 did not provide a representation of China, we used

MACs from the POLES model. The POLES model is a partial equi-librium model of the world energy system. It works in a year-by-yearrecursive simulation and partial equilibrium framework, with endogenousinternational energy prices and lagged adjustments of supply and de-mand by world region. The model enables to produce detailed long-term(2030) world energy outlooks with demand, supply and price projectionsby main region, marginal abatement cost curves by region, and technol-ogy improvement scenarios with exogenous or endogenous technologicalchange (e.g.Criqui, 1996; Criqui et al., 1999; Criqui and Viguier, 2000).GEMINI-E3 and POLES belong to different modeling paradigms. Never-theless, they can produce comparable measures of the pure cost of carbontaxation (seeBernard and Vielle, 2003).


Fig. 2. Income gains of China in rent-sharing scenarios (0< δ < 1.5).

The demand of emission permits is assessed under a “Ky-oto Forever” scenario, implying that Annex B countries (ex-cept the US) are committed to a constant level of emissionsover time—the one set in the Protocol. We suppose thatemission permits are freely tradable in the international mar-ket. To simplify, the markets are supposed to be perfectlycompetitive. Finally, developing countries are representedby China. China remains free of any commitment but hasthe opportunity to enter a rent-sharing regime by 2020.

In Fig. 2, we plot China’s income gains in the rent-sharingscenario according to the level of domestic effort. As

Fig. 3. China’s domestic effort under different scenarios in 2030 (in MtC).

shown in the graph, the gains from trading range from1.5 billions of dollars in 2020 to 3 billions of dollars in2030 when the country can sell all permits without con-straint. This situation corresponds to the “non-bindingtarget option” since DCs have no obligation, but can sellemissions allowances if their actual emissions are lessthan their budget. The gains from trading are reducedwhen DCs have to bank a part of the emission permits.As expected, the effect is neutral when it is committed tobanking as much as what is sold in the emissions markets(δ = 1).


Table 1China’s supply, domestic effort, and income gains under three rent-sharingscenarios (in 2030) (in MtC)

δ Permits supply(MtC)

Domestic effort(MtC)

Net income gains(billion US$)

0.3 527 158 2.50.4 489 195 1.90.5 457 228 1.5

In Table 1, we show the simulation results for threerent-sharing scenarios. China’s supply is 527 MtC by 2030when it has to rip out 30% of its supply and 457 MtC whenδ = 0.5. Depending on the level ofδ, China’s domesticeffort ranges from 158 MtC to 228 MtC. The net incomegains are 2.5 billion of dollars whenδ = 0.3 and 1.5 billionof dollars whenδ = 0.5. The income gains are rather lim-ited because of the low level of carbon prices (10 US$/tCin 2020 and 15 US$/tC in 2030) due to the US withdrawalfrom the Kyoto Protocol. As shown inBernard et al. (2002)and Haurie and Viguier (2002), prices and gains mightincrease significantly if one assumes strategic behavior ofRussia and China in international emission trading.

In Fig. 3, we compare the reduction effort in Chinaunder a rent-sharing scenario and three worldwide sce-narios of differentiated commitments: the per capita con-vergence scenario, the relative responsibility scenario, andthe emissions-intensity target scenario (Blanchard, 2002).The reduction required in China ranges from 228 MtC to618 MtC in 2030 under the three allocation schemes. Un-der the rent-sharing scenario (withδ = 0.5), the emissionsreduction is 228 MtC if China enters the agreement in2020. It corresponds to the reduction required under theCO2-intensity targets scenario.

This numerical example tends to show that the rent-sharingapproach may provide meaningful participation by key DCsin the international strategy to mitigate GHG emissions. Inour example, China’s income might increase by around 2billions of dollars in 2030 if it voluntarily accepts to reduceits emissions by 100 MtC in the same period of time.

5. Concluding remarks

It is necessary to create incentives for worldwide coopera-tion in the climate change issue. In order to avoid underpro-vision and free-riding, it has been proposed to link climatenegotiations with trade, technology R&D or sustainable de-velopment. These strategies may create positive interactionsand facilitate negotiations with decision-makers from DCsbut would hardly give enough incentive for commitment onclimate change.

In this paper, it is proposed to negotiate a policy architec-ture that would increase participation of developing coun-tries in the international effort to curb GHG emissions. Thebasic idea is to link DCs entry in international emission trad-ing market with a domestic contribution to GHG emissions

reduction. It is shown that this “rent-sharing” approach maybe self-enforcing for some developing countries. They mayvoluntarily accept a significant level of domestic effort inorder to get financial transfers through emission trading.

The rent-sharing strategy would be helpful to get the par-ticipation of large DCs which may be in position to sellemission permits. It is a strategy to progressively enlargethe Kyoto coalition and to manage the transition toward adeeper approach. One could imagine a post-Kyoto scenariowhere large DCs (e.g. China, India, and Brazil) would ac-cept a “soft binding target option” (δ < 0.5). The climatechange regime would then be extended to other regions andprogressively hardened.

Acknowledgements

This study is supported by the Swiss National ScienceFoundation under the NCCR-Climate grant. Helpful com-ments and suggestions have been provided by Denny Eller-man, Alain Haurie, Maryse Labriet, and Cédric Philibert.

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Laurent Viguier holds a PhD in economics from the University ofGrenoble (France). He was a visiting fellow in the MIT Joint Program onthe Science and Policy of Global Change before moving to the Universityof Geneva and in the Swiss Federal Institute of Technology in Lausanne.He has published extensively in the area of climate change economicsand modeling. His current research focuses on Russian hot air and marketpower in international GHG emission trading, DCs participation in climatepolicy, the EU-wide emission trading system, and the Swiss CO2 law.

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