6.4.4 Equity, Participation, and International Policy Instruments
The participation of developing countries and EITs in the UNFCCC is important,
since these countries are both large future emitters of carbon, and sources
and potential sources of low-cost abatement investments (McKibbin and Wilcoxen,
2000). Since the participation of regions with low marginal abatement costs
may be critical for aggregate cost and emissions reduction, encouraging their
participation may require a serious consideration of the equity implication
of that policy (Morrisette and Plantinga, 1991). Unlike efficiency, there is
no universal consensus definition of equity by which policy instruments can
be evaluated. Recent research on equity, however, analyzed the welfare impacts
of climate policy alternatives to understand the participation incentives (for
different countries and regions) of various policy instruments (Bohm and Larsen,
1994; Edmonds et al., 1995; Rose et al., 1998).
The types and structures of mechanisms adopted (such as uniform taxes, tradable
quota, or individual non-tradable targets) affect the scope and timing of participation
in some predictable ways (Edmonds et al., 1995). For example, individual
non-tradable targets based on the stabilization of national emissions would
shift more than 80% of aggregate costs to non-OECD regions by 2020, making it
unlikely that these regions would participate in such an agreement (Edmonds
et al., 1995).
Alternatively, with a common global carbon tax and full participation, the
burden of abatement costs would be distributed unevenly across the world and
would change with time. A large burden would fall on OECD and economies in transition
in the early years, shifting to developing nations in later years (Edmonds et
al., 1995). Transition economies would thus be unlikely to participate in
a common global carbon tax agreement. If such nations were to participate in
the short run, growth and changing economic and political circumstances may
increase the probability of their dropping out of a tax agreement when they
face increasing net participation costs (Edmonds et al., 1995).
The equity implications of a global tradable quota system depend on quota allocation.
The portion of global abatement costs borne by a country or group of countries
depends on its relative position in the quota market; net sellers of quota effectively
receive income transfers from net buyers. Table 6.3 describes the relative position
of groups of countries in an international quota market, based on six possible
initial allocations (Edmonds et al., 1995).102
Of course, a country’s participation in an allocation scheme depends on
net costs (the sum of transfer payments associated with quota trade, plus direct
mitigation costs), not just the direction of income transfers. However, that
the direction of transfers may change over time, especially for China and the
transition economies, complicates the incorporation of equity goals in quota
system design (Edmonds et al., 1995). Although quota allocation is referred
to here, the analysis applies equivalently to redistributing international carbon
tax revenues (Pezzey, 1992; Rose et al., 1998).
Bohm and Larsen (1994) explore the participation implications of two of the
more frequently discussed of the allocation schemes listed in Table
6.3 (allocation by population and by GDP) for a quota regime covering Western
Europe and Eastern Europe. Both of these allocations, and combinations thereof,
lead to substantial losses by the Eastern European countries, making their participation
unlikely (Bohm and Larsen, 1994). Given the aggregate cost-savings associated
with their participation, an ideal allocation system would provide the minimum
possible participation incentive to the Eastern European countries, while maximizing
potential abatement cost savings to the western countries. The authors identify
this lower bound in terms of eastern country quota-to-emissions ratios that
would induce participation, ranging among countries from 0.85 to 0.91. This
incentive scenario results in zero net gains (losses) to the eastern countries,
and net costs to each western country of 0.09% of GDP. In the presence of wide
disparity in current regional economic welfare, the perceived equity benefits
of such a scenario may facilitate a more cost-effective agreement than any that
might be achieved without Eastern European participation.103
If quota allocations are used to induce participation by transition economies
and developing countries, the international wealth transfers that occur as a
result may cause fluctuations in real exchange rates and international capital
and trade flows (McKibbin and Wilcoxen, 1997a, 1997b). The magnitude of these
fluctuations and the extent to which they could be problematic are uncertain.
McKibbin and Wilcoxen (2000) suggest an alternative approach to the problem
of equity versus participation incentive, which includes both short-run emissions
quota and long-run emissions “endowments”. In this approach, the price
of emissions quota is set through international negotiation at regular intervals
(they suggest every decade), and each country issues as many quotas as necessary
to keep the price at the negotiated level. The price of emissions endowments,
however, is flexible, and the quantity allowed per country is fixed. Each participating
country’s endowment prices reflect expected future prices of emissions
quota.
