Equity in GHG Emissions

The UN climate change conference in Copenhagen next year will have to deal with two major questions: 1) what's the agreeable level of GHG concentration in the atmosphere, considering the costs and benefits of mitigating climate change, and 2) how can the cost of emissions abatement be allocated in an equitable and efficient manner, so that a treaty ratified by at least the world's largest emitters can be achieved. I have previously expressed my preference for a carbon tax over a cap-and-trade system. However, a carbon tax, although avoiding the immediate dispute over allocation of emissions allowances, would not avoid the question about efficiency and equity altogether.

I've been inclined to change my opinion about how the tax revenue should be used. I used to think every country should be able to decide for its own how to use the tax revenue (e.g. to lower taxes on labor or capital). However, a global fund for collecting carbon tax revenues could be a wiser choice at least in two respects: 1) the proceeds could be invested directly to emissions abatement where it's most efficient, and 2) the fund could act as means to transfer wealth to poorer countries with a higher marginal utility of consumption. There could be five year periods, after which the tax could be adjusted based on required level of emissions abatement and required amount of wealth transfer to compensate developing countries for their loss of wealth (stemming from the carbon tax) . The wealth transfers would not only be a matter of equity, but also one of efficiency as Chicilnisky and Heal (1994) and Sheeran (2006) have shown. There could be some graduation criteria, such as a GDP level, beyond which money would no longer transferred to a developing country. Of course, this solution raises other interesting questions which I'll deal with another Sunday.