Internationally Tradeable Emission Certificates: Efficiency and Equity in Linking Environmental Protection With Economic Development

Ethics and the Environment, 5(1 ):61—75 Copyright © 2000 Elsevier Science Inc. ISSN: 1085-6633 All rights of reproduction in any form reserved. Udo E. Simonis Internationally Tradeable Emission Certificates: Efficiency and Equity in Linking Environmental Protection With Economic Development "The neat resolution of a free market that so beautifully reconciles buyers and sellers does so far not reconcile growthists and earthists. Something new is needed." Nathan Keyfitz I. THE IDEA AND ITS POLITICAL CONTEXT With respect to the formulation and implementation of a global climate policy, the "Berlin Mandate," the most important concluding document of the first Conference of the Parties to the Framework Convention on Climate Change, adopted on 7 April 1995, says the following: The Parties should protect the climate system for the benefit of present and future generations of humankind, on the basis of equity and in accordance with their common but differentiated responsibilities and respective capabilities...The global nature of climate change calls for the widest possible cooperation by all countries...; developed countries [should] set quantified target limitation and reduction objectives within specified time frames, such as 2005, 2010, and 2020. Finally, it states that "the process should begin without delay" (Berlin Mandate 1995, italics added). As regards "joint implementation," an instrument which affects both industrialized and developing countries, the Conference of the Parties decided to establish a pilot phase for activities implemented jointly among Annex I Parties and, on a voluntary basis, with non-Annex I Parties that so request internationally tradeable emission certificates. During this pilot phase, a framework should be established "for reporting Direct all correspondence to: U.E. Simonis, Wissenschaftszentrum Berlin, Reichpietschufer 50, D-10785 Berlin, Germany; Phone: 030-254-91-245; Fax: 030-254-91-247; E-mail: simonis@medea. wz-berlln.de 61 62 ETHICS AND THE ENVIRONMENT Vol. 5, No. 1, 2000 in a transparent, well-defined and credible fashion on the possible global benefits and the national economic, social and environmental impacts as well as any practical experience or technical difficulties encountered" (Berlin Mandate 1995, italics added). The idea for the present paper arose out of this complex context of ethics and environment . The specific question to be answered is the following one: What form should a future policy instrument for the reduction of greenhouse gas emissions take if it is to enable both global environmental protection and global development while satisfying both the criteria of economic efficiency and equity! The answer, which will be explained in the following, is: by creating a market where so far no market exists, that is, by introducing carefully designed internationally tradeable emission certificates. II. THEORETICAL CONTEXT Three main issues dominate the formulation of an international greenhouse-gas regime, in the form of a "Climate Protocol" within the Framework Convention on Climate Change that came into force in 1994: Efficiency, equity, and decision-making under uncertainty. And three policy instruments dominate the question of practical implementation of such a protocol: Introduction of an international carbon tax and/or CO2 charge, joint implementation, and tradeable emission certificates (Emissions trading1). The following discussion will cover all these instruments but will focus on the interactions between the equity issue and tradeable emission certificates. 1. International Emission Charges Pearce has summed up the arguments in favor of introducing a carbon dioxide charge or carbon tax as an instrument of a global climate policy (Pearce 1991).2 As his central argument Pearce cites Baumöl and Oates (1975), who pointed out that a tax allows total emissions to be reduced at minimum cost. A given tax will induce emitters with low marginal avoidance costs to reduce emissions, while those with high marginal costs will find it more appropriate to pay the tax. In general terms, taxes use the market mechanism to adapt in an optimum way to the greenhouse problem, while direct government regulation can, in the individual case, be extremely expensive. In a comparative study of the U.S., Tietenberg (1990) established that the average ratio of "command and control costs" to "least-cost measures" was 4:1. Pearce adds four further advantages of a carbon tax. First, the revenue gained allows other taxes to be replaced (neutrality of effect). Second, the potential revenue...