A Cost-effective Approach to Attracting Low-income Countries to International Emissions Trading: Theory and Experiments

The cost-effectiveness of the KyotoProtocol and any similar non-global treatywould be enhanced by attracting additionalcountries to international emissions tradingand achieving this as soon as possible. Incontrast to what is heard in most of thedebate, such an enlargement is here taken to beattained with the new participants, atleast to begin with, being fullycompensated. This paper focuses on twoforms of compensation that can be used toattract poor countries to participate inemissions trading. The theoretical aswell as experimental evidence suggests that, ifpoor countries are more risk averse than richcountries, partial compensation in terms offinancial transfers is more cost-effective thanrelying solely on compensation in kind –emission quotas – as has been the case so far.Using money for partial compensation would alsoreduce the risk for ``hot air'' allocations andthe ensuing political obstacles tocost-effectiveness that such allocations tendto create. Copyright Kluwer Academic Publishers 2002