CO2 Emissions Control Agreements: Incentives for Regional Participation

This paper explores the incentives for participation in international CO2 control agreements using tradable emission permits. We employ a welfare analysis in a two-region model to explore these incentives. The two regions are Annex-I (A-I) and Non-Annex I (Non-A-I). A key insight underlying the analysis is that emission permit allocations must not depart too far from optimal emissions paths, to avoid creating future incentives to drop out of the agreement. We find a range of permit allocations that improves the welfare of both the Annex-I and the Non-Annex I, and compare them with allocations based on regional population or GDP. In addition, we examine the implications of the Kyoto agreement in the context of this welfare analysis. We find that the Kyoto agreement transfers wealth from A-I to the Non-A-I, while failing to realize tile efficiency gains to be hoped for from an agreement to control CO2 emissions.