Cost-effective Approaches to Attracting Low-Income Countries to International Emissions Trading: Theory and Experiments

The cost-effectiveness of the Kyoto Protocol and any similar non-global treaty would be enhanced by attracting as many new countries as possible to integrational emissions trading and achieving these additions as soon as possible. This paper focuses on two forms of compensation that can be used to attract poor, risk-averse countries to participate in emissions trading. The theoretical as well as experimental evidence presented here suggests that, if poor countries are more cost-effective than relying solely on Assigned Amounts as has been the case so far. In fact, the theoretical argument for cost-effectiveness indicates that large parts of the Assigned Amounts to new participating countries should be replaced by financial transfers. Using money for partial compensation would aslo reduce the risk for 'hot air' allocations and the ensuing political obstacles to cost-effectiveness that such allocations tend to create.