Economics versus Climate Change

This paper argues against the common-sense conclusion that climate change demands a global market-based solution, such as international emissions trading. First, current experience suggests global cooperation is not necessary for initial mandatory actions. Second, when domestic targets vary across nations, there are a variety of reasons why international emissions trading, even though it creates aggregate economic gains for all nations, may not be desirable. These reasons include concerns over legitimizing target variations for future negotiations, real and perceived consequences of capital flows across nations, and distributional impacts within nations. Finally, the underlying need for global technology solutions suggests domestic mitigation policies that balance clear emissions price signals, incentives for technology development and deployment, and mechanisms to finance deployment to developing countries. International efforts, in turn, might focus on encouraging these domestic actions, facilitating the developing country investment mechanisms, and providing credible reviews of national action.