Fairness in a tradeable-permit treaty for carbon emissions reductions in Europe and the former Soviet Union

This paper evaluates the distributional implications of alternative permit allocations in a tradeable permit regime for carbon emissions reductions (20% below baseline) in 2010 for a region consisting of Europe and the states of the former Soviet Union (FSU). Participation in such a regime is expected to hinge on the “fairness” of the distributional consequences. We find that initial permit allocations by populationand/or GDP are unlikely to induce participation by most countries of Eastern Europe and FSU because of the net costs involved. We identify a set of initial allocations that would at least compensate these countries. A fair treatment of the countries in Western Europe (WE) is here one which equalizes net costs perGDP. For a wide set of cost functions for carbon emission reductions, the cost gains that WE would reap from a tradeable permit system relative to unilateral reductions by WE as a group are found to be on the order of 85 percent. This would imply, among other things, a significant increase in WE'scapacity to make further emissions reductions. Copyright Kluwer Academic Publishers 1994