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How to Fix the Inefficiency of Global Cap and Trade

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Abstract

Global cap and trade equalizes the price of emissions and leads to efficient abatement across countries, but sets the abatement level inefficiently low. It is set too low, because the global cap is the sum of individual country targets set on the basis of self-interest. The efficiency of a single price does not overcome the inefficiency of the public-goods problem inherent in global cap and trade. Fortunately, other policies lead to more cooperative and, hence, more efficient outcomes. Replacing the national quantity targets of global cap and trade with a global price target improves outcomes. To improve outcomes further, the price target is combined with a Green Fund. As we demonstrate by example, the Green Fund can induce cooperation between rich countries that want a high global price and poor countries that are more concerned with Green-Fund payments.

Suggested Citation

  • Peter Cramton & Steven Stoft, 2012. "How to Fix the Inefficiency of Global Cap and Trade," Papers of Peter Cramton 12cshtf, University of Maryland, Department of Economics - Peter Cramton, revised 2012.
  • Handle: RePEc:pcc:pccumd:12cshtf
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    File URL: http://www.cramton.umd.edu/papers2010-2014/cramton-stoft-how-to-fix-global-cap-and-trade.pdf
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    Cited by:

    1. Christian Gollier and Jean Tirole, 2015. "Negotiating effective institutions against climate change," Economics of Energy & Environmental Policy, International Association for Energy Economics, vol. 0(Number 2).

    More about this item

    Keywords

    global warming; climate change; climate treaty; cap and trade; carbon tax; carbon price; public goods;

    JEL classification:

    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • Q56 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environment and Development; Environment and Trade; Sustainability; Environmental Accounts and Accounting; Environmental Equity; Population Growth
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy
    • H41 - Public Economics - - Publicly Provided Goods - - - Public Goods
    • D78 - Microeconomics - - Analysis of Collective Decision-Making - - - Positive Analysis of Policy Formulation and Implementation

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