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A liability approach to climate policy: A thought experiment

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  • Billette de Villemeur, Etienne
  • Leroux, Justin

Abstract

We observe that a Pigovian climate policy need not exact full payment of the social cost of carbon upon emission to yield optimal incentives. Following this insight, we propose the creation of a carbon liabilities market to address climate change. Each period, countries would be made liable for their share of responsibility in current climate damage. This yields first-best emissions patterns. Also, because liabilities could be traded like financial debt, it decentralizes the choice a discount rate as well as beliefs about the severity of the climate problem. From an informational standpoint, implementation relies only on realized harm and on the well-documented emission history of countries, unlike a carbon tax or tradable permits scheme, which are based on a sum of discounted expected future marginal damage. We offer a discussion of the differences between a liability scheme and a carbon tax along the dimensions of information, participation, commitment, intergenerational fairness, and exposure to risk.

Suggested Citation

  • Billette de Villemeur, Etienne & Leroux, Justin, 2016. "A liability approach to climate policy: A thought experiment," MPRA Paper 75497, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:75497
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    More about this item

    Keywords

    Carbon Liability; Climate Policy; Market Instruments; Pigovian Tax.;
    All these keywords.

    JEL classification:

    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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