T he D esign of C limate P olicy edited by Roger Guesnerie and Henry Tulkens Seminar Series The Design of Climate Policy CESifo Seminar Series edited by Hans-Werner Sinn Labor Market Institutions and Public Regulation Jonas Agell, Michael Keen, and Alfons J. Weichenrieder, editors Venture Capital, Entrepreneurship, and Public Policy Vesa Kanniainen and Christian Keuschnigg, editors Exchange Rate Economics: Where Do We Stand? Paul De Grauwe, editor Prospects for Monetary Unions after the Euro Paul De Grauwe and Jacques Me ´ litz, editors Structural Unemployment in Western Europe: Reasons and Remedies Martin Werding, editor Institutions, Development, and Economic Growth Theo S. Eicher and Cecilia Garcı ´ a-Pen ˜ alosa, editors Competitive Failures in Insurance Markets: Theory and Policy Implications Pierre-Andre ´ Chiappori and Christian Gollier, editors Japan’s Great Stagnation: Financial and Monetary Policy Lessons for Advanced Economies Michael M. 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Konrad, editors Pension Strategies in Europe and the United States Robert Fenge, Georges de Me ´ nil, and Pierre Pestieau, editors Foreign Direct Investment and the Multinational Enterprise Steven Brakman and Harry Garretsen, editors Sustainability of Public Debt Reinhard Neck and Jan-Egbert Sturm, editors The Design of Climate Policy Roger Guesnerie and Henry Tulkens, editors See http://mitpress.mit.edu for a complete list of titles in this series. The Design of Climate Policy edited by Roger Guesnerie and Henry Tulkens The MIT Press Cambridge, Massachusetts London, England ( 2008 Massachusetts Institute of Technology All rights reserved. No part of this book may be reproduced in any form by any elec tronic or mechanical means (including photocopying, recording, or information storage and retrieval) without permission in writing from the publisher. MIT Press books may be purchased at special quantity discounts for business or sales promotional use. For information, please e mail special sales@mitpress.mit.edu or write to Special Sales Department, The MIT Press, 55 Hayward Street, Cambridge, MA 02142. This book was set in Palatino on 3B2 by Asco Typesetters, Hong Kong and was printed and bound in the United States of America. Library of Congress Cataloging in Publication Data The design of climate policy / edited by Roger Guesnerie and Henry Tulkens. p. cm. (CESifo seminar series) Includes bibliographical references and index. ISBN 978 0 262 07302 8 (hardcover : alk. paper) 1. Climatic changes Government policy. 2. Climatic changes Economic aspects. I. Guesnerie, R. II. Tulkens, Henry. III. CESifo. QC981.8.C5D436 2008 363.738 0 7456 dc22 2008017557 10987654321 Contents Series Foreword ix Contributors xi 1 Synopsis of the Book 1 Roger Guesnerie and Henry Tulkens I Design of Climate Institutions 2 Improving on Kyoto: Greenhouse Gas Control as the Purchase of a Global Public Good 13 David F. Bradford 3 The Design of Post-Kyoto Climate Scheme s: Selected Questions in Analytical Perspective 37 Roger Guesnerie 4 Design of Climate Change Policies: A Discussion of the GPGP Approach of Bradford and Guesnerie 65 Sushama Murty 5 Untying the Climate-Development Gordian Knot: Economic Options in a Politically Constrained World 75 Jean-Charles Hourcade, P. R. Shukla, and Sandrine Mathy II Stability of Outcomes 6 Transfer Schemes and Institutional Changes for Sustainable Global Climate Treaties 103 Johan Eyckmans and Michael Finus 7 Parallel Climate Blocs: Incentives to Cooperation in International Climate Negotiations 137 Barbara Buchner and Carlo Carraro 8 Cooperation, Stability, and Self-enforcement in International Environmental Agreements: A Conceptual Discussion 165 Parkash Chander and Henry Tulkens 9 Heterogeneity of Countries in Negotiations of International Environmental Agreements: A Joint Discussion of the Buchner- Carraro, Eyckmans-Finus, and Chander-Tulkens Chapters 187 Sylvie Th oron III Policy Design 10 Economics versus Climate Change 201 William A. Pizer 11 Economics versus Climate Change: A Comment 217 Richard S. J. Tol 12 Absolute versus Intensity Limits for CO 2 Emission Control: Performance under Uncertainty 221 Ian Sue Wing, A. Denny Ellerman, and Jaemin Song 13 On Multi-period Allocation of Tradable Emission Permits 253 Katrin Rehdanz and Richard S. J. Tol 14 Optimal Sequestration Policy with a Ceiling on the Stock of Carbon in the Atmosphere 273 Gilles Lafforgue, Bertrand Magne ´ , and Michel Moreaux vi Contents IV Models and Policies 15 Mind the Rate! Why the Rate of Global Climate Change Matters, and How Much 307 Philippe Ambrosi 16 Leakage from Climate Policies and Border-Tax Adjustment: Lessons from a Geographic Model of the Cement Industry 333 Damien Demai lly and Philippe Quirion 17 The Global Warming Potential Paradox: Implications for the Design of Climate Policy 359 Ste ´ phane De Cara, Elodie Galko, and Pierre-Alain Jayet Index 385 Contents vii Series Foreword This book is part of the CESifo Seminar Series. The series aims to cover topical policy issues in economics from a largely European perspective. The books in this series are the products of the papers and intensive debates that took place during the seminars hosted by CESifo, an international research network of renowned economis ts organised jointly by the Center for Economic Studies at Ludwig-Maximilians- Universita ¨ t, Munich, and the Ifo Institute for Economic Research. All publications in this series have been carefully selected and refereed by members of the CESifo research net work. [...]... may change the price versus quantity debate, because a lot of the uncertainty about the costs of a quantity policy depends on the rate of growth of GDP, which is a priori difficult to forecast The cost of an intensity policy would then be less uncertain, and this could open the door to a reevaluation of the asserted superiority of price policy as compared with an intensity policy Indeed the authors... and the Kyoto Protocol He warns of the multiple dimensions of the design of internal policies Richard Tol offers his views on these issues in chapter 11 Next specific policy issues are put under theoretical scrutiny, namely in order of appearance: the choice of policy targets, the intertemporal aspects of carbon trade, and the optimal implementation of a sequestration policy In chapter 12 Ian Sue Wing,... Louvain-la-Neuve Contributors The Design of Climate Policy 1 Synopsis of the Book Roger Guesnerie and Henry Tulkens This book comes as the proceedings of a conference on ‘ The Design of Climate Policies,’’ held at the Venice Summer Institute of CESifo on July 22 and 23, 2005 David Bradford had initially accepted our invitation to give a keynote lecture to the conference When we learned of his tragic death on... questions of cohesion of the international community The papers in parts III and IV bring to the discussion theoretical dimensions (part III) and quantitative tools (part IV) of climate policy design Overview of The Chapters Part I presents the framework within which climate policies are implemented The opening chapter 2 is the unpublished piece that we had asked David Bradford to contribute for the conference.1... organizing to purchase the needed resources and, at the same time, figuring out how to spread the cost of paying for them among the countries of the world The idea is to identify the ‘‘needed resources’’ and work out a method to buy and pay for them 2.1.2 Property Rights The second basic idea is that of property rights The negotiation of the Kyoto Protocol, including, importantly, the COP3bis round in... collectively Often the definitions are complex For example, the rights of an owner of a piece of real estate property incorporate restrictions due to land use zoning rules In the jargon of economics, the basic policy problem, which has been pretty well settled in the case of real estate, is to design the property rights in such a way that, in practice, the social payoff is maximized (A classic exposition of this... both the allocational questions of the total emissions of greenhouse gases and the assignment of emissions to countries and enterprises, and the matter of the sharing of burdens and benefits from alternative arrangements The proposed system is conceived of as an alternative to the particular cap and trade plan put forth in the Kyoto Protocol If that protocol takes effect in the form it has after the. .. shortcomings of the standard Global Warming Potential index used for greenhouse gases Transversal Debates We now attempt to put the different contributions in the transversal perspective of some key debates of climate policies The debates that we single out have their roots in the present situation and refer to the real or imaginary shortcomings of the Kyoto Protocol We consider two of them: the first refers... gas emissions First, the enforcement is greatly simplified As will be seen, countries can freely choose the extent of their emission reductions in pursuit of the global emission objectives, just as suppliers of ordinary goods and services choose the extent of their ‘‘contribution’’ to, for example, national defense Second, the sharing of the burden of financing the global public good of greenhouse gas control... the second issue, timing, does creep in many chapters ´ In a sense, Lafforgue, Magne, and Moreaux are mainly concerned with optimal timing They address the question within a model that takes two simplified assumptions: first that the objective of climate policies is summarised in terms of a ceiling of concentration, second that the only means of action is the use of sequestration policy, the timing of . Contributors The Design of Climate Policy 1 Synopsis of the Book Roger Guesnerie and Henry Tulkens This book comes as the proceedings of a conference on ‘ The Design of Climate Policies,’’ held at the. editors Sustainability of Public Debt Reinhard Neck and Jan- Egbert Sturm, editors The Design of Climate Policy Roger Guesnerie and Henry Tulkens, editors See http://mitpress .mit. edu for a complete list of titles. pursued by the United Nations in the Framework Convention and the Kyoto Protocol. He warns of the multiple dimen- sions of the design of internal policies. Richard Tol offers his views on these issues