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Kyoto’s Climate Game and How to Fix It

Peter Cramton () and Steven Stoft ()

Papers of Peter Cramton from University of Maryland, Department of Economics - Peter Cramton

Abstract: The Kyoto summit initiated an international game of cap and trade. Unlike a national policy, the essence of this game is the self-selection of national emission targets. This differs from the standard global public-goods game because targets are met in the context of a global carbon market. This changes the outcome of the notoriously uncooperative public-goods game. The equilibrium of the new game may increase or decrease total abatement. If it increases abatement the resulting carbon price will be no greater than the average public-goods price. Typically, high abaters in the public goods game will target more abatement in the cap-and-trade game, while low abaters will target less. Given such a dismal outcome the policy game should be changed to the global price-target game. In the same setting where cap-and-trade reduces abatement, this game induces optimal abatement. But, realistically, it must include a Green Fund whose strength is linked to the price target. This will induce poor countries to favor as high a price target as rich countries, reversing the polarizing and anti-cooperative tendencies of cap and trade.

Keywords: global warming; climate change; climate treaty; cap and trade; carbon tax; carbon price; public goods (search for similar items in EconPapers)
JEL-codes: Q54 Q56 Q58 H41 D78 (search for similar items in EconPapers)
Pages: 6 pages
Date: 2010, Revised 2010
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Published in Issue Brief, Global Energy Policy Center, August 2010

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