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How to Fix the Inefficiency of Global Cap and Trade

Peter Cramton () and Steven Stoft ()

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

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.

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: 20 pages
Date: 2012, Revised 2012
New Economics Papers: this item is included in nep-agr, nep-ene, nep-env and nep-res
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Published in The Economists’ Voice, 9, April 2012

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