A Dynamic Analysis of Fairness in Global Warming Policy: Kyoto, Buenos Aires, and Beyond

In December 1997, 34 industrialized countries signed the Kyoto Protocol committing to targets and timetables to reduce 6 greenhouse gases (GHGs). Why were the only signatories industrialized countries? Two reasons are usually put forth. The first is pragmatism, in that only this group, as opposed to developing countries, can afford the costs of mitigating GHGs. Still, this explanation is imperfect since 12 of the signatories are transitional economies of Eastern Europe and the former Soviet Union. The second reason is fairness, in that industrialized countries are responsible for the vast majority of the GHGs already built-up in the atmosphere and are responsible for over 60% of the current emissions. The fairness explanation is further supported by the fact that "differentiation" was invoked in Kyoto, i.e., not all signatories agreed to equal cutbacks, several citing special economic circumstances. In the future, both pragmatism and fairness will be relevant to the question of when and how developing countries will sign a global GHG agreement. Another major influence will be the pursuit of economic efficiency or, at least, cost-effectiveness, i.e., making sure that the targets are met at the lowest global cost. This can be fine-tuned in future agreements by the use of incentive-based instruments and the timing of commitments. Efficiency may also be affected by relative burden-sharing, since this will influence the number of countries that make mitigation commitments in the future. The purpose of this paper is to analyze fairness, or equity, aspects of the current Kyoto Protocol and its extension to a truly global agreement that includes developing countries. This is done in the context of a policy approach gaining increasing favor - tradeable emission permits. A dynamic model of intercountry CO2 permit trading is used to address the following questions: 1) To what extent does permit trading lower global CO2 mitigation costs? 2) How are intercountry welfare impacts influenced by alternative permit distributions according to various equity criteria? 3) How might developing countries be brought into the agreement without requiring CO2 reductions, yet promoting global efficiency gains by utilizing their relatively lower cost mitigation capabilities? 4) To what extent does allowing for permit trading over time further lower global mitigation costs? 5) How are intercountry welfare impacts distinguished by not just static definitions of equity but also dynamic versions, such as sustainability criteria?