Side Payments of Exceptions: The Implications for Equitable and Efficient Climate Control

The Kyoto Protocol prioritizes equity in international climate control by exempting developing countries from compulsory emissions reductions, though at a loss to efficiency. Using game theoretic models, this paper demonstrates that an efficient climate treaty must provide side payments to countries with lower marginal abatement costs and (or) benefits to induce their cooperation. Therefore, if an efficient treaty directs side payments to developing countries to induce their participation, the treaty may also achieve equity in climate control. Policy makers should remember the equity and efficiency implications of side payments as extensions and/or alternatives to the Kyoto Protocol are considered.