Common Tragedies

Thoughts on Environmental Economics

A novel, yet nascent, approach to coordinating international emissions reductions

Posted by Rich Sweeney on February 13, 2008

Over on Vox Hans Gerbach summarizes his idea for a Global Refunding System (GRS). The GRS attempts to reign in global externalities by providing incentives for actually reducing emissions once a country has entered the program. Gerbach’s system also avoids a plethora of coordination costs, by allowing each participant to set its own tax rates and targets. Here’s his summary of how the system works:

  • Countries decide whether they want to join the GRS. A country can join the GRS if it accepts the rules and levies a minimal carbon emission tax. Industrial countries pay an initial fee.
  • In each period, every country belonging to the GRS independently determines its level of taxes on CO2 emissions. Emission taxes are the sole policy instrument a country is allowed to adopt.2 All tax revenues are collected in a global fund.
  • In each period, the GRS refunds a share of the accumulated wealth to the participating countries.3 Each participating country receives an annual refund in proportion to the share of total CO2 emission reductions it achieves in the period under consideration.4
  • Non-refunded wealth of the GRS is invested in order to maintain funds for future refunding activities.
  • In each period a country is allowed to exit. If a country leaves the GRS, it loses its right to refund.
  • Decisions within the GRS are governed by majority rule.

Benefits of the GRS include incentives to reduce emissions and remain in the program after joining, as well as the system’s inherently flexible and likely redistributive properties. Costs include the ever present monitoring and informational costs, which will be exponentially greater at the international level.

I’m not entirely sure how the GPS would play out in practice, and I was unable to find and ungated version of the paper, Gersbach and Winkler (2007), which supposedly formalizes the GRS. There are certainly some interesting game-theory and political economy questions posed by such a system. On the PE side Gerbach mentions that GPS undermines national tax-sovereignty. I’m also a little skeptical of the notion that rich nations have to buy their way in whereas developing nations don’t. Seems like once you get down to setting that entry fee, we’re right back to the point that derailed Kyoto (at least if you believe W.). Nevertheless the GRS is an interesting idea and perhaps a useful starting point for future international climate negotiations.

One Response to “A novel, yet nascent, approach to coordinating international emissions reductions”

  1. Dallas Burtraw said

    At footnote 2, the description mentions that an emission tax is the sole policy instrument allowed. This is far from reality; far from enforceable. National, state and local governments have tremendous planning authority that directly effect emissions over time. Since this is unenforceable, a winning strategy might be to introduce a small carbon tax, collect relatively low revenues, pursue aggressive planning and voluntary, informational and educational policies, and collect “extra revenues” for reductions in excess of what is anticipated.

    One nice feature seems to be the incentive to perform, e.g. meet-or-exceed obligations.

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