A Class of Mechanisms for Financing a Green Fund Through Taxes on International Flights

Abstract

In this article I propose and analyze a new class of mechanisms, called ‘Contribution Contingent Green Fund Mechanisms’. These mechanisms are based on the financing of a green fund through taxes on international flights. It has often been proposed to finance climate change mitigation (e.g. Keen, Strand 2012) or climate change adaptation (Mueller, Hepburn 2006) through taxes on international flights. However, to my knowledge it has not been explored through which mechanisms this could best be done. In part 1 we define various versions of the Contribution Contingent Green Fund (CCGF) Mechanism. The CCGF would reward countries that contribute funds to it for their climate change mitigation actions. An important aspect is whether these reward payments be based on quantities (carbon emissions) or prices (carbon prices). To obtain the payoffs in the various mechanisms we firstly estimate the matrix of emissions from international flights between all pairs of countries, secondly use available estimates for parameters in countries’ emissions abatement costs and thirdly develop models that enable us to compute the welfare effects of various aviation taxes. We compute the maximal emissions reductions that the different classes of mechanisms can achieve through Nash equilibria at which all countries participate. We also define and study an equilibrium selection concept that is based on the assumption that countries act in the participation game based on their myopic incentives. We prove some general results that suggest that the predictions obtained from this equilibrium selection concept provide a lower bound on the extent of participation that will occur.