Equity and the Kyoto Protocol: measuring the distributional effects of alternative emissions trading regimes

Abstract

This paper offers a few preliminary steps in bringing the equity implications of building global emissions trading, Annex B trading only, and no trading to the fore as an issue to be considered in the negotiations of how to implement the Kyoto Protocol. All three policy regimes worked within the Charles Rivers State Impacts Assessment Model to make the distribution of per capita gross state product across the United States worse than it would be otherwise, but not significantly. In terms of the distribution of per capita consumption across the states, though, all three of the policy alternatives worked to improve equity (even more) modestly with the largest improvement associated with the “No Trade” option. The equity implications of alternative trading regimes were far more striking in the global context. Global trading did sustain the highest mean in per capita consumption, but the “No Trade” and “Annex B” trading alternatives reduced significantly the underlying inequity in the distribution of per capita. Weighted by a logarithmic utility function, the present value of the certainty equivalent level of mean per capita consumption would fall by more than five times the efficiency gain if global trading were allowed instead of limited Annex B trading. Moreover, this measure of willingness to pay to avoid inequity would be more than eight times larger than the efficiency gain if global trading were chosen over the “No Trade” alternative. The estimates reported here are, of course, highly speculative and extremely model-specific. Different models and, more importantly, different allocations of permits within the United States and/or across the globe would produce different results. The results do not mean that global trading in emissions permits should be shelved because the equity properties are so poor. Much like the other studies that have identified issues that need to be monitored carefully in the design of mechanisms with which the signators of Kyoto Protocol might meet their commitments, though, they do emphatically add equity to the list of fundamental concerns that must be considered.