Equity, Emissions Allowance Trading and the Paris Agreement on Climate Change

Abstract

The Conference of the Parties to the UN Framework Convention on Climate Change (COP21), held in Paris in December 2015, resulted in voluntary greenhouse gas (GHG) reduction pledges, independent of each other, by 195 countries. The purpose of this paper is to analyze the equity implications of this “bottom-up” approach to climate change negotiations in two major ways. First we analyze the GHG reduction targets specified in the COP21 agreement prior to any emissions trading in terms of the Gini Coefficient equity metric. We also compare the pledges with specific equity principles proposed by developing countries for many years, such as the Egalitarian and Ability to Pay equity. Second, we analyze the equity outcomes after emissions trading takes place for a sample of countries/regions. We find that international policy coordination through a system of tradable GHG emissions allowances can greatly lower the cost to all participants of reducing atmospheric concentrations of greenhouse gases. An emissions trading system involving all countries and regions that made unconditional pledges at COP21 could reduce total GHG mitigation costs from an estimated $1.71 trillion to $0.4 trillion (in 2015 dollars), a savings of 77%. The ensuing allowance sales revenues would greatly enhance the capability of lower-income countries to meet their COP21 pledges. Moreover, the cost-savings in high-income countries would facilitate contributions to the promised fund of $100 billion per year to assist climate policy implementation in low-income countries.