Global climate change and the equity–efficiency puzzle

Alan S Manne,Gunter Stephan

doi:10.1016/j.energy.2004.07.007

Abstract

There is a broad consensus that the costs of abatement of global climate change can be reduced efficiently through the assignment of quota rights and through international trade in these rights. There is, however, no consensus on whether the initial assignment of emissions permits can affect the Pareto-optimal global level of abatement. This paper provides some insight into the equity–efficiency puzzle. Qualitative results are obtained from a small-scale model; then quantitative evidence of separability is obtained from MERGE, a multiregion integrated assessment model. It is shown that if all the costs of climate change can be expressed in terms of GDP losses, Pareto-efficient abatement strategies are independent of the initial allocation of emissions rights. This is the case sometimes described as ‘market damages’. If, however, different regions assign different values to nonmarket damages such as species losses, different sharing rules may affect the Pareto-optimal level of greenhouse gas abatement. Separability may then be demonstrated only in specific cases (e.g. identical welfare functions or quasi-linearity of preferences or small shares of wealth devoted to abatement).

Highlights

Global climate change is a public good problem
The following analysis is based on MERGE
MERGE combines a bottom-up representation of the energy supply sector together with a top-down perspective on the remainder of the economy

Summary

Introduction

Global climate change is a public good problem. Rich and poor, all live in the same greenhouse. The Coase Theorem formulates conditions that assure Paretoefficiency through voluntary cooperation It states conditions under which it is feasible to separate the issue of efficiency from that of equity: If, for example, each region’s willingness-to-pay for a public good is independent of its level of income, the optimal quantity of the public good is uniquely determined. If we are to follow a logical policy, we must balance the economic costs of abating greenhouse gas emissions against the potential benefits from slowing climate change This explains, why in the model formulations proposed by Nordhaus (1991) and others, the benefits of abatement enter directly into the economy-wide production functions. It is possible to obtain quantitative evidence of separability

Separability - a simple analytical treatment

Abatement benefits affect net production only

Abatement benefits affect both utilities and production

The MERGE Model

Findings

A short model overview