Policy Framework for Transition to a Low‐Carbon World Economy

Abstract

Climate change mitigation policy is the most difficult to come before our polity in living memory. There can be no solution without international agreement involving all substantial economies, and yet each country has an incentive to free ride on others. The international agreement must have five parts: agreement on the objective in terms of concentrations of greenhouse gases in the atmosphere, agreement on allocation of an emissions entitlements budget among countries, agreement on rules for international trade in entitlements, agreement on developed countries taking the lead on development of low‐emissions technologies, and agreement on assistance from developed countries for climate change mitigation in developing countries. Two sources of market failure must be corrected to achieve emissions reduction targets efficiently: the external costs of emitting greenhouse gases and the external benefits of private investment in innovation in relation to low‐emissions technologies.