Reconciling the Needs of Developing and Developed Countries in Climate Change Agreements: A Consumption-Based Approach

Abstract

This paper argues that the current deadlock in international climate negotiations stems from a fundamental flaw in the design of the Kyoto protocol and its proposed successors, which could be resolved through a different design. Specifically, rather than setting limits on the emissions produced in each country, the agreement should set limits on the emissions embedded in what is consumed in each country. As under the Kyoto Protocol, the limits could be enforced in each participating country with measures of their own choosing. A carbon pricing scheme, such as a carbon tax or emissions trading, applicable only to domestic consumption would be the obvious choice. The carbon price would, however, need to cover all domestic consumption, whether the product was produced domestically or imported. So as with today’s value-added taxes, it would need to be charged on imported products, and refunded on exported products.This change would greatly alter the economic incentives facing the participating countries and their economies. It would also help to clarify some basic issues of fairness for developing countries that are not easily dealt with under the conventional approach. The overall effect of the change would be to make it much easier to reach a strong climate change agreement that would be acceptable to both developing and developed countries, and that would be politically easier to implement and enforce in each participating country once it was adopted.