Efficient International Agreements for Reducing Emissions of CO 2 *

Abstract

International agreements are necessary to achieve significant reductions of emissions of C02 and other greenhouse gases. Traditional agreements of the type “uniform percent reductions” have two disadvantages: in the first place, it would probably be difficult to get a sufficiently large participation in such an agreement, since it gives a distribution of costs of reducing emissions which may differ strongly from the advantages the countries have from avoiding climatic changes. In the second place, agreements of this type are generally not efficient.

An international C02 tax and tradeable CO2 quotas are two alternative schemes which have several common features, and which both are (almost) efficient under reasonable conditions. With appropriately chosen tax reimbursements in the case of a C02 tax, or initial distribution of quotas in the case of tradeable quotas, it is possible to make all, or at least almost all, countries better off with the agreement than without.