Should Developing Countries Take on Binding Commitments in a Climate Agreement? An Assessment of Gains and Uncertainty*

Abstract

In this paper we explore whether efficiency gains obtained by developing countries participation in emission trading could offset the economic risks that would be incurred by taking on binding commitments when future emissions are uncertain. Such commitments would allow developing countries to participate in emissions trading, which has significantly lower transaction costs than the present Clean Development Mechanism (CDM). However, because future emissions cannot be known, commitments can become more costly for the developing countries than expected. Using a dynamic computable general equilibrium model, we analyse whether the efficiency gains obtained by participating in emissions trading can offset this risk. We find that the efficiency gains that can be obtained by developing countries might not be very large compared to the risks they incur. Developing countries might therefore have good reasons not to embrace binding commitments in order to participate in “cap and trade” emissions trading.