A fair mechanism for the efficient reduction of global CO2 emissions in a decentralized world

Because of the public good character of global emissions it is difficult to implement reduction targets as formulated at Toronto or Rio. This paper presents a simple mechanism for inducing efficient contributions to the reductions of emissions as a non-cooperative equilibrium. The world is partitioned into groups of countries, and then each country is taxed or subsidised according to its relative performance in the group. We estimate abatement cost- and benefit functions for 135 countries and simulate the mechanism for different groupings of countries. The simulations show that the involved global budget is the smaller the finer the partition and the more equal the countries within a group. Moreover, with such a partition most countries profit from the mechanism so that broad political support may be expected. If groups are composed of unequal countries, then the mechanism leads to a more egalitarian distribution of world income and welfare.