An "Ideal Kyoto Protocol": Emissions Trading, Redistributive Transfers and Global Participation

We demonstrate that an interregional policy scheme featuring trading of carbon dioxide emissions, redistributive resource transfers and global participation, a scheme which we call “Ideal Kyoto Protocol,” yields an efficient equilibrium allocation for a global economy. An altruistic international agency – say, the Global Environment Facility – should operate the resource transfer mechanism. In addition, regional governments should be able to make independent policy commitments regarding how to control regional emissions of carbon dioxide in anticipation of the redistributive transfers. Our efficiency result suggests that the USA should be “bribed” to reverse its decision of not participating in the Kyoto Protocol. Acknowledgements: We would like to thank Daniel Arce, Harvey Lapan, Todd Sandler and two anonymous referees for very helpful comments and suggestions, which greatly improved the paper. Silva also wishes to thank the Tulane Committee on Research Summer Fellowships for partially funding this research.