REDUCING THE GLOBAL EMISSIONS OF CARBON FAIRLY

Abstract

Many scholars have considered the problem of how to achieve an effective, efficient, and fair reduction of greenhouse gas emissions (GHG); the basic objective of this dissertation is to investigate how this can be accomplished. The analysis compares the economic effects of different approaches to allocating emission permits among countries to reduce global GHG concentrations to a specified target level by the end of a planning horizon. This dissertation introduces a new method, the Boltzmann distribution, for allocating emission permits. Simple yet versatile and flexible, this new method holds the potential for many economic and environmental applications. In addition, we evaluate three other allocation methods using three conventional fairness principles (Egalitarian, Sovereignty, and Rawls’s maximin). To compare the different allocation methods, a new model is developed that evaluates the economic effects of allocating the permits between two regions, representing developing and developed countries. The model uses a dynamic Stackelberg differential game-theoretic framework in which the leader, e.g., the United Nations, specifies the total number of permits issued and the allocation method. Given an allocation, each country must limit their emissions to the number of permits that they have from the initial allocation, plus permits purchased from the other country, and by investing in expensive, low-emission capital equipment. The model determines standard measures of welfare, such as utility, consumption and GDP, and the trading pattern between the two countries. Comparing the three conventional allocation methods, we find that the Egalitarian allocation (permits are proportional to population) is inferior, in terms of utility and consumption, to the Sovereignty allocation (permits are proportional to emissions) and the Rawlsian one. In fact, Sovereignty leads to the highest levels of utility and consumption for developing countries even though they receive many more permits under Egalitarian. A major reason for this finding is that under Sovereignty the both countries benefit from a higher volume of trade between the two countries. Using the Boltzmann distribution to allocate permits requires identifying an input variable and estimating a shape parameter given that variable. The three input variables tested are emissions, energy, and income. For each of these variables, the model is evaluated for a range of values for the parameter and the value that gives the lowest total social cost over the planning horizon is selected. Comparing the minimum social costs for the three input variables, emissions has the lowest value and is the variable selected for the Boltzmann distribution. Comparing the Boltzmann results with Sovereignty, the best of the three conventional criteria, shows that they are very similar, and there is no clear winner. The differences in utility levels are minimal for both developing and developed countries, although consumption is substantially lower for developing countries using Boltzmann. Both criteria are equally effective at reducing GHG concentrations, and the allocation of permits is also very similar. Hence, the Boltzmann distribution performs well, and the flexibility that it possesses makes it a potentially useful tool for other economic applications.