Working Paper: NBER ID: w19644
Authors: Martin Weitzman
Abstract: Thus far, most approaches to resolving the global warming externality have been quantity based. With n different national entities, a meaningful comprehensive treaty involves negotiating n different binding emissions quotas (whether tradeable or not). In post-Kyoto practice this n-dimensional coordination problem has proven intractable and has essentially devolved into sporadic regional volunteerism. By contrast, on the price side there is a natural one-dimensional focus on negotiating a single binding carbon price, the proceeds from which are domestically retained. Significantly (and unlike negotiated quantities) the negotiated uniform price on carbon emissions embodies an automatic "countervailing force" against free-riding self interest by incentivizing agents to internalize the externality. The model of this paper indicates an exact sense in which each agent's extra cost from a higher emissions price is counter-balanced by that agent's extra benefit from inducing (via the higher emissions price) all other agents to simultaneously lower their emissions. With some further restrictions, the theoretical model shows that population-weighted majority rule for a uniform price on carbon emissions can come as close to global efficiency as the median marginal benefit (per capita) is close to the mean marginal benefit (per capita).
Keywords: carbon price; global warming; externality; international cooperation; climate change
JEL Codes: Q5; Q54
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Uniform carbon price (D41) | Internalizing global warming externality (D62) |
| Higher emissions price (Q52) | Agents lower their emissions (Q52) |
| Higher emissions price (Q52) | Additional costs for agents (L85) |
| Additional costs for agents (L85) | Benefits from collective emissions reduction (Q52) |
| Negotiating a single binding carbon price (D41) | Countervailing force against free-riding behavior (H40) |
| Median marginal benefit aligns closely with mean marginal benefit (D61) | Equilibrium price approaches global efficiency (D41) |