Making Carbon Emission Quota Agreements More Efficient: Joint Implementation versus Quota Tradability

Abstract

Given that a set of countries agree to keep their carbon emissions within certain national quota limits, the outcome would be a treaty in the tradition of the Rio Convention, only one step more demanding. This chapter discusses two additional measures to improve the efficiency properties of such a nontradable quota treaty. Both measures would allow committed countries to buy emission reductions from other countries as a way of partially fulfilling their commitments. One is “joint implementation”, which was supported by the Convention as an instrument capable of increasing the efficiency of commitments to limit carbon emissions. It is questioned here whether joint implementation between developed and developing countries would imply a considerable increase in efficiency. The other measure is to make national emission quotas tradable, which, in contrast, could significantly improve efficiency (to the extent that trade does), especially if developing countries with low abatement costs could be induced to participate. Here, we identify the circumstances under which quota tradability would allow developing countries to participate without subjecting them to risks of economic losses.