Environmental Markets: Equity and Efficiency

By Graciela Chichilnisky; Geoffrey Heal | Go to book overview

Chapter 4
Emissions Constraints, Emission Permits,
and Marginal Abatement Costs
Geoffrey Heal

4.1 Introduction

Should the marginal cost of emission abatement be equalized across countries? Do markets for tradable emission permits lead to Pareto-efficient patterns of emission abatement? Until recently, the standard answers to both questions were yes. However, Chichilnisky [4] and then, in a more general context, Chichilnisky and Heal [5] proved that the efficient abatement of carbon dioxide (CO2) emissions does not require the equalization of marginal abatement costs across countries. Equalization is required if and only if it is possible to make unrestricted and free lump-sum redistributions of wealth sufficient to equate the marginal social valuation of consumption in all countries. It follows almost immediately that markets for tradable emission permits do not lead in general to Pareto efficiency, as shown in chapter 3. Chichilnisky, Heal, and Starrett's central result there is that if a market for emission rights is introduced, then the manner in which the emission rights are initially distributed between countries is important for efficiency. To be specific they showed that only a finite number of ways of allocating a given total of emission rights between countries will lead to Pareto-efficient outcomes. Distribution and efficiency are linked in

I am grateful to Graciela Chichilnisky, Peter Sturm of the Economics Department of the OECD and Joaquim Oliveira-Martins, Economics Department, OECD for comments and suggestions. Financial support from the OECD, the Global Environment Facility of the World Bank, and NSF grant 93–09610 is also acknowledged. This chapter replaces an earlier paper entitled “Political Targets and Marginal Abatement Costs.” This version was written while the author was visiting the Beijer Institute in Stockholm. I am grateful to Karl-Göran Mäler for his hospitality and comments.

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