Environmental Markets: Equity and Efficiency

The world's public opinion has been increasingly alarmed by the dangers posed by carbon dioxide (CO₂) emissions. The current level of emissions, if not curbed, could lead to relevant climate changes that might have disastrous effects on humanity. Chichilnisky [3] and Chichilnisky and Heal [4] offer a general review of the problem of CO₂ emissions. Such a complex issue can be analyzed from several viewpoints. This chapter focuses on the public good aspect. As CO₂ tends to distribute itself evenly in the atmosphere over time, in the long run it does not matter where on the earth's surface CO₂ originates; what matters is only the global amount of emissions. Carbon dioxide closely approximates a global public good.

To curb or at least slow the growth of CO₂ emissions, a mechanism needs to be devised to deal with the public good problem. Two possibilities are direct regulation and discouraging taxation. A third possibility, which forms the object of this chapter, follows the Coasian tradition and consists of distributing tradable emission permits.

I am grateful to Kenneth Arrow, Graciela Chichilnisky, Geoffrey Heal, Michael Smart, Valter Sorana, and David Starrett for their helpful comments.

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