A 'Global Refunding System' to Fight Climate Change

bali climate change conference

Image courtesy of oxfam international via flickr

The message from the Bali climate change conference was clear: the road to ratifying a successor to the Kyoto Protocol will be a long and arduous one. Indeed, the difficulty inherent in brokering an international pact has led many countries to redouble their efforts to develop and enact national policies; most are understandably loath to relinquish any authority to an international body that may not have their best interests in mind.

A new plan put forth by Hans Gerbach, an economist at the Center for Economic Research at ETH Zurich, would foster an international framework, called the Global Refunding Scheme (GRS), that would allow states to determine their individual climate policies while simultaneously creating incentives for cooperation at the global level. Its provisions would be as follows:

* Countries decide whether they want to join the GRS. A country can join the GRS if it accepts the rules and levies a minimal carbon emission tax. Industrial countries pay an initial fee.
* In each period, every country belonging to the GRS independently determines its level of taxes on CO2 emissions. Emission taxes are the sole policy instrument a country is allowed to adopt. All tax revenues are collected in a global fund.
* In each period, the GRS refunds a share of the accumulated wealth to the participating countries. Each participating country receives an annual refund in proportion to the share of total CO2 emission reductions it achieves in the period under consideration.
* Non-refunded wealth of the GRS is invested in order to maintain funds for future refunding activities.
* In each period a country is allowed to exit. If a country leaves the GRS, it loses its right to refund.
* Decisions within the GRS are governed by majority rule.

Gersbach argues that the GRS would motivate countries to set higher tax rates in order to receive higher refunds; having paid an initial fee to join the pact, countries would be hesitant to leave and lose out on their refund claims. To encourage their participation, developing countries would be exempt from the initial fee; the refunding formula would also be designed in a way to favor them over more developed countries. The plan's main advantage, he stresses, is that it would give individual nations the flexibility to design their own policies and emissions rates.

The biggest challenges will come from coordinating an agreement on the framework's structure and, more importantly, the use of a carbon tax (still the subject of much contention). In addition, the GRS will require countries to share information about their tax regimes and per-capita emission levels to determine the refund claims. Determining an appropriate baseline for emissions levels will also be difficult, as will the general formulation of the refunding system which, in order to be effective, will need to carefully balance the participants' interests - particularly those of developing countries - to ensure their cooperation.

As Mark Thoma and some of his readers note, there is also the practicality aspect; will creating such a framework prove any easier than brokering a Kyoto-type agreement and will disputes over the refunding system sink its chances of being adopted (Gersbach does note several of his concerns in the footnotes)?

Via ::Economist's View: "Climate Policy with a Global Refunding System" (blog)

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