Carbon Emissions Trading and Equity in International Agreements

This paper explores the distributional consequences of alternative emissions trading schemes. It is argued that the distributional impact stems from the difference between two social welfare functions: the function which is implicitly maximised in a competitive market equilibrium and the function which is implicitly adopted when a given equity principle is chosen. An integrated assessment model is used to illustrate these findings, by simulating the introduction of various emissions trading schemes for the Kyoto protocol on the reduction of greenhouse emissions. It is shown that (1) changes produced on an equity index by the imposition of emission constraints (by country) may not be significantly higher than those obtained by the subsequent introduction of a market mechanism, and that (2) the various market regimes which could be adopted have quite different distributional implications. This revised version was published online in July 2006 with corrections to the Cover Date.