Date of Award

6-2011

Document Type

Open Access

Degree Name

Bachelor of Arts

Department

Economics

First Advisor

Steve Schmidt

Language

English

Keywords

climate policy, emissions, carbon dioxide, trading

Abstract

The world climate policy debate has come to a political standstill between devel-oped and developing countries. They cannot agree on a “fair” manner to decide how much each country is allowed to pollute, and who should pay for pollution abate-ment costs. The United States and developed countries believe that all countries should participate and reduce their carbon dioxide emissions to their 1990 levels be-cause everyone will benefit. By contrast, developing countries believe that developed countries should be required to do the majority of the emission abatement because they cause the majority of the pollution. Carsten Helm [2008] proposed an unconventional emission trading scheme that uses fair division (or cake-cutting), a mathematical tool for dividing up a common resource in a manner that the recipients believe is fair. Helm sets out four equity cri-teria to be met by a fair division of pollution allowances–Pareto efficiency, individual rationality, stand-alone upper bound, and envy-freeness. He developed a fair divi-sion method, the “bounded Walrasian solution,” to meet these criteria. Each coun-tries appropriate transfer payment is determined from its marginal abatement cost curve and its initial pollution allowances. With Helm’s method, all countries partic-ipate in pollution abatement, but it turns out that developing nations are fully com-pensated for their incremental abatement costs through emission trading. The key difference between Helm’s scheme and a conventional cap-and-trade system is the stand-alone upper bound, which imposes that no country should be better off than if it consumes the entire common resource. My thesis examines Helm’s application of fair division equity criteria to the divi-sion of emission permits. I use actual carbon dioxide emission data and estimated marginal cost abatement data to simulate a market with a subset of ten countries. I apply Helm’s emission trading scheme to the simulated market and observe the re-sults. I analyze the market outcome and discuss whether this is a feasible solution for controlling global carbon dioxide pollution.

Download

Included in

Economics Commons

Share

COinS