A Credible Foundation for Long-Term
International Cooperation on Climate Change
Warwick J. McKibbin, Australian National University
and Peter J. Wilcoxen, Syracuse University
Summary:
Warwick McKibbin and Peter Wilcoxen propose a system of parallel national-level capand-trade programs. Each country would determine its own emissions path and give
away long-term permits to regulated firms. Some of these long-term permits would be
perpetual and some would be term-limited (e.g., expiring several decades in the future).
A long-term permit grants the holder the right to emit one ton of carbon equivalent
annually. In addition, national governments may sell an unlimited number of annual
permits into their national markets at a pre-determined and internationally coordinated
price. Both long-term and annual permits are only valid in their country of issue; there
would be no international trading of emission permits. An international agreement would
provide guidance for the number of long-term permits governments could issue and
ensure harmonization in the price of annual permits. McKibbin and Wilcoxen
recommend that industrialized countries allocate long-term permits equal to a fraction of
1990 emissions, and developing countries distribute long-term emissions in excess of
their current emissions but less than forecast emissions. They also suggest that the price
of annual permits sold by governments could start at $20 per ton of carbon equivalent. A
country could employ an extreme version of this hybrid policy by allocating no long-term
permits and instead selling annual permits to cover all emissions in any given year, which
effectively reduces the program to an emission tax. Accession would only require that a
country establish a domestic cap-and-trade program and set its annual permit price in
accordance with other participating countries.
Pros:
The McKibbin and Wilcoxen proposal promotes cost-effective emission abatement
through the harmonized annual permit price. So long as the domestic cap-and-trade
programs are functioning well and at least one firm in every participating country
purchases at least one annual permit, then all sources face the same marginal cost of
abatement. The sale of unlimited annual permits at a pre-determined price (a safety
valve) ensures that costs are not unexpectedly high. The large wealth transfer associated
with the free allocation of long-term permits to the private sector creates a constituency
for maintaining the cap-and-trade program.
Cons:
The proposal by McKibbin and Wilcoxen requires every participating country to
implement the same domestic policy. Some countries may prefer to tailor their domestic
climate change mitigation efforts to their own institutions and preferences. The emission
commitments implicit in the long-term permit allocations may not be sufficiently
ambitious, which could become problematic if at some point in the future more stringent
emission caps will be necessary. Will governments have the resources to buy back longterm permits or the will to devalue permits if the science calls for more ambitious
mitigation efforts? The proposal also may not provide sufficient incentives for
developing country participation. The prohibition on international emission trading
eliminates the gains from trade in emission permits that could entice such participation.