The following is one proposal for negotiating Green Fund payments:
1. Linking the Green Fund to price. Because the uniform global price is only as high as the lowest price accepted by any country in the agreement, we need to focus on raising the lowest accepted price. This minimum is likely to be found in a poor country. (OPEC countries may need to be excluded.)
Hence, to achieve the strongest policy we should link the receipt of Green Funds to the acceptance of a high global price. The simplest way is to make the per-capita Green Fund (GF) disbursements proportional to the globally accepted price, P.
2. Linking the Green Fund to emissions. Of course we must also pay more to countries with a greater need. But remember that the payment formula must handle both contributions and disbursements, and it should be simple. It seems that if two countries are equally rich, but one emits twice as much, then it should make a larger contribution to the Green Fund. Similar a poor country that works hard at conserving energy should be rewarded for this.
The simplest way to achieve this effect is to define excess emissions, E, as actual per-capita emissions minus average per-capita emissions. For the US, this would be about 19 tonnes/person minus 5 tonnes/person or 14 tonnes per capita. And for India, E would equal about −4 tonnes per capita.
Per-capita Green Fund Payment = G × E × P
The generosity of the Green Fund depends on G. If G = 0.05, E = −4t/year, and P = $40/t, then the GF payment per Indian citizen would be 0.05 × 4 × 40 = $8/year. Since the average Indian emits 1 t/year, their carbon-price revenue would be $40/year. But remember, revenue is not cost.
Why the Cost is Cheaper than it Looks. Recall that the carbon revenues are not lost. In fact, for simplicity, assume a $40/t carbon tax that is refunded on a per-capita basis. At first, there may appear to be no cost at all, since consumers get back all the taxes they pay. However, there is a cost to adjusting to the tax and emitting less carbon. Assume that emission would have been 1.2 t/year without the tax. No one will spend more than $40 to avoid a tonne of emissions, and the first small abatements will have no cost, so the average cost of abatement is $20. And the total cost of abatement is 0.2 t × $20/t = $4/capita per year, only half as much as the GF payment received. In this example, India’s climate policy would cost it nothing. It would come out ahead.
Summary. Green Fund payments are needed to induce poor countries to vote for and accept a strong global price. By coupling these payments to emissions per capita, they will automatically transfer funds from rich to poor and provide all participants with an added incentive to reduce emissions. Linking payments to price will induce poor countries to favor a higher price.