Poor countries should have to pay proportionally less to fix the climate than rich countries. But we need a common global price (to rich and poor) to achieve agreement on a strong policy. So to reduce the cost to poor countries, we need a Green Fund (GF) that transfers some wealth from the rich to the poor to reduce the burden on poor countries. That way a common price is acceptable.
Won’t a Green Fund break the “common commitment”?
If we treat countries differently by income or by some other quality, doesn’t that mean we are no longer negotiating a common agreement? Does that ruin the negotiating advantage of a common price commitment?
Not if we do it right.
If we negotiate a separate Green Fund payment from or to every country, then yes, negotiations will be as messy as always and will fail. So what we need is a Green Fund formula that is the same for everyone. Here it is:
Per-capita Green Fund Payment = G × XE × P
- G = generosity
- XE = excess emissions
- P = the global carbon price.
With this, negotiators only need to settle on two values (G and P) instead of one (P), which makes negotiations a bit harder, but nowhere near as hard as negotiating 200 GF payments with 200 countries.
How does this formula work?
Excess emissions are calculated from the same emissions data the UN already collects along with the populations of those joining the agreement. Suppose the average per-capita emission rate of those countries is about 5 tons per person per year. So if a country, like the US, emits 18 tons per person, then its excess emissions are 13 tons/person-year. Since this is positive the US will pay into the GF.
If India emits 2 tons/person-year, it XE = 2 – 5, or minus 3 tons/person-year. So it will be paid by the GF. A little math shows that with this formula, the total payments into the fund equal the total payment from the fund.
Obviously, the higher G is the more generous are the payments. So, G needs no explanation. We simply need to find a way to negotiate G and we’re done.
How should generosity, G, be chosen?
The standard approach would be to have a huge international argument about what is fair. But everyone in such an argument is biased by their own self-interest. Such arguments never end.
Instead of arguing about fairness, the countries should vote. And rather than having a committee nominate different levels of generosity, why not let every country simply name its preferred G. If 100 countries all name different Gs, then we average the 50th and the 51st highest and use that—the median vote.
Of course, poor countries will want a high G and rich, a low G. And with more poor than rich, it seems this voting scheme could produce a biased and extremely high value of G. But this tendency can be held in check as follows.
The entire pricing agreement is voluntary. So if the value of G is too high, rich countries will not agree to a high price or will not join the agreement, and little money will be transferred from rich to poor. Similarly, if G is too low, poor countries will not agree to a high price or will not join.
All countries will find that some compromise value of G will benefit them the most, so all votes should fall in the range of reasonable compromise, and the median votes that determine G will certainly be well within this range.
As an enhancement of this basic mechanism, one could restrict voting to a group of 10 or 20 countries that have the smallest absolute excess emissions. Remember that a country with zero excess emissions has no interest in G other than setting it to the value that gives the best (maximum) agreed-upon carbon price P.
How will Green Funds be spent?
Economics suggest leaving this up to the receiving country. But politics may dictate that green strings should be attached. Technology transfers should likely be part of GF payments as well, according to Weitzman and Nordhaus.
Why is the Cost Cheaper than it Looks?
This is best explained with a simple example calculation. Assume a $40/t carbon tax that is refunded on a per-capita basis. So far there is no cost at all to any country. Now assume people adjust by spending money (or effort with a monetary value) to avoid paying this charge.
Assume that emissions in India are 2 tons/person-year and that this price causes a 20% reduction in emissions. That’s a 0.4-ton reduction. Some reductions can be made at essentially no costs and no one will pay more than $40/ton to reduce emission, so the average cost of the reduction is about $20/ton of CO2 abated. So the cost of a 0.4-ton reduction is about $0.80 per person per year.