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How Should We Allocate CO2 Permits?—A Commentary by Ian Ayres ’86

The following commentary was published in The New York Times on September 29, 2008.

How Should We Allocate CO2 Permits?
By Ian Ayres ’86

Doug Kysar and I have a piece in Slate that suggests a way forward on the vexing problem of how to allocate CO2 permits. The problem is that rich and poor countries want very different permit allocations:

Generally speaking, richer nations want permit allotments that track historic emissions rates — essentially locking in their economic advantage by awarding permits based on how much a country is already emitting. Developing countries, in contrast, want permits allocated according to population size, with every person on the planet getting equal emissions rights.

Some representatives from poorer nations also point to the fact that countries have not contributed equally to the existing problem of global warming. They argue that the countries most responsible for the current state of affairs, like the United States, should get the fewest permits, since they have already spent their share of the planet’s GHG [greenhouse gas] budget.

The allocation stalemate is currently a deal killer. Of course, one response to the dispute is to convexify between the two systems: have some of the permits allocated according to historic use and others allocated according to justice concerns. We support this approach — but an important wrinkle is that we suggest branding the two types of permits:

Rather than debate endlessly about how to carve up the spoils from just one global GHG currency, why not separate GHG permits into different brands based on how seriously they take the question of climate justice?

Imagine an annual GHG cap that is subdivided into two categories. First, each country would receive a share of “regular” permits based on historic emissions rates or whatever base-line allocation method emerges from international negotiations. Second, each country would receive “justice” permits based on some formula that takes into account factors like population size and previous contributions to climate change. The easiest approach to allocating justice permits would follow the preferred approach of developing countries — i.e., “the bigger your population, the more permits you get.”

The justice permits would produce a dual currency with two different prices:

Creating a separate market for justice permits also would offer the prospect of generating more money per permit for developing countries. Both regular and justice permits would entitle the holder to emit a ton of CO2 and both types would be fully tradable, but the justice permits would carry with them the right to advertise that goods and services were produced using the more equitably allocated emissions rights. The moral sentiments of consumers would then determine whether justice-branded products could be sold at a premium.

Instead of arguing whether a developing region should get 15 percent or 17 percent of undifferentiated permits, countries might agree to give the region 15 percent of the rights to pollute, but (because of the branded premium) 17 percent of the expected revenue.