Proceedings of the UNESCO - University of Tsukuba International Seminar on Traditional Technology for Environmental Conservation and Sustainable Development in the Asian-Pacific Region, held in Tsukuba Science City, Japan, 11-14 December, 1995.
Editors: Kozo Ishizuka, D. Sc. , Shigeru Hisajima, D. Sc. , Darryl R.J. Macer, Ph.D.
The objective of Dr Bertram's paper is, however, not to embark on such ambitious modelling but instead - in addition to providing a brief survey of the issues - to do some simple spreadsheet type calculations to get a feel for the direction and value of trade that may take place if greenhouse gas emission permits are to be used as the economic instrument. It is my personal experience that such "back of an envelope" calculations in economics are often quite informative. However, at the time of writing this commentary the paper did not yet include any results, except for the base case in which we see how different per capita initial allocations would be from the actual emissions.
We can nonetheless make two observations from Table 1. The first is that the volume and direction of trade is easy to predict from any given initial allocation of permits, if we make the assumptions that the same abatement technology is available to all countries and that this technology is linear and identical across the countries, as in the figures in the paper. In this case, the allocation which minimises the global cost of abatement will be such that the absolute reduction in emissions should be equally shared among countries and this allocation is therefore independent of the slope of the abatement curve. If countries were trading permits, small countries - rich or poor - would sell all the permits given to them and the revenue would be more than sufficient to finance 100 percent abatement. For large countries, the optimal outcome would not be all that different from the zero shadow price case (i.e. when the global quota is equal to actual emissions).
However, this is just a theoretical result. In practice, the abatement curves will be different between countries. For example, those of small countries are likely to be steeper than those of large countries. Moreover, the marginal abatement cost curves are likely to have an increasing slope. In this case we do need to know these curves to compute the volume and direction of trade. The value of the trade, and therefore the financial transfers between countries, also depend on the marginal abatement cost curves, because these determine the permit price. Further research on the economics of abatement technology is therefore essential, both at the micro level and at the macro level.
The second point with respect to Table 1 is that, given the strong variations in per capita greenhouse gas generation, even with groups of poor and rich countries, the impact of a per capita allocation is going to be very different in relative terms between countries. Judging from the figures in Table 1, I guess that a country such as Brazil would do very well out of the permit market on a per capita basis, while one wonders about the ability of former USSR countries to buy permits.
For a detailed discussion about issues regarding the experience with trading of pollution permits within countries and the scope for global trading in greenhouse gas permits, I refer to Tietenberg (1995).
Preceding the establishment of a market for permits, there is of course the issue of what the global target should be. The permit system will, when the market is competitive, ensure a cost-effective outcome but it will not maximise global welfare unless we know more about the net economic cost of the greenhouse effect and the distribution of this cost across countries.
The control of the greenhouse effect is also an inherently dynamic problem. Moreover, because the greenhouse effect is a long-term process, we must consider the way in which effects on future generations should be compared to the effects of policy measures on the present generation. The evolution of abatement technology will also be endogenous, because research and development in this area will depend on the agreements that will be reached between countries about reductions in the emission of greenhouse gases. Indeed, the provisional results shown by Dr Bertram in his presentation suggests that, given the assumptions of his model, the developing countries would have no incentive to find more cost-effective abatement methods.
In conclusion, there are still many unanswered questions. But I believe that the problem requires all the attention it gets, perhaps even more. In the current literature about the determinants of investment in physical capital (machines, buildings, infrastructure etc.), it is argued that it is sometimes economically rational to wait until more information becomes available before embarking on such an investment, even if the investment already shows an expected profit on paper. The reason is that an investment may involve considerable sunk costs that cannot be recovered if the investment turns out to be bad. However, while present-day investments to slow down the greenhouse effect may also involve irreversible costs, the ecological damage of underestimating the impact may be irreversible too. In this case, as many authors in the literature acknowledge, any research efforts that will help to reduce uncertainty further are extremely important.