CO₂ pollution rights: The curse of climate money

International trade in carbon permits could harm growth in developing countries, and thus jeopardize international cooperation—even though they would benefit financially.

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The developing and emerging economies play a key role in the future prevention of CO2 emissions. An international emissions trading scheme could generate additional revenue for these countries and relieve them financially. With the help of this money both justice issues would be addressed and international cooperation would be promoted—at least at first sight. However, researchers from the Mercator Research Institute on Global Commons and Climate Change (MCC) warn that this new source of revenue also carries risks for economic development. The scientists around the two lead authors Ulrike Kornek and Jan Steckel have now published their results in the study “The climate rent curse: new challenges for burden sharing” in the scientific journal International Environmental Agreements: Politics, Law and Economics.

The researchers apply the scientifically well-known "resource curse" phenomenon on the trade in emissions rights. The classical theory of the resource curse is based on the observation that countries that are particularly rich in natural resources, and thus export large amounts of raw materials, have mostly developed worse economically compared to countries with little natural resources. According to research, this is due to a number of reasons: Among other things, raw material deposits whet the appetite of various political players, which can lead to (armed) conflicts. In countries with weak institutions, corruption also plays a major role.

In the model developed by the MCC scientists, the countries’ initial endowment with emissions rights in an international trading system is treated as a natural resource. If, as commonly suggested, the population size is used as the basis for the initial distribution of the permits, the developing and newly industrialized countries would benefit the most. They could export their surplus of pollution rights and thus receive de facto transfer payments from the industrialized countries. This would initially incentivize them to agree to international cooperation on climate protection. However, the new source of revenue is also likely to harm the economy, since here the same principles apply as for the export of raw materials. In fact, the money could turn out to be a curse rather than a blessing.

The researchers can demonstrate the negative effects using the model in their new study. They show that with the commonly discussed mechanisms for the distribution of pollution rights, the developing and newly industrializing countries would lose their incentive to participate in the emissions trading system—as their economies would suffer—and thus in international cooperation.

"Our results raise the question of how climate finance should be designed and whether developing countries should be integrated in an international market for emission rights in the first place—other instruments such as a carbon tax could be more suitable," says Kornek. However, in this case, the developing countries would bear the CO2-avoidance costs completely themselves, which could also put international cooperation in danger. Steckel adds: "It is also conceivable that transfers are collected and managed internationally. For example, a fund could be used to provide necessary additional investments needed to finance low-carbon technologies."


More information:

Kornek, U.; Steckel, J. C.; Lessmann K. et al. Interantional Environmental Agreements: Politics, Law and Economics (2017). DOI:10.1007/s10784-017-9352-2