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.
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."