Different Global Allocation Schemes for Emission Permits and Their Impact on Economies

International Kyoto mechanisms are especially designed to reach worldwide emissions reduction targets globally. The main intention behind the idea of emissions abatement attainment by Kyoto mechanisms is to make emissions cut opportunities more flexible and to allow the trade of emissions permits (ET) and the investment transfer from industrialized to less developed countries or regions in transition (CDM or JI) instead of or additional to emission abatement by domestic policy strategies. Within climate change negotiations, all Kyoto mechanisms are discussed controversially, one important discussion point is directed on equity. Particularly, active discussion and literature concentrate on the opportunity to compensate most vulnerable regions by reliable countries. This paper investigates which economic effects are induced by Kyoto mechanisms and focuses especially on the equity implications of world emissions trading schemes. Different options of permit allocation within the world regions and revenue distribution due to equity rules and its impacts on world economic relations are compared and evaluated. Due to the Kant and Rawls criteria, all regions share the fate of the region affected worst by climate change, Varian`s non envy implies an equalization between costs and benefits of all world regions. Model calculations by a world general equilibrium model WAGEM include different equity criteria incorporating the initial permit allocation and the revenue distribution in order to evaluate global economic effects. The polluter pays principle is included through the compensation of vulnerable regions by the responsibilities. Model results demonstrate that these equity criteria does not imply as fundamental consequences to world economies as other more influential allocation and redistribution criteria like per capita measurements. Whereas international Kyoto mechanisms support negative implications due to trade spill over effects also to less developed regions, model results demonstrate that equity compensation and allocation methods can alleviate these effects.