Global climate change and the equity–efficiency puzzle

There is a broad consensus that the costs of abatement of global climate change can be reduced efficiently through the assignment of quota rights and through international trade in these rights. There is, however, no consensus on whether the initial assignment of emissions permits can affect the Pareto-optimal global level of abatement.This paper provides some insight into the equity–efficiency puzzle. Qualitative results are obtained from a small-scale model; then quantitative evidence of separability is obtained from MERGE, a multiregion integrated assessment model. It is shown that if all the costs of climate change can be expressed in terms of GDP losses, Pareto-efficient abatement strategies are independent of the initial allocation of emissions rights. This is the case sometimes described as ‘market damages’.If, however, different regions assign different values to nonmarket damages such as species losses, different sharing rules may affect the Pareto-optimal level of greenhouse gas abatement. Separability may then be demonstrated only in specific cases (e.g. identical welfare functions or quasi-linearity of preferences or small shares of wealth devoted to abatement).