Greenhouse gas abatement: How much? and Who pays?

Two basic questions that arise in international policy debates over greenhouse gas emission reduction are: (1) How much to control? and (2) Who pays? In this paper, we investigate the interdependence between these two issues. We characterize general conditions under which the Pareto-optimal environmental control will depend on the distribution of the cost burden among nations and provide a sufficient condition under which a Pareto optimum can be implemented by a market mechanism with tradable emission permits. However, numerical results suggest that the interdependence may be weak in a hypothetical negotiation between the OECD and the ROW (the rest of the world). The approach can be applied to more realistic cases with multiple regions.