On the fair division of greenhouse gas abatement cost

This paper introduces a solution for the fair division of emission reduction costs in the climate change regime. Our primary focus is on the fair division of efficiency gains that arise from exchanging the initial allocation of emission entitlements, rather than the initial allocation itself. We propose to complement the competitive Walrasian solution with welfare bounds, the ethical justification of which rests on commonality of ownership. Simulations with an intertemporal computable general equilibrium model illustrate the relevance of such welfare bounds. For a wide range of initial allocations of emission entitlements – including an equal per capita allocation – we find that developing countries should be fully compensated for their emission abatement efforts, but should not receive any further transfers.