Abstract

The atmosphere represents a global commons and containing global warming can be considered an international public good. There is now increasing consensus that in order to avoid high risks of climate change the concentration of greenhouse gases in the atmosphere should not exceed the 500ppm CO2e by 2050. To reach the desired target a strong international effort with binding emission caps for major polluting countries is required. The success of any post-Kyoto agreement at mitigating global warming stands or falls with the participation of developing countries, of which China and India are among the top five emitters in the world. Underlying the difficulty of reaching a comprehensive agreement are two basic issues pertaining to the public good nature of the atmosphere. First, reducing greenhouse gas emissions is costly while benefits are shared universally; this gives nations an incentive to free ride. Second, there are large differences in past, current and projected future emissions. Independent of its particular shape, a post-Kyoto agreement will likely have an emissions trading system as its centerpiece. In this paper we present, based on the experiences with the Kyoto Protocol and the EU-ETS the challenges to be overcome when designing a global carbon market. The economic theories of public choice and of regulation will be used to shed light on the importance of design features when developing the blueprint for such global carbon market. Looking at the divergent positions taken by developed and developing countries we argue in favor of decentralized measures.