Global unanimity agreement on the Carbon Budget

Abstract

This paper analyzes a stylized model of the global economy in which countries must agree on the carbon budget while the decision on the level of carbon emissions is decentralized, with firms treating their emissions as a production input for which a uniform price is charged. The revenue accumulates in a global fund and is returned to global citizens according to national shares that are announced ex ante. The vector of country shares for the distribution of the carbon revenue assures that countries agree by unanimity on the carbon budget. The equilibrium exhibits the following desired features: (1) the global emissions level is set by unanimous agreement; (2) the demand to emit carbon is decentralized and, hence, there is no need to determine the distribution of permits; and (3) the equilibrium is Pareto efficient. We explore the implication of the model in an application based on RICE-2010.