We propose a simple mechanism providing incentives to reduce harmful emissions to their efficient level without infracting upon productive efficiency. The mechanism employs a contest creating incentives among participating nations to simultaneously exert efficient productive and efficient abatement efforts. Participation in the most stylised form of the scheme is voluntary and individually rational; all rules are mutually agreeable and are unanimously adopted if proposed. The scheme balances its budget and requires no principal. In a perhaps more realistic stochastic output version which could potentially inform policy decisions, we show that the transfers required by the efficient mechanism create a mutual insurance motive which may serve as effective rationale for the (gradual) formation of International Environmental Agreements.
Bibliographical note(c) The editors of The Scandinavian Journal of Economics 2015. This is an author produced version of a paper accepted for publication in Scandinavian Journal of Economics. Uploaded in accordance with the publisher's self-archiving policy.
- Climate policy