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"The Global Refunding System"

By Anonymous

Hans Gersbach has an interesting proposal ($) for how to overcome the international collective action problems of the Kyoto accord:

Imagine that the twenty largest industrial countries would be able to coordinate and agree to put a significant, though not extraordinary, amount of money into a fund, the Global Climate Fund. Then, the countries agree to a constitution by which money will be paid out according to reductions in emissions: the Global Refunding System (GRS). If the system is set up properly, no further coordination is required, except in administering the system, measuring reductions and distributing money.
...
The rules are simple. Each nation can choose what tax rates to set to reduce its emissions. Tax revenues go into the Global Fund, and each year (or a longer period), refunds are distributed to each nation in proportion to that nations? emission reductions relative to the prior year divided by the sum of all nations? reductions.

It's an interesting idea, and a Global Refunding System could work well if established, but as Gersbach readily admits, it rests on the assumption that the 20 largest industrial countries can and do coordinate to establish the GRS in the first place. In other words, we have to overcome an international collective action problem in order to set up a system that overcomes an international collective action problem. Here's how Gersbach proposes to clear the first hurdle (i.e., establishing the GRS):

[A]bout twenty nations must meet and agree to a treaty that fails if any of them defect. They must be stubborn and believe that the others will be stubborn and insist on full participation before moving forward. Such a procedure is common in international agreements and has worked before in some cases.

The problem with this is that it ignores the inevitable holdout problem. I know very little about international agreements of this sort, so it's possible that procedures exist that can effectively deter holdouts in these settings, as Gersbach seems to suggest. But the WTO uses a similar procedure in its negotiations?and how did that work out for the Doha Round again? So I'm not overly optimistic.

Full post as published by Economics of Contempt on August 23, 2008 (boomark / email).