Kyoto’s Climate Game and How to Fix It

The Kyoto summit initiated an international game of cap and trade. Unlike a national policy, the essence of this game is the self-selection of national emission targets. This differs from the standard global public-goods game because targets are met in the context of a global carbon market. This changes the outcome of the notoriously uncooperative public-goods game. The equilibrium of the new game may increase or decrease total abatement. If it increases abatement the resulting carbon price will be no greater than the average public-goods price. Typically, high abaters in the public goods game will target more abatement in the cap-and-trade game, while low abaters will target less. Given such a dismal outcome the policy game should be changed to the global price-target game. In the same setting where cap-and-trade reduces abatement, this game induces optimal abatement. But, realistically, it must include a Green Fund whose strength is linked to the price target. This will induce poor countries to favor as high a price target as rich countries, reversing the polarizing and anti-cooperative tendencies of cap and trade.