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Should Developing Countries Take on Binding Commitments in a Climate Agreement? An Assessment of Gains and Uncertainty

In this paper we explore whether efficiency gains obtained by developing countries participation in emission trading could offset the economic risks that would be incurred by taking on binding commitments when future emissions are uncertain. Such commitments would allow developing countries to participate in emissions trading, which has significantly lower transaction costs than the present Clean Development Mechanism (CDM). However, because future emissions cannot be known, commitments can become more costly for the developing countries than expected. Using a dynamic computable general equilibrium model, we analyse whether the efficiency gains obtained by participating in emissions trading can offset this risk. We find that the efficiency gains that can be obtained by developing countries might not be very large compared to the risks they incur. Developing countries might therefore have good reasons not to embrace binding commitments in order to participate in �cap and trade� emissions trading.

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Energy Specializations: Energy Access – Sustainable Development and Distributed Energy; Energy and the Environment – Climate Change and Greenhouse Gases; Energy and the Environment – Policy and Regulation; Energy Access – Energy Poverty and Equity

JEL Codes:
Q01 - Sustainable Development
Q54 - Climate; Natural Disasters and Their Management; Global Warming
E60 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook: General
Q56 - Environment and Development; Environment and Trade; Sustainability; Environmental Accounts and Accounting; Environmental Equity; Population Growth

Keywords: Climate change, CDM, developing countries UNFCCC, DEEP model, emissions trading

DOI: 10.5547/ISSN0195-6574-EJ-Vol26-No3-2

Published in Volume 26, Number 3 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.