We recommend that the successor to the Kyoto Protocol (“Kyoto II”) impose mandatory ceilings on rich countries’ greenhouse gas emissions and that it promote the participation of developing countries. Our proposal requires two major changes to the current Protocol, the use of an escape clause and the potential use of trade restrictions. The agreement must be seen as fair to developing nations. These countries will be subject to disciplines that prevent them from undermining the agreement in the short run, and they will be required to accept the principle that they will have to reduce emissions in the longer run. International trade in emissions permits plays a modest role in our proposal. The agreement should not attempt to prescribe the national policies (e.g. cap and trade or taxes or a hybrid) used to achieve reductions.
The escape clause gives signatories the option to reduce their abatement, provided that they pay a penalty. We discuss two mechanisms for imposing this penalty, either a monetary fine or WTO-sanctioned trade restrictions. The escape clause option is similar to the often-discussed “safety valve”, in that it puts a ceiling on actual abatement costs, thereby reducing the expected costs and the risk of membership. The escape clause proposal also helps to solve the problem of inducing nations to join the agreement and of inducing members to comply with their commitments. The severity of the (implicit or explicit) fine increases with the number of members. Therefore, a potential member’s decision to join the agreement increases other members’ incentive to abate. This added leverage promotes membership, helping to solve the participation problem. The absence of institutions that compel signatories to carry out their commitments has weakened the Kyoto Protocol. Our escape clause proposal addresses the enforcement problem by transforming an exotic commitment (reduction of emissions) into a familiar requirement (payment of an international financial obligation or adherence to a trade commitment). Institutions currently exist to help enforce these kinds of international commitments.