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Equity and efficiency

It may be easier to find a point of international agreement on mitigation costs by separating the negotiating criteria, and the indices to measure them, according to the two general questions that we have set out to address (numbers 3 and 4 above). Using this approach, we can consider the competing goals of equity and efficiency, while maintaining a rational (but still negotiable) basis for assigning obligations at the national level.

We categorize the basic negotiating criteria in terms of the following questions:

• To determine the best projects (question 3) these questions must be addressed:

- What are the goals (globally, and who should do what)?
- What are the best opportunities (who can do what)?

• To determine who will pay (question 4) these questions must be addressed:

- Where are the resources available (who can pay)?
- Who has responsibility for the problem (who should pay)?

These four questions are organized in Figure 4.1. The 'Who can ...' questions in the left column are addressed by criteria that can be measured according to physical and financial quantities, and the 'Who should ...' questions in the right column are addressed by criteria that, while they can be quantified, must involve a large degree of value judgement. The 'Pay for . . .' questions in the top row involve equity criteria, based on past and present activities, while the 'Do this . . .' questions in the bottom row involve efficiency criteria, based on present and proposed future action.

Figure 4.1 Typology and indices for allocating greenhouse gas emission reductions

In Figure 4.1, the intersection of the rows and columns form four cells that contain the four criteria just defined. The ovals represent information flows that measure the corresponding criterion. For example, marginal cost is a measure of emissions reductions opportunities. The rectangles indicate allocation processes that would be needed to reconcile different criteria: resources and responsibility through international negotiation; and opportunities and goals through international trade or transfers.

The starting point of a negotiating process is the global goal for emissions reductions, based on a perceived common vulnerability to climate change. This goal may be the result of any combination of scientific, economic, and political considerations (questions 1 and 2, above). Once the general goal is set, each country's share of the responsibility for causing the problem can be determined, based on its past and present contribution to the source of the problem, namely carbon dioxide and other greenhouse gas emissions.

Responsibility is a useful but incomplete measure of a country's accountability for financing emissions reductions, however. A negotiated solution must also consider a country's available resources with which to pay. The overall obligation to pay (OTP), thus, addresses two issues, one ethical and one practical. The ethical issue is that those countries that have contributed most to the problem (and benefited thereby) should have some obligation to pay for its amelioration. The practical consideration is simply that a solution to the problem is more likely if those countries that have greater resources are willing to pay relatively more of the total cost.

By having a separate indicator for each of the top two boxes of Figure 4.1 (resources and responsibility), therefore, international negotiations can proceed in an orderly way to trade one against the other to obtain the politically optimum mixture that becomes the obligation to pay.

Once the obligations to pay for each nation are determined, they can be compared with the international distribution of opportunities for emissions reductions. Clearly, it should not be expected that the opportunities will be distributed among countries in the same way as obligations. Some countries will have a relatively high concentration of opportunities, while others will have relatively large obligations to pay for emissions reductions. The resolution of these differences will be taken up in later chapters.

As there are several concerns that need to be addressed in any scheme to determine obligations, the primacy given to such criteria as simplicity, equity, efficiency, the perceived ease of reaching agreements, etc., leads to different indices for obligation. Yet, it seems to us that it is preferable, and perhaps easier to obtain agreements as well, if the indices for different objectives are kept separate (and reconciled later in the negotiating process) than to assert that they are indicators of something that they do not measure.

We thus divide the question of 'Who pays?' in Figure 4.1 into two parts: (I) the 'ability to pay', which is indicated by present wealth and is completely separate from greenhouse gas emissions, and (21 a 'responsibility' index, based on cumulative per capita emissions. These address the respective subquestions 'Who can pay?' end 'who should pay?' of Figure 4.1.

Ability to pay (ATP)

In spite of its well-known difficulties, gross national or domestic product (GNP or GDP) is accepted widely as an index of national economic resources. GDP is the basic determinant of a country's contribution to the UN system, for example. With certain modifications, the international fund set up under the Montreal Protocol (Table 4.1) also relies on the UN scale to calculate a country's contribution to be used for technology transfer and financial assistance to signatory developing countries to use safer substitutes for CFCs. As seen in Table 4.1, however, by comparison, the contributions to the Global Environment Facility have come more from Western Europe and a few of the larger developing countries.

There are a few methodological problems with international comparisons of GNP statistics, arising from the presence of large informal sectors in some economies, the vagaries of fluctuating exchange rates, and from the differences in purchasing power. To some degree, adjustments can be made to correct these problems, for example in the development of purchasing power parity statistics (Summers and Heston 1988).

There is one drawback to using GNP, even if corrected for purchasing power, as an index of payments into a fund for the mitigation of the climatechange problem. This is that no allowance is made for 'disposable national income', so that poor countries like Indonesia and rich ones like Sweden would be expected to make similar contributions because their population ratio happens to be approximately equal to the inverse of their ratio of per capita GNP. To determine a country's ability to pay (ATP), it seems obvious that some measure of wealth based on per capita income is required.

One way to define an ability to pay would be to subtract from the GNP, some threshold of 'basic need.' In the case of the global fund set up under the amendments to the Montreal Protocol, countries that emit less than 300 grams of CFC-equivalent per capita per year are exempted from contributing. In a similar fashion, the Global Environment Facility uses a cut-off of $4,000 per capita for determining certain categories of contributions and recipients. Another such cut-off that could be used, for example, would be one of the 'poverty fine' estimates discussed in the World Development Report (World Bank 1990). The original precedent is the UN scale of assessments set up in 1946, which subtracts a threshold income (originally $1,000 per capita, more recently set to $2,200), before calculating dues (UN 1989)

Table 4.1 Relative and total contributions to the Global Environment Facility, the Montreal Protocol and the two combined

Listed for each nation are the percentages of the global totals as of mid-1992. The nations are divided into income classes, and their total contributions are ranked within each class. Shown in the last column are 1989-91 assessments for dues to the United Nations. Data from UN (1989), NZMERT (1990), UNEP (1992), and World Bank (1992). 0 = zero; 0.0 = very small.

a The present maximum UN contribution is set at 25 per cent, although it started at 40 per cent in
1946. Otherwise the US contribution would be higher than the 25 per cent shown here. The original floor was set at 0.04 per cent, but in 1973 was set to 0.01 per cent (UN 1989).
b Not a full UN member.
c This total is divided as follows Russian Republic = 86 per cent; Ukraine = 11 per cent;
Belarus = 3 per cent.

One argument for using such a cut-off is that countries below this level require all the resources they have to bring their populations up to a minimum acceptable income. A rationale related directly to climate change is that countries below this limit are more vulnerable to the effects of adverse climate change and should devote most of their resources to reduce this vulnerability, which will have great advantages even if global warming does not occur in the period of concern.

Many would argue, however, that the poverty line is not a sufficiently high goal, and yet it is difficult to define some other income level as an acceptable minimum. Here, we take the somewhat different approach of choosing an income that seems to be capable of achieving a minimum 'qualify of life' based on the past ability of countries to achieve adequate levels of infant mortality, life expectancy, and literacy. These are combined in the Physical Quality of Life Index (PQLI) developed by Morris (1979)

Thus, we choose as a cut-off, income which is the average income of nations with a Physical Quality of Life Index of 80-90. This represents the approximate inflection point in the relationship of PQLI and GNP, or purchasing power parity (PPP) (see Figure 4.2). Below this point, small increases in income often lead to large increases in PQLI, while above it, large increases in GNP only produce modest increases in PQLl.

The second column of Table 4.2 shows this index calculated with two indicators of income: GNP and GDP corrected for PPP. The table shows that the US ATP changes by only 10 per cent (from 37 to 40) if income is corrected for PPP, but that other countries' ATP can change dramatically. The USSR ATP, for example, changes from 18 to 12 per cent (of the world total), while that of Mexico increases by a factor of 18 and Romania goes down by almost a factor of five.'

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