Devising an Effective Incentive System

The goals of public policy are frequently articulated as (1) efficiency, (2) equity, and (3) security. Briefly, efficiency refers to making rational use of available resources so that both individual countries and the global economy grow at the optimal rate. Equity refers to obtaining a distribution of income consistent with what the body politic desires. And security refers to an absence of, or minimal exposure to, risk and uncertainty.

A major problem with the Kyoto Protocol is that there are no incentives for national governments or policymakers to participate. Whether governments participate or not is strictly a voluntary issue. That, in turn, depends on the degree of political support and consensus that they can generate to mobilize support for what can in some cases be painful processes.

If there is to be progress in addressing the issue of global temperature change, it seems likely that there will have to be incentives for policymakers and national governments to participate and comply with what is mutually agreed upon. This is an area in which more creativity is needed. To offer one speculative suggestion on the possibility for incentives, it would seem that one could obtain a fruitful cooperation and linkage between the issues of global warming and international trade. In principle, the idea would be to link progress in dealing with the global temperature problem with potential benefits from trade.

This is not the occasion to sketch out in full detail what such a system might look like. However, it would seem that the critical component would be a means of linking performance on environmental modification with potential benefits from trade liberalization. The tarrification of all barriers to trade that was associated with the establishment of the WTO would seem to be an observable parameter with which one could work. The problem would be to have an institutional mechanism for granting trade liberalization for individual countries as the means to reward sound performance in reducing greenhouse gases, together with a means of enforcing it.

The obvious choice would be the WTO, but whether that organization can be credible in such a situation is questionable. An alternative would be to create a new international institution specifically to broker such negotiations. Finally, there is the possibility that the OECD countries could muster sufficient political will and commitment to provide the leadership for brokering such arrangements.

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