Equity For Efficiency The Developing Country Perspective

Limitations of the neoclassical perspective are, however, exposed when one realizes that free markets with no transaction costs do not exist. This global real-politik rests on foundations of power (not freedoms), abilities (not needs), and capacities (not vulnerabilities). Climate negotiations to date are confined to the mitigation efficiency agenda, as it suits the interest of powerful developed countries. Climate mitigation actions, however, require universal cooperation. Those who are outside the agreement could benefit in situations involving competition, as their emissions are not penalized. The nations facing impacts would cooperate only if fairly compensated. The parties, thus, not only have cooperative needs to minimize the global burden but competing needs to minimize their own share of the burden.

The market efficiency-oriented global mitigation assessments arrive at the obvious conclusion that the cheapest mitigation actions can only be carried out in developing countries (see IPCC, 2001c; Richels, Edmonds, Gruenspecht, & Wigley, 1996) due to prevailing market inefficiencies and inadequacies. However, a cost-effective analysis of this kind has two major deficiencies: First, it assumes the existence of efficient markets in a developing country and, second, it ignores equity in burden sharing (see Shukla, 1996a). In other words, such analysis suffers from the neoclassical pitfall of separating efficiency and equity. If there were no transaction costs and if cost-effectiveness was the sole criteria, the negotiations would have been needless - and, as per the Coase theorem, the trivial solution would have been to agree on a market instrument like emissions trading; cost-effectiveness would have automatically materialized.

In the real world, however, there are transaction costs. The developing country view suggested by the Coase theorem duly recognizes this, and hence differs from the neoclassical view. In situations involving multiple players with conflicting interests, there are high transaction costs that render market instruments inefficient. Low transaction costs are necessary for market efficiency. This point is particularly important in the context of the climate change issue - where stakes are high, interests of parties are in conflict, and perceptions of what justice means vary widely - the transaction cost of reaching an agreement could, in fact, be very high. The primary challenge global negotiators face is to minimize transaction costs, which will automatically lead to efficiency, a la Coase theorem. The transactions in a long-term multilateral agreement would be frictionless only if players were convinced that the negotiation process was just and fair and the end results equitable. Equity is central to minimizing transaction cost and should be the raison d'etre of negotiations; if it is, efficiency will follow. Climate negotiations have, to date, been tardy and wayward; they will progress only if equity is given primacy.

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