Tradable Climate Liabilities: A Thought Experiment

Abstract

We envision the creation of a climate liability market to address climate change. Each period, countries would be made liable for their past responsibility in current climate damage. We show that this yields the same first-best incentives to reduce emissions as a Pigovian tax. Also, because liabilities are traded like financial debt, the mechanism decentralises the choice a discount rate as well as beliefs about the severity of the climate problem, two highly contentious issues of climate negotiations. We discuss the differences with a Pigovian tax along the dimensions of information, participation, commitment, intergenerational fairness, and exposure to risk.

Keywords: Climate Liabilities, Climate Policy, Market Instruments, Pigovian Tax

JEL Classification: Q54, H23