Abstract

When an environmental agreement between two countries is regarded from a dynamic perspective, it is very often observed that cooperation does not lead to an immediate reward. More to the contrary, an agreement to reduce the emissions of pollutants is usually associated with lower flows of production income. However in a profitable agreement the current costs are more than compensated by a future cleaner environment. While this is true globally (for the two countries), neither the costs from lower emissions nor the value of a cleaner environment need to be identical for the two parts. Because the uneven benefits from cooperation are delayed, it is the cost of compliance what needs to be distributed between the signing countries. This paper analyzes a sharing mechanism satisfying two main properties. Firstly, a benefit-pay-principle or fairness axiom: the greater the benefit one country gets from cooperation, the greater must be its share of the costs. And secondly, assuming that the responsibility from the initial environmental problem is not even across countries, a responsibility axiom requires that a country’s share of the costs increases with its responsibility. Moreover, the sharing scheme must be defined to guarantee time consistency. At any intermediate instant of time, no country can do better by deviating from cooperation with the sharing mechanism presented in the paper.

Practical information