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In the past, climate negotiations have focused primarily on emissions targets. Stiglitz, however, argues that it would be easier to negotiate about taxes¹. In his view, the advantage of a common tax over the Kyoto approach would be that most of the distributional debate is sidestepped. In particular, under the Kyoto approach, obtaining the right to pollute is like receiving a gift. Hence, countries may struggle for the best 'deal', which can make an agreement difficult to achieve. In an earlier contribution, Schelling² suggests that countries choose their own policy instruments when contributing to climate stability. He argues that a proposal should specify policies, such as taxes, regulations, or research and development subsidies, accompanied by (uncertain) estimates of their probable effects on emissions. I re-evaluate Schelling's proposal in the light of the developments over the past two decades and recent economic research, and develop it further. I argue that this strategy may not only be instrumental in reaching a global climate agreement, but such a flexible approach towards cooperation may also lead to a more efficient outcome than negotiating about emissions.

Schelling suggests a model for climate cooperation similar to the negotiations of Western European countries for distributing Marshall Plan (the European Recovery Plan) dollars after the Second World War, and the negotiations on burden sharing in NATO. He argues that although there was no explicit criterion (such as equal living standards), the submission of data and the open argument that took place led to a reasonable appreciation of the needs of the different countries (for example, investment needs). Schelling goes on to state that in the context of climate negotiations, this model suggests that the main participating countries would “submit for each other's scrutiny and cross-examination plans for reducing carbon emissions”. These plans would be accompanied by estimates of emissions (or abatement of emissions). However, any commitment of a country would be to its policies, and not to its emissions.

Let us develop this idea further. If countries do as Schelling suggests, then the efforts that countries undertake can be compared by estimating the costs that the individual mixture of policies will imply for a given country. A natural starting point for negotiations may then be a regime in which countries seek to balance their efforts in terms of percentage costs of gross domestic product (GDP) implied by their climate policies. By contrast, a uniform reduction target for emissions of, say, 20% below the emissions in a base year or below some projected baseline level might impose larger costs (as a percentage of GDP) for one country than for another. An agreement that harmonizes countries' efforts may be easier to agree on than many other suggestions that have been put forward (for example, formula approaches³). It implies that richer countries will contribute more in absolute terms to climate stability than poorer countries. Furthermore, when countries negotiate exclusively about emissions, they are essentially restricting themselves to the policy instrument of cap-and-trade. But given the various uncertainties surrounding the problem, the actual welfare cost for a country of implementing a given emissions target may be highly uncertain. Committing themselves to policies (such as an emissions price, or subsidies for low-carbon technologies), may be much easier than adopting commitments about emissions. Given their characteristics, countries can then decide individually which policies are likely to have the largest environmental benefits, while minimizing the risks for their economies.

Interestingly, the pledge-and-review approach that has recently been adopted in climate negotiations resembles the method that is proposed here¹⁰. Adopting a 2% target, however, would give more structure to the negotiations. It provides us with a simple and transparent criterion to evaluate and compare the pledges of different countries. In particular, the balanced-efforts approach is the first that values direct investments in climate stability and investments in low-carbon technologies equally, and lumps them into a single number that measures the total contribution of each country to both public goods (emissions reductions and knowledge accumulation).

As a starting point, it may be necessary to agree on a set of 'accounting rules' for expenses related to climate change mitigation. For instance, if a country is offering to commit to a carbon tax of, say, US$20 per ton of CO₂, then estimated marginal abatement cost curves can be used to evaluate the probable effects on emissions and the induced total abatement costs. The estimation of costs may be complicated by general equilibrium and trade effects, as well as by co-benefits of induced technological change. I believe, however, that the accounting rules should be simple, and only take into consideration the most immediate of the possible effects. In the presence of significant co-benefits of the policies for the respective country, this may lead to an overestimation of the total costs, but eliminating such effects may render the estimates potentially very complicated and intransparent.

Estimates of abatement costs are already available for many countries. They are often based on specific abatement targets. For example, a recent study evaluates proposals from China and India for their 2020 emissions targets¹¹. The results of this study indicate that implementing China's target of reducing the emissions intensity of the economy by 40–45% may require a comparable effort to that implied by the targets announced by the EU and the US. However, to evaluate countries' overall efforts in the area of climate protection, estimates of their total costs that explicitly take into account also their investments into low-carbon technologies will be needed, in addition to their direct mitigation costs.

Let me finally point out that the balanced-efforts approach is also compatible with the adoption of a global carbon tax, which many economists view as the most efficient policy instrument for climate stabilization¹. While a uniform carbon price can help to implement emissions reductions efficiently, the resulting costs (as percentage of GDP) of such a uniform tax could vary drastically across countries. This could make it hard to reach an international agreement that establishes a uniform carbon tax. To neutralize these cost disparities, a global transfer scheme could be implemented, but this would probably be even harder to agree upon than a global carbon tax, considering the unprecedented amounts of monetary transfers between countries that would be needed. Under a balanced-efforts scheme, such cost disparities can be offset more easily. Countries that suffer less under a uniform carbon tax would simply be asked to contribute more to the other global public good: knowledge in the area of low-carbon technologies.

1. Stiglitz, J. E. Economist's Voice 3, http://dx.doi.org/10.2202/1553-3832.1210 (2006).
2. Schelling, T. C. Am. Econ. Rev. 82, 1–14 (1992).
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I have benefitted from discussions with and/or received very helpful comments from the following people: Scott Barrett, Ottmar Edenhofer, Larry Karp, and Robert Marschinski. I also thank the members of the CREW-project for inspiring discussions. Financial support by the German Federal Ministry for Education and Research is gratefully acknowledged (FKZ01LA1121C).