This paper reflects on the economics and politics of an
international climate policy agreement. The international
community has so far failed to design institutions and a
compensation scheme that would lead to an abatement effort
commensurate with the IPCC recommendations that it attempts to
follow. The paper first lays out what could be a proper institutional
design, minimizing the impact of abatement on the world
consumer’s income, and thereby making the fight against climate
change more credible. It then sketches a governance mechanism as
well as an approach to compensation. Finally, it concludes with a
roadmap for the negotiation. [JEL classification: D62, F51, H23,
Q54]
Keywords: climate change, command and control, cap and trade,
international agreement.