Energy Policy 36 (2008) 1420–1429 Greenhouse gas emissions trading among Pacific Rim countries: An analysis of policies to bring developing countries to the bargaining table $ Adam Rose à , Dan Wei School of Policy, Planning and Development, University of Southern California, Los Angeles, CA 90089, USA Received 31 August 2007; accepted 3 December 2007 Available online 20 February 2008 Abstract This paper examines the aggregate net costs and individual country cost savings of greenhouse gas emissions trading among Pacific Rim countries. We propose emission permit allocation rules designed to entice developing countries to participate. Absence of developing country involvement has served as an excuse for the lack by participation by the United States in the first compliance period of the Kyoto Protocol and may serve as a disincentive to even more countries in subsequent periods. Our analysis specifies permit allocation rules that could result in no net costs, and even cost-savings, to developing countries for their involvement in the emissions trading market, while at the same time providing extensive benefits to industrialized countries through access to lower-cost mitigation alternatives. r 2007 Elsevier Ltd. All rights reserved. Keywords: Cap and trade for greenhouse gas mitigation; Economics of climate policy; International cooperation 1. Introduction The earth’s mean temperature has been rising steadily in recent decades, and there is now a strong scientific consensus that this phenomenon is primarily caused by human activity, most prominently the combustion of fossil fuels (IPCC, 2007). In response, some progress has been made on the design of policies to mitigate greenhouse gas (GHG) emissions. The Kyoto Protocol, for example, is based on commitments from most industrialized countries (ICs) and a handful of developing countries (DCs) to cap emissions. Individual cities and sub-national regions around the world have made commitments as well (Kousky and Schneider, 2003; Peterson and Rose, 2006). Mitigation actions are currently taking place at all levels indepen- dently and more are about to take place cooperatively as the first Kyoto Protocol compliance period of 2008–2012 is about to begin. Still, all of these efforts omit more than one-third of GHG emitters by volume, and, moreover, the committed reductions may be modest in relation to what is needed to prevent serious climate change and its potentially devastat- ing consequences (IPCC, 2007). Although Northeastern, Mid-Atlantic, and Western States of the US have committed to GHG reduction, the Bush administration has rejected the Kyoto Protocol. Also, most DCs have not made any mitigation commitments. China and India are major sources of GHGs, and, in fact, the former will soon outpace the US in emitting carbon dioxide. DCs have explained their lack of commitment to emissions caps with reference to the associated cost burden and the fact that diversion of resources to address this problem would detract from their future economic growth. 1 They point out that ICs were not required to do so at a similar point of their development and that it is ARTICLE IN PRESS www.elsevier.com/locate/enpol 0301-4215/$ - see front matter r 2007 Elsevier Ltd. All rights reserved. doi:10.1016/j.enpol.2007.12.008 $ Paper presented at the Fudan University Shanghai Forum, Shanghai, China, May 26, 2007. à Corresponding author. Tel.: +1 2137408022. E-mail address: adam.rose@usc.edu (A. Rose). 1 DCs are contributing to the solution of the problem in a limited way through the Kyoto ‘‘flexibility mechanisms,’’ such as the Clean Develop- ment Mechanism (CDM), whereby they host low-cost mitigation options sponsored by industrialized countries (e.g., low emitting steel mills and power plants, or the planting of forests for sequestration).