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Adam Smith

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“Adam Smith Meets Climate Change
How the theory of moral sentiments could be applied to cap-and-trade greenhouse-gas emissions.”
By Ian Ayres and Doug Kysar
Slate, Posted Thursday, Sept. 25, 2008, at 11:53 AM ET

Despite all the attention to domestic oil drilling, Obama and McCain are not that far apart on climate change—both candidates support a cap-and-trade system to limit U.S. greenhouse-gas emissions. And neither candidate has told us much about how they will get the rest of the world on the cap-and-trade bandwagon. That challenge deserves more focus—unless we can entice fast-growing emitters like China, India, and Brazil ! into a climate change treaty as full participants, even complete energ y independence in this country will be little consolation in a warming world. We think Adam Smith may have had a suggestion for how to think about this problem—and it's more than just an invisible hand.

For 30 years now, officials have been groping toward a system in which greenhouse-gas emitters all around the world can trade permits. GHG reductions achieve the same global atmospheric benefit regardless of where they occur, but because industries and firms have different costs of reduction, it makes economic sense to allow them to trade permits. That way we can lower emissions for less money.

But a crucial sticking point is figuring out how to initially allocate emissions permits among the various countries of the world. [PROPOSAL ONE:] Generally speaking, richer nations want permit allotments that track historic emissions rates—essentially locking in their economic advantage by awarding permits based on how much a country is already emitting. [PROPOSAL TWO:] Developing countries, in contrast, want permits allocated according to population size, with every person on the planet getting equal emissions rights. Some representatives from poorer nations also point

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