The G8 countries propose a goal of a 50% reduction in global emissions by 2050, in an effort that needs to take account of other agreements specifying that developing countries are to be provided with incentives to action and protected from the impact of measures taken by others. To help inform international negotiations of measures to achieve these goals we develop a technique for endogenously estimating the allowance allocations and associated financial transfers necessary to achieve predetermined distributional outcomes and apply it in the MIT Emissions Prediction and Policy Analysis (EPPA) model. Possible burden sharing agreements are represented by different allowance allocations (and resulting financial flows) in a global cap-and-trade system. Cases studied include agreements that allocate the burden based on simple allocation rules found in current national proposals and alternatives that specify national equity goals for both developing and developed countries.

The analysis shows the ambitious nature of this reduction goal: universal participation will be necessary and the welfare costs can be both substantial and wildly different across regions depending on the allocation method chosen. The choice of allocation rule is shown to affect the magnitude of the task and required emissions price because of income effects. If developing countries are fully compensated for the costs of mitigation then the welfare costs to developed countries, if shared equally, are around 2% in 2020, rising to some 10% in 2050, and the implied financial transfers are large—over $400 billion per year in 2020 and rising to around $3 trillion in 2050. For success in dealing with the climate threat any negotiation of long-term goals and paths to achievement need to be grounded in a full understanding of the substantial amounts at stake.