Adverse Selection and Participation in International Environmental Agreements

This paper looks at the question of how transfers of resources should be structured to induce countries to efficiently produce global environmental protection even when they have private information about their costs and benefits. Addressing this question is immediately relevant to the problem of Global Climate Change where the meetings under the Framework Convention on Climate Change are largely preoccupied with issues of how resources can be transferred and how much should be transferred.

No country wishes to move forward with expensive controls without a credible commitment from other countries about their own future behavior. These commitments are impossible to create without an efficient method of financial transfers when the largest growth in CO2 emissions is likely to come from developing nations. Because CO2 emissions are largely due to energy use, its control could potentially have severe effects on the development of economies. If global climate change proves to be a serious concern addressing it could require massive transfers of resources well beyond the capacity of current international aid institutions. The form of new institutions set up to deal with this could have large effects on the world economy.