Markets versus International Funds for Implementing International Environmental Agreements: Ozone Depletion and the Montreal Pro

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Abstract:

This paper compares an international fund with a tradeable permit market as two alternative institutions for transferring resources during the implementation of an international cooperative agreement. The paper draws on the theory of contracts and transac tion cost economics to identify the common problems, definition of property rights, renegotiation, cost effectiveness and enforcement, that any institution must address. The solutions which are available to address these problems are partly dependent on t he institutional form used. The paper explores these differences both generally and in the context of the problem of ozone depletion and the institutions developed to address it. The paper concludes that in the early stages of an agreement, the need for flexibility and lack of consensus make an international fund an appropriate instrument because of the greater discretion it allows both in determining responsibilities and in encouraging compliance. However, in the long run, a tradeable permit market off ers significant advantages for cost effectiveness, may be less prone to renegotiation and therefore more robust, and may have advantages in monitoring and enforcement. Therefore the fund is ideally regarded as a transitional instrument, and designed to facilitate the development of a market.

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Notes:

Working Paper 95–12, Weatherhead Center for International Affairs, Harvard University, 1995.