Public Disclosure Authorized 10759 A Global Incentive Scheme to Reduce Carbon Emissions Somik V. Lall Raghuram Rajan Christian Schoder Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Policy Research Working Paper Development Economics Development Policy Team April 2024 A verified reproducibility package for this paper is available at http://reproducibility.worldbank.org, click here for direct access. Policy Research Working Paper 10759 Abstract This paper proposes an objective way of estimating and allocating “differentiated” responsibilities for carbon emissions across countries. These responsibilities translate into specific obligations and incentives for future emission reductions and support for adaptation, mitigation, and development. The proposals in this paper should be seen as a starting point for an informed and productive debate. Under the Global Carbon Reduction Incentive, every country that emits more than the per capita global average pays into a global incentive fund. This annual payment will be calculated based on the “excess” emissions per capita, the country’s population, and a dollar amount called the Global Carbon Incentive. Countries below the global per capita average would receive a payout commensurate with their “under-emission.” The United States and China are the two biggest emitters and, assuming a Global Carbon Incentive of $10, they jointly would contribute more than $70 billion to the fund, from which nations such as India, Nigeria, Pakistan, Bangladesh, and Indonesia would be the major recipients. An important adjustment to the Global Carbon Reduction Incentive is to focus on consumption rather than production—a country should not avoid responsibility for the carbon it consumes by outsourcing production to another country. The proposal considers that countries that have used more of the collective carbon budget have benefited from the associated development and should pay for it. The proposal also considers methane emissions as well as crediting countries for their efforts toward preventing deforestation. LI CY RESEA R CH PO This paper is a product of the Development Policy Team, Development Economics. It is part of a larger effort by the World Bank to provide open access to its research and make a contribution to development policy discussions around the world. Policy Research Working Papers are also posted on the Web at http://www.worldbank.org/prwp. The authors may be contacted at raghuram.rajan@chicagobooth.edu and slall1@worldbank.org. A verified reproducibility package for this paper is available at http://reproducibility.worldbank.org, click here for direct access. O R W ANALYSIS R S TRANSPARENT KI NG PA P E The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent. Produced by the Research Support Team A Global Incentive Scheme to Reduce Carbon Emissions1 Somik V. Lall, Raghuram Rajan, and Christian Schoder JEL classification: F30, F55, Q56 Keywords: greenhouse gas emissions, global warming, international financial institutions 1 Somik Lall is an Economic Adviser at the World Bank, Raghuram Rajan is the Katherine Dusak Miller Distinguished Service Professor of Finance at the University of Chicago, and Christian Schoder is an Economist at the World Bank. The authors thank Baris Tercioglu for excellent research assistance, and Indermit Gill and Ayhan Kose for helpful discussions. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent. Author for correspondence: Rajan < raghuram.rajan@chicagobooth.edu> Motiv