The Kyoto Protocol to reduce greenhouse emissions has not been widely adopted or followed and the Copenhagen climate summit ended in a fiasco. Why is it that the world community cannot cooperate on an important issue? And even if one doubts about global warning, one has to agree that this is a potentially large issue, and thus at least some coordination is required. People will immediately point out that there is a huge free rider problem, and they are right. As emissions are global, everyone benefits from the efforts of the others but little from one's own. Hence the need for cooperation.
Peter Cramton and Steven Stoft write that this cooperation problem becomes even more difficult depending on what the central coordination mechanism is. The argue that cap-and-trade makes things especially difficult, because it makes objectives of the negotiating parties even more divergent. If the rule of the game is that everybody needs to have individual and binding emission ceilings, then everyone will try harder for low (developed economies) or high (developing ones) emission caps. One solution out of this quagmire is to adopt a global emission ceiling that is enforced through a market-based mechanism, with the sale of pollution permits. We have known for a very long time that prices are very powerful enforcement mechanisms, and in the context of this public-goods game it is even better because it will foster more cooperation in the negotiation of the emission ceiling and lead to an agreement having a better chance of actually happening.