A credible compliance enforcement system for the climate regime

The compliance enforcement system of the Kyoto Protocol provides only weak incentives for Parties to comply with their commitments. For example, the penalties for non-compliant countries are not legally binding, and moreover, there is no second-order punishment for those countries that fail to implement them. Thus, a Party can simply refuse to comply without consequence. The alternative compliance enforcement systems that have been proposed in the literature also face substantial problems. A simple, flexible, potent, and credible compliance enforcement system for a post-Kyoto climate agreement, based on deposits, is proposed here: at ratification, each country deposits a significant amount of money, and continues to do so in the preparation stage each year until the start of the commitment period. At the end of this period, those countries that meet their emissions limitation targets receive a full refund of their deposit, while those that fail to do so forfeit part or all of it. A simplified two-country model of the deposit system and a numerical example of an agreement involving the US, Japan, Russia, and Europe is also provided. If each country's deposit is no less than its abatement costs, there is a strong incentive for participating countries to avoid non-compliance.