Who Should Pay How Much?

International climate policy has assigned the leading role in emissionsabatement to the industrialized countries who have assumed historicalresponsibility for the greenhouse gas problem. Developing countries thatremain uncommitted may nevertheless face adverse impacts on their economiescaused by international spillovers from abatement in the developed world. Inthis context, the United Nations Framework Convention on Climate Changeguarantees compensation from the industrialized countries to the developingworld for induced economic costs under Articles 4.8 and 4.9. In this paper,we shed some light on the difficulties involved in establishing a measurementof bilateral spillover effects that is sufficiently robust to be used in theclimate policy debate as a reference point for computing transfer payments.We argue that the decomposition procedure suggested by Harrison, Horridge andPearson (2000) can reduce arbitrariness in the measurement of bilateralspillovers. Application of the procedure to decompose the economicimplications of the Kyoto Protocol at the cross-country level, however,reveals fundamental problems to the issue of compensation. At the bilaterallevel, developing countries may benefit from abatement in one industrializedcountry, and be worse off from abatement in another industrialized country.This poses the question if developing countries which are compensated foradverse spillovers should in turn pay for positive spillovers.