[Publisher:] Institut für Weltwirtschaft (IfW) [Place:] Kiel [Year:] 1993
Kiel Working Paper 602
A situation is analysed in which two countries negotiate the financing of the incremental costs which accrue if one of them switches from a non-sustainable onto a sustainable development path. The other country's incentive to pay arises as it benefits from the developing country's environmental resources, but at an ever declining rate as long as development remains non-sustainable. The paper shows that such negotiations induce a redistribution of income in favour of the developing country which in general will exceed incremental costs. The paper also derives conditions under which the developing country has an incentive to get on a less sustainable path in the pre-agreement phase. In an application to the protection of tropical rainforests as carbon sinks it is shown that North to South redistribution of welfare would indeed be substantial. However, despite these transfer payments in excess of incremental costs the North would still gain enormously in efficiency terms from the use of the carbon sink option.