The Global Warming Potential Paradox: Implications for the Design of Climate Policy

We address the issue of the design of climate policy in a dynamic, multi-greenhouse gas context. Despite well-established shortcomings, the Global Warming Potential (GWP) is the most commonly used index to compare greenhouse gases. We first review the shortcomings of the GWP from an economic perspective and examine some of the possible reasons for its success in the climate negotiations so far.We then examine the analytical properties of a second-best GWP-based emission target and compare the resulting second-best abatement paths with the first-best ones. We particularly show that the second-best CO2-equivalent target must exceed the CO2 equivalence of first-best abatements in order to reduce the bias induced by the GWP.