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The efficiency, equity and politics of emissions permit trading

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  • Wooders, Myrna
  • Zissimos, Ben

Abstract

This paper illustrates that an international permit trading system may hurt relatively poor countries by making associated economic activities una¤ordable. A model is constructed in which the free market solution is Pareto ine¢cient as a result of pollution. The introduction of tradable permits allows pollution to be internalised, and brings about an increase in the total social surplus. But when incomes vary, this may not lead to a Pareto improvement; those in poor countries stop the polluting activity because they cannot a¤ord to do otherwise. Only those in relatively rich countries are made better o¤. This may explain why poor countries are reluctant to ratify the Kyoto Protocol, itself advocating a permit trading scheme. The politico-economic implications of permit trading are also examined. We show that the democratic requirements for rati…- cation impose a lower bound on pollution reduction that can be achieved through a system of pollution permits with trade.

Suggested Citation

  • Wooders, Myrna & Zissimos, Ben, 2001. "The efficiency, equity and politics of emissions permit trading," Economic Research Papers 269357, University of Warwick - Department of Economics.
  • Handle: RePEc:ags:uwarer:269357
    DOI: 10.22004/ag.econ.269357
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    1. Robert W. Staiger & Kyle Bagwell, 1999. "An Economic Theory of GATT," American Economic Review, American Economic Association, vol. 89(1), pages 215-248, March.
    2. Copeland, Brian R. & Taylor, M. Scott, 2005. "Free trade and global warming: a trade theory view of the Kyoto protocol," Journal of Environmental Economics and Management, Elsevier, vol. 49(2), pages 205-234, March.
    3. Severin Borenstein, 1988. "On the Efficiency of Competitive Markets for Operating Licenses," The Quarterly Journal of Economics, Oxford University Press, vol. 103(2), pages 357-385.
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    More about this item

    Keywords

    Environmental Economics and Policy; International Relations/Trade;

    JEL classification:

    • F18 - International Economics - - Trade - - - Trade and Environment
    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • D45 - Microeconomics - - Market Structure, Pricing, and Design - - - Rationing; Licensing

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