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What Has Kyoto Wrought? The Real Architecture of International Tradable Permit Markets

  • Stavins, Robert
  • Hahn, Robert

This paper investigates a central issue in the climate change debate associated with the Kyoto Protocol: the likely performance of international greenhouse gas trading mechanisms. Virtually all design studies and many projections of the costs of meeting the Kyoto targets have assumed that an international trading program can be established that minimizes the costs of meeting overall goals. This conclusion rests on several simplifying assumptions. In this paper, the authors focus on one important issue that has received little, if any, attention: the interaction between an international trading regime and a heterogeneous set of domestic greenhouse policy instruments. This is an important issue because the Protocol explicitly provides for domestic sovereignty regarding instrument choice, and because it is unlikely that most countries will choose tradable permits as their primary domestic vehicle. It is true that costs can be minimized if all countries use domestic tradable permit systems to meet their national targets (allocate permits to private parties) and allow for international trades. But when some countries use non-trading approaches such as greenhouse-gas taxes or fixed quantity standards � which seems likely in the light of previous experience � cost minimization is hardly assured. In these cases, achieving the potential cost savings of international trading will require some form of project-by-project credit program, such as joint implementation. But theory and experience with such credit programs suggest that they are much less likely to facilitate major cost savings, because of large transactions costs, likely government participation, and absence of a well functioning market. Thus, individual nations' choices of domestic policy instruments to meet the Kyoto targets can limit substantially the cost-saving potential of an international trading program. There is an important trade-off between the degree of domestic sovereignty and the degree of cost effectiveness. Moreover, there is a need to analyze the likely cost-savings from feasible, as opposed to idealized, international policy approaches to reducing emissions of greenhouse gases.

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File URL: http://www.rff.org/RFF/documents/RFF-DP-99-30.pdf
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Paper provided by Resources For the Future in its series Discussion Papers with number dp-99-30.

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Date of creation: 01 Mar 1999
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Handle: RePEc:rff:dpaper:dp-99-30
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  1. Fischer, Carolyn & Kerr, Suzi & Toman, Michael, 1998. "Using Emissions Trading to Regulate U.S. Greenhouse Gas Emissions: An Overview of Policy Design and Implementation Issues," National Tax Journal, National Tax Association, vol. 51(n. 3), pages 453-64, September.
  2. Richard Schmalensee & Paul L. Joskow & A. Denny Ellerman & Juan Pablo Montero & Elizabeth M. Bailey, 1998. "An Interim Evaluation of Sulfur Dioxide Emissions Trading," Journal of Economic Perspectives, American Economic Association, vol. 12(3), pages 53-68, Summer.
  3. Bohm, Peter & Carlen, Bjorn, 1999. "Emission quota trade among the few: laboratory evidence of joint implementation among committed countries," Resource and Energy Economics, Elsevier, vol. 21(1), pages 43-66, January.
  4. Toman, Michael & Powell, Mark & Lile, Ron, 1998. "Implementing the Clean Development Mechanism: Lessons from U.S. Private-Sector Participation in Activities Implemented Jointly," Discussion Papers dp-99-08, Resources For the Future.
  5. Stavins, Robert, 1997. "Policy Instruments for Climate Change: How Can National Governments Address a Global Problem?," Discussion Papers dp-97-11, Resources For the Future.
  6. Barrett, Scott, 1998. "Political Economy of the Kyoto Protocol," Oxford Review of Economic Policy, Oxford University Press, vol. 14(4), pages 20-39, Winter.
  7. Robert N. Stavins, 1998. "What Can We Learn from the Grand Policy Experiment? Lessons from SO2 Allowance Trading," Journal of Economic Perspectives, American Economic Association, vol. 12(3), pages 69-88, Summer.
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