Permit Trading and Stability of International Climate Agreements

Abstract

We analyze the implication of different allocation schemes of CO₂-emission permits for stability and the success of international climate agreements. Our model combines a game theoretical with an empirical module that comprises 12 world regions and captures important dynamic aspects of the climate change problem. We consider seven different permit allocation schemes. Two “pragmatic schemes” allocate permits according to a uniform emission reduction quota, five “equitable schemes” allocate permits based on some normative criteria frequently discussed in the literature permit trading can raise participation and the success of climate agreements, but pragmatic schemes are superior to equitable ones.

JEL classification codes:

• C72
• Q25
• Q28

Key words:

• climate agreements
• tradable emission permits
• coalition formation
• self-enforcing agreements