Trading hot-air. The influence of permit allocation rules, market power and the US withdrawal from the Kyoto protocol

Abstract

After the conferences in Bonn and Marrakech, it is likely that international emissions trading will be realized in the near future. Major influences on the permit market are the institutional detail, the participation structure and the treatment of hot-air. Different scenarios not only differ in their implications for the demand and supply of permits and thus the permit price, but also in their allocative effects. In this paper we discuss likely the institutional designs for permit allocation in the hot-air economies and the use of market power and quantify the resulting effects by using the computable general equilibrium model DART. It turns out that the amount of hot-air supplied will be small if hot-air economies cooperate in their decisions. Under welfare maximization, more hot-airis supplied than in the case where governments try to maximize revenues from permit sales. © Springer 2005.