The use of intercountry carbon dioxide emission trading for international global climate change policy

This thesis investigates global climate change policies that make use of international carbon emission permit trading. The standard Pigouvian/Baumol-Oates theory of externalities as applied to emission permit trading is reviewed, and shown to be inappropriate for application to the international greenhouse policy situation. This is because the Pigouvian/Baumol-Oates model makes two assumptions that do not hold in the greenhouse case: that an outside agency is capable of enforcing permit trading rules, and that emitters and victims of the externality in question are distinct classes.;Computer simulations of a global carbon emission stabilization policy are presented. The annual intercountry/interregional wealth transfers that would result under alternative "equity-based" permit allocation schemes are calculated, and shown to be quite large. In some cases, the benefits required seem to be so large as to reduce to a remote possibility the successful implementation via trading of this stabilization policy under the allocation scheme considered.;A new model of emission trading is developed here, one that uses a game-theoretic approach. Equilibria in a special case of this theory are shown to exhibit characteristics that are identical to equilibria in the standard Pigouvian/Baumol-Oates externality models. The welfare implications of alternative allocations of emission rights prior to trading are examined. It is found that as long as an emission reduction target increases social welfare relative to the status quo, there exists a permit allocation that can ensure that trading leads to a pareto superior outcome (assuming no cheating). This is not true in the Pigouvian/Baumol-Oates model wherein pareto efficiency can only be attained by a post-trading forced wealth transfer from victims to emitters. This is an important point: forced intercountry wealth transfer is controversial.