DP7035 International Emission Permit Markets with Refunding

Author(s):	Hans Gersbach, Ralph Winkler
Publication Date:	November 2008
Keyword(s):	climate change mitigation, global refunding scheme, international agreements, international permit markets, tradeable permits
JEL(s):	H23, H41, Q54
Programme Areas:	Public Economics
Link to this Page:	cepr.org/active/publications/discussion_papers/dp.php?dpno=7035

We propose a blueprint for an international emission permit market such as the EU trading scheme. Each country decides on the amount of permits it wants to offer. A fraction of these permits is grandfathered, the remainder is auctioned. Revenues from the auction are collected in a global fund and reimbursed to member countries in fixed proportions. We show that international permit markets with refunding lead to outcomes in which all countries tighten the issuance of permits and are better off compared to standard international permit markets. If the share of grandfathered permits is sufficiently small, we obtain approximately socially optimal emission reductions.