Project-Based Co2 Trading

Helsinki School of Economics Working Paper No. W-252

28 Pages Posted: 8 Nov 2000

See all articles by Matti Liski

Matti Liski

Aalto University - Department of Economics

Juha Virrankoski

University of Helsinki - Department of Political and Economic Studies

Date Written: June 2000

Abstract

The market mechanisms built into the Kyoto Protocol have the potential of significantly reducing the costs of meeting the aggregate emission target. But if trading proceeds on a project-by-project basis rather than on a frictionless market, the total cost saving potential of trading is unclear. This paper provides the first attempt to explain market-level implications of project-based CO2 trading by developing a many-polluter cap-and-trade model where trades are coordinated by a time-taking search process. Trading entails frictions that alter the total number and size of private trades, and basic properties of the CO2 market as a transfer-mechanism. Perhaps surprisingly, frictions can also increase, not only decrease, the size of private trades. A calibration using previous cost estimates of CO2 reductions shows that frictions need not damage both sides of the market.

Keywords: climate change, pollution permits, matching

JEL Classification: C61; H23; Q49

Suggested Citation

Liski, Matti and Virrankoski, Juha, Project-Based Co2 Trading (June 2000). Helsinki School of Economics Working Paper No. W-252, Available at SSRN: https://ssrn.com/abstract=242509 or http://dx.doi.org/10.2139/ssrn.242509

Matti Liski (Contact Author)

Aalto University - Department of Economics ( email )

PO Box 1210
FI-00101 Helsinki
Finland
+358-9-43138384 (Phone)
+358-9-43138735 (Fax)

HOME PAGE: http://www.hkkk.fi/~liski

Juha Virrankoski

University of Helsinki - Department of Political and Economic Studies ( email )

P.O. Box 54
FIN-00014 Helsinki
Finland

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