The Political Economy of Negotiating International Carbon Markets

Abstract

International carbon markets are frequently propagated as an efficient instrument for reducing CO2 emissions. We argue that such markets, despite their desirable efficiency properties, might not be in the best interest of governments who are guided by strategic considerations in negotiations. We identify the circumstances under which governments benefit or are harmed by cooperation in the form of an international market. Our results challenge the conventional wisdom that an international market is most beneficial for participating countries when they have vastly diverging marginal abatement costs; rather, it may be more promising to negotiate agreements with non-tradable emissions caps.

Keywords: cooperative climate policy, political economy, emissions trading, linking of permit markets, strategic delegation, strategic voting

JEL Classification: D72, H23, H41, Q54, Q58