| Matti Liski, Helsinki School of Economics Juha Virrankoski, Helsinki School of Economics |
| Project-Based C02 Trading |
| Session: C-11-5 Tuesday 15 August 2000 by Liski, Matti |
| The market mechanisms built into the Kyoto Protocol have the potential of significantly reducing costs of limiting greenhouse gases. But if trading proceeds on a bilateral 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 bilateral CO2 trading by developing a many-polluter cap-and-trade model where bilateral trades are coordinated by a time-taking matching process. Bilateral trading entails frictions that alter the total number and the size of private trades, and the 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 in the EU and economies in transition shows that frictions need not damage both sides of the market. |
| Submitted paper full-text in .pdf |