A Dynamic Analysis of the Marketable Permits Approach to Global Warming Policy: A Comparison of Spatial and Temporal Flexibility

This paper presents a generalized dynamic model of greenhouse gas emissions trading under constraints on the volume of transactions. An empirical version of the model is used to evaluate potentially cost-saving flexibility mechanisms (joint implementation and clean development mechanism) and potentially cost-adding restrictions (supplementarity) of the Kyoto Protocol. The results indicate the greatest gains would stem from extending permit trading spatially among industrialized nations, although sizable gains would also emanate from the inclusion of developing countries. Gains from intertemporal trading (banking and borrowing) are meager. Restrictions on the volume of permit purchases have by far the most costly effect when developing countries are incorporated into trading. Sensitivity tests with respect to differential discount rates across countries and technological change indicate the results are robust.