Hot Air as an Implicit Side Payment Arrangement: Could a Hot Air Provision have Saved the Kyoto-Agreement?

Urs Steiner Brandt () and Gert Tinggaard Svendsen ()

No 42/03, Working Papers from University of Southern Denmark, Department of Environmental and Business Economics

Abstract: The purpose of this paper is to analyse whether the presence of Hot Air trading jeopardizes the environmental target of an international environmental agree-ment. We argue that Hot Air can be used as an implicit side-payment mecha-nism to actually bring about higher environmental protection compared to the situation without the trade option. We point to the existence of a fundamental trade-off between costs of compliance and the creation of dynamic incentives to develop cheaper reduction technologies. Implicit side-payments, in terms of Hot Air provision, may be needed in order to establish a compromise between these opposing demands. We identify the shortcomings and benefits of allowing fully flexible permit trading including the allocation rule of grandfathering.

Keywords: Hot Air; Global GHG trade; Kyoto protocol; Grandfathering; Cost issue; EU; US (search for similar items in EconPapers)
JEL-codes: Q28 H2 H4 (search for similar items in EconPapers)
Date: 2003-07
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