Bilateral C02 Trading

Matti Liski () and Juha Virrankoski
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Juha Virrankoski: Helsinki School of Economics

No 1312, Econometric Society World Congress 2000 Contributed Papers from Econometric Society

Abstract: 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.

Date: 2000-08-01
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