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Strategic Delegation and Non-cooperative International Permit Markets

Wolfgang Habla () and Ralph Winkler ()

No 636, Working Papers in Economics from University of Gothenburg, Department of Economics

Abstract: We analyze a principal-agent relationship in the context of international climate policy in a two-country framework. First, the principals of both countries decide whether to link their domestic emission permit markets to an international market. Second, the principals select agents who then non-cooperatively determine the levels of emission permits. Finally, these permits are traded on domestic or international permit markets. We find that the principals in both countries have an incentive to select agents that care (weakly) less for environmental damages than the principals do themselves. This incentive is more pronounced under international permit markets, particularly for permit sellers, rendering an international market less beneficial to at least one country. Our results may explain why we do not observe international permit markets despite their seemingly favorable characteristics and, more generally, suggest that treating countries as atomistic players may be an oversimplifying assumption when analyzing strategic behavior in international policy making.

Keywords: non-cooperative climate policy; political economy; emissions trading; linking of permit markets; strategic delegation; strategic voting (search for similar items in EconPapers)
JEL-codes: D72 H23 H41 Q54 Q58 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ene, nep-env and nep-gth
Date: 2015-11
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