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Bilateral C02 Trading

Author

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  • Matti Liski

    (Helsinki School of Economics)

  • Juha Virrankoski

    (Helsinki School of Economics)

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.

Suggested Citation

  • Matti Liski & Juha Virrankoski, 2000. "Bilateral C02 Trading," Econometric Society World Congress 2000 Contributed Papers 1312, Econometric Society.
    • Handle: RePEc:ecm:wc2000:1312
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    Cited by:

    1. Pertti Haaparanta, 2000. "International Trade and Search," Econometric Society World Congress 2000 Contributed Papers 0858, Econometric Society.

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