An Economic Analysis of Flexible Permit Trading in the Kyoto Protocol

This paper evaluates the relative gains from augmenting or restricting several of the flexibility mechanisms of the Kyoto Protocol. A nonlinear programming model of international emissions trading is used to assess the net benefits of extending trading across time periods and across countries (Joint Implementation), and including the developing world (Clean Development Mechanism). The effect of limiting permit purchases (supplementarity) is also evaluated. The analysis is intended to help guide further climate negotiations by identifying flexibility mechanisms that contribute the most to enhancing the gains from greenhouse gas mitigation and identifying restrictions that detract the most from these gains.