Skip to main content

Trade of Permits for Greenhouse Gas Emissions: Bilateral Trade Need not be the Answer


The Kyoto Protocol sets national quotas on GHG emissions and allows international trade of these quotas. Taking terms-of-trade effects into account, we argue that this trade is characterized by asymmetric, identity-dependent externalities, and show that bilateral trade of permits may not be sufficient for an efficient allocation of emissions. We derive conditions under which bilateral trade does improve the allocation of permits. The conditions are strong. In this sense, we argue that, for emissions permits, market design matters.

This is a preview of subscription content, access via your institution.


  • Bagwell K, Mavroidis P, Staiger R: Auctioning countermeasures in the WTO. J Int Econ 73, 309–332 (2007)

    Article  Google Scholar 

  • Copeland BR, Taylor MS: Free trade and global warming: a trade theory view of the Kyoto Protocol. J Environ Econ Manag 49, 205–234 (2005)

    Article  Google Scholar 

  • Dixit A, Norman V: Theory of international trade. Cambridge University Press, Cambridge (1980)

    Book  Google Scholar 

  • Jehiel P, Moldovanu B: Strategic nonparticipation. Rand J Econ 27(1), 84–98 (1996)

    Article  Google Scholar 

  • Jehiel P, Moldovanu B: Resale markets and the assignment of property rights. Rev Econ Stud 66(4), 971–991 (1999)

    Article  Google Scholar 

  • Jehiel P, Moldovanu B: Auctions with downstream interaction among buyers. Rand J Econ 31(4), 768–791 (2000)

    Article  Google Scholar 

  • Jehiel P, Moldovanu B, Stacchetti E: How (not) to sell nuclear weapons. Am Econ Rev 86(4), 814–829 (1996)

    Google Scholar 

  • Joscow P, Schmalensee R, Bailey E: The market for sulfur dioxide emissions. Am Econ Rev 88, 669–685 (1998)

    Google Scholar 

  • Schmalensee R, Joskow P, Ellerman A, Montero J, Bailey E: Interim evaluation of sulfur dioxide emissions trading. J Econ Perspect 12(3), 53–68 (1998)

    Google Scholar 

  • Springer U: The market for tradable GHG permits under the Kyoto Protocol: a survey of model studies. Energy Econ 25(5), 527–551 (2003)

    Article  Google Scholar 

  • Tuerk A, Urge-Vorsatz D: Implementing green investment schemes: options, first experiences and the way forward. Joint Implement Q 15(1), 2–4 (2009)

    Google Scholar 

  • van Vuurena DP, Cofalab J, Eerensa HE, Oostenrijka R, Heyesb C, Klimontb Z, den Elzena MGJ, Amann M: Exploring the ancillary benefits of the Kyoto Protocol for air pollution in Europe. Energy Policy 34(4), 44–460 (2006)

    Google Scholar 

  • Wong K-Y: International trade in goods and factor mobility. MIT Press, Cambridge (1995)

    Google Scholar 

Download references

Author information

Authors and Affiliations


Corresponding author

Correspondence to Roberto Burguet.

Rights and permissions

Reprints and Permissions

About this article

Cite this article

Burguet, R., Sempere, J. Trade of Permits for Greenhouse Gas Emissions: Bilateral Trade Need not be the Answer. Environ Resource Econ 46, 495–509 (2010).

Download citation

  • Accepted:

  • Published:

  • Issue Date:

  • DOI:


  • Terms-of-trade
  • Asymmetric externalities
  • Permits trade

JEL Classification

  • D62
  • F18