Emissions trading with non-signatories in a climate agreement - an analysis of coalition stability

Kai Lessmann, Robert Marschinski, Michael Finus, Ulrike Kornek, Ottmar Edenhofer

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We investigate how different designs of carbon offset mechanisms, like the Kyoto Protocol's Clean Development Mechanism (CDM), affect the success of self-enforcing climate treaties. In a game-theoretic numerical model of coalition formation we find that participation in the agreement is negatively affected when strategic behavior and free-rider incentives matter. This does not change when selling targets restrict credit supply. Substantially higher participation emerges when the treaty restricts its signatories not to use the gains from credit trading to lower their emission caps. Despite the high sensitivity of participation to different CDM design, we find that global welfare levels achieved in various equilibria are remarkably similar.
Original languageEnglish
Pages (from-to)82–109
JournalThe Manchester School
Issue numberS2
Early online date31 Oct 2013
Publication statusPublished - Dec 2014


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