Incentives to Join International Environmental Agreements with Permit Trading and Safety Valves∗

Conditional on the level of membership of an International Environmental Agreement, trade in emissions allowances reduces aggregate abatement costs and promotes efficiency. Using a safety valve (a price ceiling) together with trade leads to a further increase in efficiency, conditional on membership. However, both of these policies reduce the extent to which a potential signatory to an International Environmental Agreement is “pivotal”, thereby reducing incentives to join the agreement. The safety valve, despite increasing efficiency conditional on membership, causes a more pronounced reduction in the incentive to participate. A non-standard, “high-powered” safety valve can promote membership and achieve ex post efficiency.