International Emission Trade and Voluntary Global Warming Agreements

We evaluate the prospect of forming voluntary global warming agreements in which membership entitles a country to trade emission permits with other member states. To do so, we construct a calibrated general equilibriummodel that jointly describes the world economy and the strategic incentives that guide the design of national abatement policies. Countries choose their initial permit endowments noncooperatively, so a priori it is not clear that permit trade will induce participation in international abatement agreements or that participation will result in significant environmental gains. Despite this, we find that emission trade agreements can be effective; that smaller groupings of two or three countries pairing developing and developed-world partners often perform better than agreements with larger rosters; and that general equilibrium responses play an important role in shaping these outcomes.