International Negotiations for Reducing Greenhouse Gases with Emission Permits Trading∗

We build a three-stage game model of international negotiations on regulation of global emissions of greenhouse gases, and examine the Pareto optimality of an equilibirium allocation. First, we derive the condition for Pareto optimal allocations, which is an extension of the celebrated Samuelson condition. Next, we show that although production efficiency of a final allocation is always met at an equilibrium of the game, overall Pareto optimality may not be satisfied. This is because in negotiations on the level of global emissions in the first stage of the game, countries make expectations on the effect of the total supply of emission permits on the revenue from or the expenditure for emission permits in a later stage. ∗The author is grateful to Akira Okada, Kotaro Suzumura and the members of the Project on Intergenerational Equity at Hitotsubashi University for their useful comments, and to Ryusuke Shinohara for his comments and assistance in calculations of a numerical example. Financial support from the Ministry of Education, Culture, Sports, Science and Technology of Japan through the Grant-in-Aid for the Scientific Research of Priority Area B 603 (Project on Intergenerational Equity) is gratefully acknowledged. †Faculty of Economics, Hitotsubashi University, Kunitachi, Tokyo 186-8601, Japan. Fax: (81)-42-580-8748. E-Mail: [email protected]