Scandinavian Working Papers in Economics

Working Papers in Economics,
University of Bergen, Department of Economics

No 04/06: Coalition formation and strategic permit trade under the Kyoto Protocol

Odd Godal () and Frode Meland ()
Additional contact information
Odd Godal: Göteborg University and University of Bergen, Postal: Department of Economics, Box 100, S-405 30 Gothenburg, Sweden and, Department of Economics, Hermann Fossgt. 6, N-5007 Bergen, Norway
Frode Meland: University of Bergen, Department of Economics, Postal: Hermann Fossgt. 6, N-5007 Bergen, Norway

Abstract: This paper discusses coalition formation with side payments in markets for transferable property rights where strategic agents prevail on both sides of the market. Our concern is emissions permit trading under the Kyoto Protocol. While a seller cartel is not profitable, our analysis indicates that coalitions between sellers and buyers pay off. Three stable cartels are found. None involve all agents, yet they all induce overall e¢ ciency. To support a stable coalition, the EU, Japan and Canada may pay together between 0 and 13 billion US dollars per year to Russia. The permit price and society-wide emission reductions are nil.

Keywords: Emissions trading; Kyoto Protocol; cartel formation; merger profitability.

JEL-codes: C71; C72; Q58

25 pages, April 1, 2011

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