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Stavins I 171
International Tradable Permits/Carbon Pricing Coordination/Stavins: Under an international tradable permit scheme, all participating countries would be allocated permits for “net emissions,” that is, emissions minus sequestration. A permit would define a right to emit a given volume over some time period, such as a year. In each period, countries would be free to buy and sell permits on an international exchange. Initial permit allocations could reflect a variety of criteria, such as previous emissions, gross domestic product, population, and fossil fuel production. Whatever the initial allocation, subsequent trading can, in theory, lead to a cost-effective outcome (Montgomery, 1972)(1), if transaction costs are not significant (Stavins, 1995)(2). This potential for pursuing distributional objectives while assuring cost-effectiveness is an important attribute of the tradable permit approach. From a distributional point of view, developing countries would receive compensation, whereas developed countries would have to pay for their own emission abatement and for permit purchases from abroad to cover the balance of their emissions (Olmstead & Stavins, 2012)(3). An important obstacle to the successful operation of such a system is that by its very nature, the trading would be among nations (Hahn & Stavins, 1999)(4).
Nation states are hardly simple cost-minimizers, like private firms, so there is no reason to anticipate that competitive pressures would lead to equating of marginal abatement costs across countries. Even if nations were cost-minimizers, they do not have sufficient information about the marginal abatement costs of firms within their jurisdiction to define their own aggregate marginal costs. If every country participating in such a system were to devolve the tradable permits to firms within its jurisdiction, that is, if each country instituted a domestic tradable permit system as its means of achieving its national target, then the trading could be among firms, not governments, both within countries and internationally (Hahn & Stavins, 1999)(4). Such a system could indeed be cost-effective. In the near term, this
Stavins I 172
trading system could be integrated with an emission-reduction-credit system, such as the CDM [Clean Development Mechanism], for countries that do not take on emission caps. >Carbon Pricing Coordination/Stavins.



1. Montgomery, D. W. (1972). Markets in licenses and efficient pollution control programs. Journal of Economic Theory, 5, 395-418.
2. Stavins, R. N. (1995). Transaction costs and tradeable permits. Journal of Environmental Economics and Management, 29, 133-148.
3. Olmstead, S. M., & Stavins, R. N. (2012). Three key elements of post-2012 international climate policy architecture. Review of Environmental Economics and Policy, 6(2), 1-22.
4. Hahn, R. W., & Stavins, R. N. (1999). What has the Kyoto Protocol wrought? The real architecture of international tradeable permit markets. Washington, DC: The AEI Press.



Robert N. Stavins & Joseph E. Aldy, 2012: “The Promise and Problems of Pricing Carbon: Theory and
Experience”. In: Journal of Environment & Development, Vol. 21/2, pp. 152–180.


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Explanation of symbols: Roman numerals indicate the source, arabic numerals indicate the page number. The corresponding books are indicated on the right hand side. ((s)…): Comment by the sender of the contribution.
The note [Author1]Vs[Author2] or [Author]Vs[term] is an addition from the Dictionary of Arguments. If a German edition is specified, the page numbers refer to this edition.

Stavins I
Robert N. Stavins
Joseph E. Aldy
The Promise and Problems of Pricing Carbon: Theory and Experience 2012


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