GHG Emissions, Lobbying, Free-Riding, and Technological Change

I examine GHG emission policy in a world with a fixed number of regions. In each region, labor and emissions are complementary in production, total world-wide emissions decrease welfare, and total factor productivity can be improved by R&D. A subset of regions can establish an "abatement coalition", authorizing a central planner to grant them non-traded or traded GHG permits. The planner is self-interested, subject to lobbying, and has no budget of its own. The results are the following. The establishment of the "abatement coalition" enhances welfare, promotes economic growth and diminishes emissions both inside and outside the coalition. With technological change due to R&D, GHG permit trade decreases welfare. Furthermore, it increases emissions and slows down economic growth, if emissions are inelastic with respect to the price for permits. Without technological change, GHG permit trade does not make any difference.