Strategic Choice of International Emissions Trading Scheme in an Open Economy with Perfect Competition

Emissions trading can be organized in several ways. In particular, private emissions trading can be organized as permit trading, or as credit trading. The schemes have a different impact on output with credit trading leading to a higher output level than permit trading. This paper analyzes what the optimal choice of emissions trading scheme is in a model with international trade and perfect competition in the product and emission quota market. Furthermore, I discuss whether it is optimal for the country to allow its firms to trade emissions internationally. The paper shows that countries want to use these schemes in different circumstances, depending on whether they import or export the good. Furthermore, it is shown that in several cases, countries maximize their welfare by not allowing international emissions trading.