The Efficiency, Equity and Politics of Emission Permit Trading.

This paper illustrates that an international permit trading system may hurt relatively poor countries by making associated economic activities unaffordable. A model is constructed in which the free market solution is Pareto inefficient as a result of pollution. The introduction of tradable permits allows pollution to be internalised, and brings about an increase in the total social surplus. But when incomes vary, this may not lead to a Pareto improvement; those in poor countries stop the polluting activity because they cannot afford to do otherwise.