The Political Economy of International Emissions Trading Scheme Choice: A Theoretical Analysis

The Kyoto Protocol allows emissions trading between the Annex B countries. We consider three schemes of emissions trading: government trading, permit trading, and credit trading. The schemes are compared in a public choice setting focusing on group size and rent-seeking by interest groups. We find that industry will have most influence on government policy, with environmental organizations taking second place. Our conclusion is that most interest groups prefer a combination of government trading and credit trading even though permit trading is more efficient. Furthermore, some governments prefer government trading because it retains the possibility of hot air trading.