The market mechanisms built into the Kyoto Protocol have the potential of significantly reducing the costs of meeting the aggregate emission target. But if trading proceeds on a project-by-project basis rather than on a frictionless market, the total cost saving potential of trading is unclear....

This paper studies firms' incentives to invest in environmental R&D under different market structures (Cournot and Bertrand) and environmental policy instruments (emission standards, taxes, tradable permits and auctioned permits). Because of market strategic effects, R&D incentives vary widely...