University of HelsinkiAbstract. Heterogeneous countries produce goods from fixed resources and emitting inputs that cause simultaneous localized and global externality problems (e.g. smog and global warming). Since there is no benevolent international government, the issue of emission permits is delegated to an international self-interested regulator whom the countries try to influence. A single country can exceed its emission permits with a fixed penalty. In this setup, this article shows that emission trading is welfare diminishing, because it grants less (more) permits to countries with relatively clean (dirty) localized technology.
Professor Emeritus