Emissions Trading: The Economics and Policy Implications

Abstract

This article investigates the theory of emissions trading. It aims to identify issues to be discussed in designing emissions trading schemes, and to explore their policy implications. Emphasis is given to the potential and limitations of the scheme, and to clarification of the merits and challenges. According to introductory-level economic theory, economic policy instruments including environmental tax, subsidies, and tradable permit schemes yield identical results in respect to economic efficiency, given that these are optimally designed; the differences are in the initial distribution of property rights. Based on this basic view, I construct my discussion on elements that can make these policy instruments differ from each other. I underline the roles of information asymmetry, definitions of rights, market power, intertemporal trading, uncertainty, etc.