Designing Greenhouse Gases Emissions Trading Institutions : Theory and Experiments

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The Kyoto Protocol to the Climate Convention in December 1997 establishes national emission targets for greenhouse gases (GHGs) for advanced countries and countries undergoing the process of transition to market economies. As one of mechanisms in order to implement this goal, it authorizes emissions trading. In this research project, we have examined how to design desirable institutions for GHGs emissions trading. If emissions permits are traded at the competitive equilibrium price, the goal of the Protocol can be attained efficiently with the minimum cost. However, the Kyoto Protocol specifies that emissions trading should be supplement to domestic actions in reducing GHGs emissions, and supplementarity has been one of the major issues. By using a game theoretical method, we investigated the concrete EU proposal on supplementarity and developed a general theory on supplementarity. Moreover, we analyzed the political and strategic positions of the EU, the USA, and Japan in negotiations to design the details of the Kyoto Protocol.Based on these theoretical analyses, we have conducted over eighty experiments on emissions trading using subjects. In particular, we found that irreversibility of abatement investment and its investment time-lag effect play very important roles in terms of efficiency of emissions trading. When abatement investment is reversible and no time-lag effect is introduced, we observed that emissions trading attains extremely high efficiency, regardless of the choice of trading methods and information closure and disclosure. However, when introducing irreversible abatement investment and its time-lag effect, we found two patterns of price dynamics in emissions trading : the "success" case and the "failure" case. These results clarify how investment uncertainty reduces market efficiency concretely.