Working Paper Moral concerns on tradable pollution permits in international environmental agreements

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1 constor Dr On-Accss-Publkatonssrvr dr ZBW Lbnz-Informatonszntrum Wrtschaft Th On Accss Publcaton Srvr of th ZBW Lbnz Informaton Cntr for Economcs Eyckmans, Johan; Kvrndokk, Snorr Workng Par Moral concrns on tradabl olluton rmts n ntrnatonal nvronmntal agrmnts Mmorandum // Dartmnt of Economcs, Unvrsty of Oslo, o. 2009,13 Provdd n Cooraton wth: Dartmnt of Economcs, Unvrsty of Oslo Suggstd Ctaton: Eyckmans, Johan; Kvrndokk, Snorr (2009) : Moral concrns on tradabl olluton rmts n ntrnatonal nvronmntal agrmnts, Mmorandum // Dartmnt of Economcs, Unvrsty of Oslo, o. 2009,13 Ths Vrson s avalabl at: htt://hdl.handl.nt/10419/47270 Standard-utzungsbdngungn: D Dokumnt auf EconStor dürfn zu gnn wssnschaftlchn Zwckn und zum Prvatgbrauch gschrt und kort wrdn. S dürfn d Dokumnt ncht für öffntlch odr kommrzll Zwck vrvlfältgn, öffntlch ausstlln, öffntlch zugänglch machn, vrtrbn odr andrwtg nutzn. Sofrn d Vrfassr d Dokumnt untr On-Contnt-Lznzn (nsbsondr CC-Lznzn) zur Vrfügung gstllt habn solltn, gltn abwchnd von dsn utzungsbdngungn d n dr dort gnanntn Lznz gwährtn utzungsrcht. Trms of us: Documnts n EconStor may b savd and cod for your rsonal and scholarly uross. You ar not to coy documnts for ublc or commrcal uross, to xhbt th documnts ublcly, to mak thm ublcly avalabl on th ntrnt, or to dstrbut or othrws us th documnts n ublc. If th documnts hav bn mad avalabl undr an On Contnt Lcnc (scally Cratv Commons Lcncs), you may xrcs furthr usag rghts as scfd n th ndcatd lcnc. zbw Lbnz-Informatonszntrum Wrtschaft Lbnz Informaton Cntr for Economcs

2 MEMORADUM o 13/2009 Moral Concrns on Tradabl Polluton Prmts n Intrnatonal Envronmntal agrmnts Johan Eyckmans Snorr Kvrndokk ISS: Dartmnt of Economcs Unvrsty of Oslo

3 Ths srs s ublshd by th Unvrsty of Oslo Dartmnt of Economcs P. O.Box 1095 Blndrn OSLO orway Tlhon: Fax: Intrnt: htt:// -mal: cond@con.uo.no In co-oraton wth Th Frsch Cntr for Economc Rsarch Gaustadallén OSLO orway Tlhon: Fax: Intrnt: htt:// -mal: frsch@frsch.uo.no Last 10 Mmoranda o 12/09 o 11/09 o 10/09 o 09/09 o 08/09 o 07/09 o 06/09 o 05/09 o 04/09 o 03/09 Ddrk Lund Margnal vrsus Avrag Bta of Equty undr Cororat Taxaton Frdrk M. Baldusson and ls-hnrk M. von dr Fhr Prc Volatlty and Rsk Exosur: on th Intracton of Quota and Product Markts Dag Mortn Daln, Enrco Sorso and Stnar Strøm Choosng among Comtng Blockbustrs: Dos th Idntty of th Thrd-arty Payr Mattr for th Prscrbng Doctors? Ugo Colombno, Erk Hrnæs, Marlna Locatll and Stnar Strøm Towards and Actuarally Far Pnson Systm n orway Kll Arn Brkk, Karn Evlyn Haug, Jo Thor Lnd and Karn yborg Playng wth th Good Guys: A Publc Good Gam wth Endognous Grou Formaton Bndct Carlsn and Karn yborg Th Gat s On: Prmary Car Physcans as Socal Scurty Gatkrs Alssandro Cors and Stnar Strøm Th Prmum for Organc Wns? Estmatng a Hdonc Prc Equaton from th Producr Sd Jo Thor Lnd, Karl Mon and Frdrk Wllumsn Oum for th Masss? Conflct-nducd arcotcs Producton n Afghanstan Jo Thor Lnd and Karl Mon Msrly Dvlomnts Stnar Holdn and Frdrk Wulfsbrg Wag Rgdty, Insttutons, and Inflaton Prvous ssus of th mmo-srs ar avalabl n a PDF format at: htt://

4 Moral concrns on tradabl olluton rmts n ntrnatonal nvronmntal agrmnts * by Johan Eyckmans ** Hogschool-Unvrstt Brussl HUB Stormstraat 2, B-1000 Brussls, Blgum and Katholk Unvrstt Luvn Cntrum voor Economsch Studën and Snorr Kvrndokk *** Ragnar Frsch Cntr for Economc Rsarch Gaustadallén 21, 0349 Oslo, orway Jun 2009 Abstract W nvstgat how moral concrns about rmt tradng affct an ndognous olluton rmt tradng qulbrum, whr govrnmnts choos non-cooratvly th amount of rmts thy allocat to domstc ndustrs. Poltcans may fl rluctant to allow rmt tradng and/or may rfr that abatmnt s undrtakn domstcally du to moral concrns. Ths wll hav an ffct on th ntal rmt allocatons, and, thrfor, on global mssons. Th mact on global mssons dnds on th rcs formulaton of th moral concrns, but undr rasonabl assumtons, w show that global mssons may ncras. Thus, dong what s rcvd as good dos not always yld th dsrd outcom. Howvr, ths can b offst by rstrctons on rmt tradng whn govrnmnts hav moral concrns about ths trad. Kywords: Tradabl msson rmts, ntrnatonal nvronmntal agrmnts, noncooratv gam thory, moral motvaton, dntty. JEL cod: D63, Q54. * W ar ndbtd to commnts from Kll Arn Brkk, Carolyn Fshr, Rolf Golombk, Karn Evlyn Haug, Carstn Hlm, Karn yborg, Alstar Ulh and othr artcants at th Frsch Cntr Klækkn smnar (May 2007), th CAS Worksho n Askr (August 2007), th ublc conomcs smnar n Luvn (Arl 2008), EAERE n Gothnburg (Jun 2008), RFF (May 2009) and ORKLIMA kck-off n Drøbak (Jun 2009). Kvrndokk s also ndbtd to th hostalty of Katholk Unvrstt Luvn, Dartmnt of Economcs, and Johns Hokns Unvrsty, SAIS whl workng on ths ar. ** Johan.Eyckmans@HUBrussl.b *** Corrsondng author: Snorr.Kvrndokk@frsch.uo.no 1

5 1. Introducton Economsts tycally rfr trad n olluton rmts to convntonal, non marktbasd nvronmntal olcy nstrumnts, as both n thory (Montgomry, 1972) and n ractc (Schmalns t al., 1998), markt-basd olcy nstrumnts hav bn shown to fostr cost ffctvnss. Howvr, many non-conomsts such as nvronmntal organsatons and oltcal arts hav obctd aganst rmt trad. Som consdr t a way of avodng on s oblgatons, to ay othrs to clan u, or to ay ndulgnc, s Goodn (1994). 1 Svral xstng multnatonal tradabl rmt schms contan rstrctons on rmt tradng. Ths may hav bn ntroducd as a consqunc of sgnators bng rluctant to allow full tradng. 2 In th Kyoto rotocol on grnhous gas mssons for nstanc, trad n olluton rmts s allowd, but only as a sulmnt to natonal mtgaton. 3 Also n th Euroan Emsson Tradng Schm (ETS), accss to buyng msson rductons n thrd arty countrs (JI Jont Imlmntaton for conoms n transton and CDM - Clan Dvlomnt Mchansm for dvlong countrs) s lmtd. 4 Thus, th cost-ffctv volum of trad may not b wthn rach. In ths ar w wll study th mlcatons of moral consdratons about rmt tradng n an ntrnatonal ca-and-trad markt. Ths moral consdratons ar assumd to lay a rol only n th govrnmnts dcson makng rocss; not n th roft maxmzaton obctv of th rmt tradng frms. In a frst stag of th modl, govrnmnts ar assumd to ngotat on natonal msson targts at an ntrnatonal forum. Th msson clngs ar allocatd frly to th natonal ndustrs, whch can trad th rmts n an ntrnatonal and comttv olluton rmt markt n th scond stag of th modl. Th st u s smlar to th on of Hlm (2003) and mls that th ovrall mssons, and hnc th total numbr of olluton rmts, s 1 Carstn Hlm ontd out to us that "Luftvrschmutzungsrcht" - tradabl ar olluton rmts - was on lac 3 n th 2004 votng for th "Unwort ds Jahrs" (uglst word of th yar) n Grmany, s htt:// 2 Comtng xlanatons basd on markt owr argumnts hav also bn ut forward, s Ellrman and Wng (2000). 3 Artcl 6.1 of th orgnal Kyoto Protocol txt stats Th acquston of msson rducton unts shall b sulmntal to domstc actons for th uross of mtng commtmnts undr Artcl 3. Howvr, latr mtngs of th Confrnc of th Parts (CoP) hav not bn abl to fnd a consnsus on a mor rcs or quanttatv manng of ths sulmntarty rqurmnt. 4 Mor dtals on th latst roosd changs n th EU ETS 3 rd has ( ) can b found at htt://uroa.u/rad/rssrlassacton.do?rfrnc=memo/08/796. As by May 2009, t s clar that accss to CDM and JI rocts wll not b unlmtd. 2

6 dtrmnd ndognously and not gvn xognously as s th cas n most of th xstng ltratur on tradabl rmt markts. Our modl s artcularly sutd to dscrb th ongong ngotaton rocss to forg a follow u agrmnt to th Kyoto Protocol, whch should culmnat n a nw clmat traty by th nd of Most lkly, a nw agrmnt wll combn natonal mssons targts wth rovsons for mssons tradng. Moral consdratons ar caturd n our modl by mans of dntty ffcts (Akrlof and Kranton, 2000, 2005; Brkk, t al., 2003). Govrnmnts ar assumd to car about th dntty of thr naton as ths rflcts th vws of thr votrs. Thr may b dffrnt rasons for moral concrns as dscussd blow, and w focus on two ways to scfy dntty ffcts, that w thnk catur many argumnts that hav bn rasd. Frst, w assum that a naton s dntty s ngatvly affctd by ts nt rmt trad volum. Ths rflcts th da that som do not lk tradng olluton rmts smly bcaus thy blv on should not trad n an ssntally non-dsrabl tm lk lcncs to ollut. But, at th sam tm, w assum that countrs ar wllng to trad off th bttr dntty aganst bnfts from xchangng rmts. In our scond formulaton of moral consdratons, w assum countrs dntts dnd on thr actual abatmnt ffort at hom. Thus, thy bnft n dntty trms from abatng at hom nstad of buyng msson rductons lswhr. Ths s scfd as th dntty dndng ngatvly on th ga btwn countrs actual and dal msson lvls, th lattr rflctng what thy thnk thy dally should do. Ths formulaton caturs concrn for th stat of th global nvronmnt and on s own rsonsblty for t. W study how moral consdratons may affct global mssons n an ndognous rmt tradng qulbrum, and w fnd that th ffct on global mssons dnds on how ths concrns ar scfd. Wth dstast for rmt tradng, moral consdratons wll most lkly lad to hghr, nstad of lowr, global mssons n an ntrnatonal clmat agrmnt wth rmt tradng. Th rason s that on avrag, rmt mortng countrs hav a strongr ncntv to ovr allocat thr domstc ndustrs to rduc rmt urchass comard to th ncntv of rmt xortng countrs to undr allocat thrs. Howvr, f th concrn of countrs s basd on a rfrnc for domstc abatmnt and global rsonsblty, global mssons wll go down. Ths concluson s basd on an qual concrn n all countrs, whch wll 3

7 robably not b th cas. If only a fw countrs shar ths concrn, th ostv nvronmntal ffct may b rathr small. Both ths rsults show that good ntntons do not always yld th dsrd rsults. Whl rstrctons on rmt tradng as ntroducd n th Kyoto Protocol and th ETS, may b bad for th nvronmnt as thy ncrass th costs of rachng an mssons targt, and, thrfor, th ncntv to on a traty, w show that such rstrctons may actually rduc global mssons whn govrnmnts ar morally concrnd about tradng rmts. Th rason s that th ncntv of rmt mortrs to ovr allocat domstc ndustrs to rduc rmt urchas has bn rducd. Thus, f th rstrctons rsult from rluctanc to trad, thy may actually b good for th nvronmnt. Th ar s organsd n th followng way. W frst dscuss ossbl rasons bhnd th rluctanc to trad olluton rmts. In scton 3, w rsnt th modl, whl scton 4 drvs conclusons on how moral concrns about msson rmt tradng chang govrnmnts bhavour n th rmt tradng markt and, thrfor, global mssons. Scton 5 studs th macts on global mssons from rstrctons on buyng rmts, and th fnal scton concluds. 2. Ethcal rasonng, norms and dntty In conomc thory, t s assumd that most goods can b bought or sold n a markt. Howvr, ths may not always b th cas and dstast, or vn rugnanc, for crtan transactons may b a ral constrant n many markts, s Roth (2007) for a survy. 5 Ths stuaton can b dscrbd as f thr xsts a norm aganst tradng crtan goods. A norm s dfnd as a standard of rght or wrong, and n all culturs thr ar goods that ar consdrd to b rclss or sacrd n such a way that w cannot st a rc on thm. Examls may b lf, frdom, lov, frndsh, chldrn, rlgon, dmocracy and th nvronmnt. Som of ths goods ar calld taboo goods (Fsk and Ttlock, 1997) whr a taboo s dfnd as a artcularly owrful knd of normatv rohbton. Taboos ar mant to rotct ndvduals and socts from bhavour dfnd or rcvd to b dangrous (Tannnwald, 1999), and brakng a taboo usually rsults n socal sanctons or rrcussons. Howvr, thr ar also 5 Frank (1985), chatr 10, also gvs svral xamls of why trad n crtan goods should not b allowd. 4

8 tradabl goods for whch thr s a socal norm aganst t bng frly tradd, but for whch ths norm s not as strct as for taboo goods. Examls may b lgalzd rosttuton, body organs and mltary duty (Bénabou and Trol, 2007; Roth, 2007). Som knds of transactons ar consdrd rugnant n som tms and lacs, but not n othrs, thus th boundars btwn th scular and th sacrd ar volvng ovr tm. Slavry usd to xst n larg arts of th world, but s now rugnant and llgal n most lacs. But thr hav also bn mor ostv atttuds to som goods ovr tm such as lf nsuranc (Zlnr, 1999) and lgalzd rosttuton. Markts for olluton rmts has bn rcognsd by svral authors as a cas n whch thr may xst som rluctanc or vn rugnanc aganst transactons, s,.g., Goodn (1994), Bénabou and Trol (2007) and Roth (2007). But why may thr b rluctanc aganst trad n olluton rmts? W can dntfy svral ossbl rasons for ths, som of whch ar basd on argumnts rootd n a mor rocdural vw of ustc, and othrs n a mor consquntalst thcs framwork. Basd on a rocdural ustc aroach, on can argu that ndustralsd countrs hav cratd th global warmng roblm, and that t s thr duty to rduc th consquncs of t, vn f ths dos not mnms ovrall costs of takng acton. Ths can b usd as an argumnt aganst dvlong countrs sllng rmts to ndustralsd countrs bcaus th rmt trad would not lad to abatmnt n th countrs rsonsbl for th roblm. Anothr argumnt s basd on unfar background condtons (s Kvrndokk, 1995, and Eyckmans and Schokkart, 2004). Evn f two arts agr to trad rmts, th trad may not b ustfd on thcal grounds. A voluntary agrmnt btwn two arts s not ncssary far f s ntrd nto condtons that ar not far (Pogg, 1989). Background ustc s not rsrvd whn som artcant s basc rghts, oortunts or conomc ostons ar grossly nfror. 6 Undr th Kyoto Protocol, for nstanc, som may argu that ths s th cas for som CDM contracts, as ths s a trad btwn oor and rch countrs. 7 Anothr ln of argumnts hngs on consquntalst thcs. Standard conomc analyss s bascally about consquncs and f th consquncs of a artcular olcy ar ostv (.., ncrasd wlfar), conomsts rcommnd t. Ths s th cas wth 6 Som xamls can b kdny trad or an agrmnt btwn a rosttut and hr/hs customr. 7 Som argu that t s not far that th dvlod countrs tak all th low hangng fruts and th dvlong countrs ar lft wth th mor xnsv mtgaton otons n a ossbl futur agrmnt. 5

9 msson rmts. Th basc argumnt n favour of rmt trad s that t s costffctv (Montgomry, 1972). Parts nvolvd n rmt trad would gt lowr abatmnt costs than f thy had to mtgat th mssons wthn thr gograhcal boundars. Thus, cost-savngs wll b wlfar mrovng, vrythng ls qual. On ossbl xlanaton of th rsstanc to rmt trad s, thrfor, that wlfar mrovmnts followng from rmt trad hav not bn communcatd wll nough,.., ths ont of vw s basd on lack of nformaton. 8 Howvr, xlanatons basd on allgdly ngatv consquncs of a rmt markt, may also b lausbl. Buyng CDM quotas,.., grnhous gasss olluton rmts n countrs that dd not subscrb to bndng msson lmts n th Kyoto Protocol, may hav advrs ffcts basd on lack of an msson basln, moral hazard, lack of ncntvs to undrtak mssons rductons by th dvlong countrs, transacton costs and carbon lakags. As a rsult, CDM rocts may not fully offst mssons, s Rosndahl and Strand (2009). Hot ar, manng that som countrs rcv an ntal msson quota allocaton that xcds thr actual mssons, has also bn mntond as a rason to avod msson tradng as tradng hot ar wll not rduc mssons. Abatng at hom nstad of buyng msson rmts may also b sn as a bttr olcy basd on consquncs. Argumnts that hav bn rasd n ths dbat ar th ostv sllovr ffcts of tchnology dvlomnt by natonal abatmnt as wll as th ancllary bnfts (rducton n local mssons, traffc accdnts, congston tc.) of abatng at hom. It s furthr argud that unlatral abatmnt may lad to smlar bhavour by othr countrs, t may affct ostvly th ngotaton clmat n th ntrnatonal olcy arna, and t may rduc th conflct of ntrst wthn a country as t actually shows th tru costs of abatmnt, a cost that conomc agnts hav an ncntv to xaggrat; s Hol (1991) and Golombk and Hol (2004). Also nvronmntal ustc, rlatd to rac and thncty, has bn usd as an argumnt for abatng at hom rlatd to th ancllary bnfts argumnt abov (s,.g., Kvrndokk and Ros, 2008, for a survy). Many toxc wast sts ar locatd n or nar mnorty nghborhoods, and ths has ld to ooston to mssons tradng. 8 On xaml ontd out to us by Alstar Ulh s as follows. If a country has xtrmly hgh margnal abatmnt costs (n th lmt nfnt:.., t cannot abat) thn wantng to do all th abatmnt at hom s ust not snsbl; t would sm mor arorat, for a country to us ts rsourcs to ay a country whch can abat chaly to do so. 6

10 Although th locaton of grnhous gas rducton dos not mattr bcaus t s a globally mxd ollutant, rducton of co-ollutants (.g., sulfur oxds, artculats, ar toxcs) dos. Mnorty nghborhoods mght not gan a otntal rducton of ths co-ollutants f th local mttrs buy rmts and, thrfor, do not tak actons to lowr mssons of all ollutants at hom. Th dscusson abov rovds argumnts, basd on both rocdural farnss and consquntalst thcs, aganst rmt tradng. W summarz ths dscusson by rducng t to two basc statmnts that w wll us to formalz moral concrns: 1) Pol mght dslk rmt tradng, and 2) Pol mght rfr to do abatmnt at hom. Th frst statmnt s wakr than th scond as rluctanc to trad rmts dos not ncssary man that countrs car about th nvronmnt. Howvr, rasons to avod tradng ar oftn basd on a rfrnc for nvronmntal valus, and n th scond clam, th maor motvaton s to sav th nvronmnt, ndndnt of ntrnatonal agrmnts and quota trad. W do not clam that ths statmnts ar tru or that thr ar good thcal argumnts aganst rmt tradng. Instad, w tak an agnostc stand and tak ths argumnts as gvn as w thnk thy dscrb som of th rluctanc obsrvd n th oltcal dbat on rmt tradng. Also not that n th followng, w assum that govrnmnts rform th moral rasonng on bhalf of thr votrs, so that moral concrns by th ol of a naton ar rflctd n govrnmnt s olcs. If a substantal shar of votrs has moral concrns about rmt tradng, t wll b rflctd n th govrnmnt s dcson f oltcans car about thr r-lcton chancs. Th statmnts abov may consttut a norm aganst tradng olluton rmts. orms ar closly rlatd to th rsrvaton of dntty, and by modllng a norm aganst rmt trad, w buld on th thory of dntty and moral motvaton (Akrlof and Kranton, 2000, 2005; Brkk, t al., 2003). In ths way w can modl both th rluctanc to trad wth olluton rmts, and gvn that th agnt dos not follow th norm, th wsh to rduc th trad vn f t s conomcally roftabl. As th rasons for rluctanc to trad may b basd on both rocdural farnss as wll as consquncs, w do not try to ndogns th norm n th modl, manng that w do not dtrmn why a socty chooss a crtan norm aganst olluton rmt tradng. 7

11 3. Th ndognous rmt markt allocaton modl Our framwork s basd on Hlm (2003) who rsnts a modl of ntrnatonal mssons tradng n whch countrs choos th amount of rmts thy allocat to thr domstc ndustry n an ndognous and non-cooratv way. 9 W xand Hlm s modl by ntroducng moral concrns (dntty consdratons). Countrs ar assumd to b rluctant to trad mssons rmts and/or may dslk th fact that thy mt mor than what thy thnk thy dally should do. Th basc buldng blocks of th modl ar as follows. Thr ar n countrs or govrnmnts ngagd n ngotatng a futur ntrnatonal nvronmntal agrmnt ncludng rovsons for olluton rmt tradng. Th govrnmnts rrsnt th vw of thr votrs who ar, to som xtnt, rluctant to trad rmts. Howvr, thy ar also wllng to trad f th bnfts from trad ar larg nough. As n Hlm (2003), w mak th assumton that th rmt-tradng rgm s stablshd only by unanmous aroval of all countrs. 10 In th frst stag, govrnmnts choos non-cooratvly thr ntal mssons allocaton. Ths st-u rsmbls closly th ralty of ntrnatonal clmat ngotatons, n artcular n th run u to th 1997 Kyoto Protocol and n th ngotatons on a follow u agrmnt. Anothr xaml s th ETS whr EU mmbr stats had to draft atonal Allocaton Plans (APs) suggstng a rmt allocaton for all nstallaton covrd by th ETS drctv on thr trrtory for Phas 1 ( ) and Phas 2 ( ). In contrast to most of th ltratur on natonal msson rmt schms, th ovrall numbr of rmts cannot b assumd to b xognous n an ntrnatonal contxt. In th scond stag of th gam, ndvdual frms trad mssons n a comttv rmt markt. W assum that thy oby th msson clng and that thy maxmz thr rvat roft only. Thus, frms do not hav moral concrns about tradng. 11 Ths gam s solvd by backward nducton,.., w start b solvng th scond stag. 9 For othr alcatons of th modl, s Holtsmark and Sommrvoll (2008) and Carbon t al. (2009). 10 Allowng for ndognous coalton formaton would substantally comlcat th analyss, as th countrs ar not symmtrc n our analyss. Symmtrc or homognous countrs s a common assumton n studs of coalton formaton, s,.g., Barrtt (2005), but would b narorat n our cas snc th dffrnc btwn countrs s ssntal n th analyss of olluton rmt tradng. 11 Ths s consstnt wth Sbrt (1992,. 130) and Rauschr (2006) who argu that a frm sndng rsourcs on socal actvts not rwardd by th markt wll not rman comttv and wll b drvn out of th markt. Howvr, f frms hav markt owr, non-roft motvs can survv. 8

12 3.1 Stag 2: Frms tradng mssons In vry country = { 12,,,n} thr s a larg numbr of dntcal frms that maxmzs rofts du to mssons, π, takng as gvn th mssons tradng schm: ( ) B ( ) [ ] max π ;, = + (1) Lt 0 b th ntal allocaton of rmts to th rrsntatv frm n country and assum that rmts ar allocatd for fr. For smlcty, w st th mssons of on country qual to th mssons of ts rrsntatv frm, [ 0, ], whr s busnss as usual (BAU) mssons,.., mssons n absnc of an ntrnatonal traty and any moral consdratons. Ths s th maxmum mssons that a country wll mt. 12 Emssons can b tradd at a gvn markt rc. Frms choos mssons n ordr to maxmz rofts,.., th sum of bnfts and nt rmt trad rvnus. Th bnfts of mssons, B, can b ntrrtd as a roducton functon. Producton rqurs nut of carbon mssons, and s assumd ncrasng and strctly concav n mssons: B 0 and B < 0. In th Andx, th formal rorts of th bnft functon ar drvd from th standard rorts of an msson abatmnt cost functon. From th frst-ordr condton for roft maxmzaton, w can drv th dmand for mssons: 1 ( ) ( ) ( ) ( ) B = = E = B (2) Proft maxmzng bhavour by frms lads to cost-ffctvnss; margnal bnfts of mssons ar qualsd across frms. Thus, ths condton s vald vn f countrs hav moral argumnts aganst rmt tradng as such consdratons ar not takn nto account by th comttv frms. Comaratv statcs of ths xrssons shows that mssons ar dcrasng n th rmt rc: 1 B d = d = E = < 0 B (3) 12 ot that wll moral concrns on abatmnt at hom, mssons wll b lss than vn n th absnc of a clmat traty, s scton

13 Usng frst-ordr condton (2), w can dfn a nt suly of rmts functon that s ncrasng n th rc of rmts: S S E S E ( ) = ( ) wth = = > 0 (4) A rmt markt qulbrum dfns a rc lvl such that total nt suly of rmts s nonngatv: ( ) = ( ) (5) o o o such that S E 0 Ths markt qulbrum condton mlctly dfns a rc functon mang a o vctor of msson allocatons nto th markt clarng rc lvl: ρ ( ) =. W assum that th margnal bnft functons ar such that for vry vctor of msson allocatons, thr xsts a unqu qulbrum rmt rc. 13 Th rmt rc functon can b shown to b dcrasng n th ntal allocatons of rmts to a country. ρ ρ d* 1 = = = < 0 d E (6) ( ) Hnc, n accordanc wth standard conomc ntuton, hghr allocatons of rmts lad to a dcras n th qulbrum rmt rc. 3.2 Stag 1: Govrnmnts choosng ntal rmt allocatons Gvn th smoothly workng rmt markt n stag two, govrnmnts ngotat n stag on on th ntal allocaton of rmts, and w assum that thy choos th numbr of rmts as to maxmz th followng natonal wlfar functon: Th functon (, ; ) ( ) [ ] ( ) (, S, ) W = B + D + + I (7) D dnots olluton damags ncurrd n country. Ths damags ar convx n global mssons, dfnd by th total amount of rmts dstrbutd (country s rmts ar, whl all othr countrs msson rmts ar dnotd by ). Thus, th nvronmntal roblm s causd by a unformly mxng ollutant as 13 If mor rmts would b allocatd than th nt dmand for mssons, w assum that th o qulbrum rc s zro: > E ( 0) = 0. 10

14 n th cas of global warmng. W assum that country maxmzs ts wlfar, takng as gvn th rmt allocatons by all othr countrs ( = ). Hnc, w ar lookng for a ash qulbrum n rmt allocatons among natonal govrnmnts. Our st-u s smlar to th modl ntroducd by Hlm (2003). Howvr, n addton to th aroach by Hlm, w assum that countrs hav moral concrns about rmt tradng dfnd as an dntty, I, whch adds ostvly to thr wlfar functon. Idntty s usually dfnd as a rson s slf mag as an ndvdual or as a art of a grou (Akrlof and Kranton, 2005). Idntty has bn rcognsd as mortant for ndvdual bhavour n flds as socal sychology and socology, but has only rcntly bn adotd n formal conomc modls. In ths ar w dfn a country s moral concrns n th sam way as th dntty of an ndvdual as govrnmnts rform th moral rasonng on bhalf of thr votrs. Th modl also bars som rsmblanc to th ltratur on voluntary rovson of ublc goods, s Brgstrom t al. (1986), and n artcular to th strand of ltratur on th so-calld warm glow of gvng, s Andron (1990). In ths ltratur, conomc agnts car about th ovrall lvl of th ublc good and fl good about contrbutng a ostv amount to ts rovson. On can ntrrt ths warm glow ffct as a ostv dntty ffct (s Brkk t al., 2003). Howvr, n our modl, rvat contrbutons, n th sns of low allocaton of olluton rmts to on s domstc ndustry, may lad to a cold flng nstad of a warm glow as ths ncrass th ncntvs for frms to ntr th rmt tradng markt and buy larg amounts of rmts. Basd on th statmnts mad n scton 2, th moral concrn (dntty) of a country s a functon of t s actual mssons,, t s rmt allowancs as wll as t s dal mssons, S. Th lattr s dfnd as th msson lvl that th country would lk to am for basd on thcal rasonng. Ths dal s consdrd xognous. W rturn to ths n scton 4. Usng th notaton ntroducd bfor, w can wrt th wlfar functon of country, takng nto account th comttv rmt tradng n stag two, as: (, ) ( ( )) ( ) ( ) ( ( ) ) S ( ) ( ( ρ( ) ),, ) W = B E ρ + ρ E ρ D + + I E (8) 11

15 Each country wants to st ts ntal rmt allocaton,, n ordr to maxmz ts wlfar dfnd by xrsson (8), whr th stratgy sac for vry layr s [ 0, ]. Th frst-ordr condton for an ntror soluton s, thrfor, 14 whr I s th chang n dntty for a chang n : Usng th frst-ordr condton [ ] 1 0 BE ρ + ρ E + ρ E ρ D + I = (9) B = ρ of comttv rmt tradng among frms n stag 2 (q. (2)), th followng condton should b satsfd for all countrs : [ E ] + D + I = 0 ρ ρ (10) Th frst trm on th lft hand sd (LHS) s th ffct of addtonal rmt allocatons on th msson tradng rvnu through th ffct on th rmt rc. A mor gnrous rmt allocaton s bnfcal for rmt mortrs (th markt rc gos down), whl a mor rstrctd rmt allocaton s bnfcal for rmt xortrs (th markt rc gos u). W labl ths ffct th stratgc rmt tradng ffct. Th scond trm s th drct rc ffct of a mor gnrous rmt allocaton. Evry addtonal rmt s worth th rvalng markt rc ρ. Th thrd trm stands for th addtonal olluton damag ffct causd by a mor gnrous rmt allocaton. Mor rmts lad, ctrs arbus, to hghr global mssons and hnc hghr olluton damags. Ths ffct s thrfor ngatv. Fnally, th last trm caturs th chang n th moral concrns of xtra rmts. Ths ffct can b ostv or ngatv dndng on th rcs scfcaton of th dntty functon. Rarrangng (10) and usng agan th frms roft maxmzng frst-ordr condton B = ρ, w obtan: [ ] B = D ρ E I (11) Hnc, vry country chooss an ntal rmt allocaton such that ts margnal bnft from th last ton of mssons quals ndvdual margnal damags, corrctd for a stratgc rmt trad ffct and an dntty ffct. 14 All varabls and functons ar valuatd n th ash qulbrum of rmt allocatons,.., th rmt allocatons of othr countrs ar takn as xognous. 12

16 4. Dffrnt formulatons of natons moral concrns 4.1 Rluctanc to trad So far w hav not scfd th dntty functon. Lt us consdr th two statmnts on moral concrns from scton 2: Countrs mght dslk rmt tradng, and countrs mght rfr to do all th abatmnt at hom. Howvr, for as of xoston, w study th two statmnts saratly bfor combnng thm. W frst focus on th statmnt that countrs dslk rmt tradng. Assum a symmtrc formulaton of rluctanc to trad,.., countrs dslk both sllng and buyng rmts: I (, ) 2 ( ( ) ) ( ( ) ) F δ E ρ f E ρ = 0 othrws (12) Involvmnt n rmt tradng rrsnts a cost, both for buyrs and sllrs, du to th fact that on dos not act n accordanc wth on s moral convcton. Ths loss n dntty conssts of a fxd cost ndndnt of th amount of rmts tradd, and a varabl cost. Th fxd cost, F > 0, s th loss of gong from on rgm to anothr, hr rrsntd by gong from a non-trad rgm to a tradng rgm. Howvr, th volum of trad also mattrs. If a country dcds to trad, t fls lss comfortabl th hghr th volum of rmt tradng s whn δ > An xaml can b th sulmntary condton n th Kyoto Protocol as wll as rcnt oltcal dscussons n orway on sttng a lmt on how much on can rduc abatmnt abroad. Fnally, not that ths dntty functon has a maxmum at zro wthout mssons tradng. Th scfcaton of th moral concrns, both th fxd and th varabl trm rrsnt costs of tradng and thus lowr wlfar n th tradng systm comard to whn moral concrns ar not rsnt. Ths shars smlarts wth a rmt trad systm wth transacton costs as n Stavns (1995). Wth transacton costs, th volum of trad s lowr and wlfar s lowr comard to a systm wthout such costs. Also th ntal allocaton of rmts may affct th outcom of tradng. Howvr, moral consdratons affct rmt tradng dffrntly than transacton costs n svral 15 In th cas whr δ = 0,.., thr s an dntty cost of not followng th norm, whch s ndndnt on th volum of trad as long as th volum s ostv, w wll actually gt th sam frst ordr condtons as whn dntty dos not mattr,.., = 0. I 13

17 rscts. Frst, th fxd dntty trm affcts th dcson whthr th country wants to tak art n th rmt tradng markt, and scond, th ndognous art of th dntty functon affcts th allocaton of ntal allowancs as countrs do not want th allocatons to b vry dffrnt from actual mssons. Howvr, for a gvn lvl of aggrgatd allowancs (global mssons targt), th outcom of tradng s not affctd by th ntal allowanc allocaton. In our modl, frms fac no transacton costs n trad so thy trad cost-ffctvly,.., margnal abatmnt costs among sourcs ar qual. Ths s not th cas n modls wth transacton costs as ths costs ar usually modlld as a functon of th volum of trad. Usng ths xlct dntty functon, w can drv th followng lmma: LEMMA 1 If countrs ar rluctant to trad rmts, and f dntty s symmtrc, thn: f country s a rmt sllr ( > E) t follows that B > D ; f country s a rmt buyr ( < E) t follows that B < D. Ths mans that sllrs undrallocat and buyrs ovrallocat mssons comard to a stuaton wthout rmt tradng and wthout moral concrns. Proof: Th chang n dntty from a margnal ncras n [ ] I = 2δ 1 E ρ E s gvn by:. Ths chang s ostv for rmt buyrs and ngatv for rmt sllrs for th symmtrc dntty functon bcaus 0 E ρ = E E 1. It follows from (11) that: ρ [ ] 2δ 1 ρ [ ] [ E ] ρ 2δ 1 E ρ B D = E + E E = + + and thrfor B D f E. Q.E.D. Th lmma says that rmt sllrs allocat rmts so that th margnal bnft from mssons s hghr than th margnal damag, whl t s th othr way around for rmt buyrs. Th ntuton s as follows. t rmt sllng countrs tnd to undr allocat thr domstc frms, yldng margnal bnft from mssons n xcss of 14

18 margnal costs, as ths maks rmts scarc and drvs u th qulbrum markt rc. In addton, th undr allocaton has ostv dntty ffcts as th volum of trad gos down and th ga btwn rmt allocaton and actual mssons shrnks. On th othr hand, nt rmt buyng countrs tnd to ovr allocat thr domstc frms bcaus ths maks rmts mor abundant and lowrs th markt rc. Furthr, th sam dntty mchansm as dscrbd for sllrs s also vald for buyrs; ovr allocatng rmts has ostv dntty ffcts as th volum of trad gos down. Summarzng, th moral concrns, f thy only stm from rluctanc to trad, strngthn th rsults obtand by Hlm (2003). Thy rnforc th stratgc trad ncntvs for both sllrs and buyrs of rmts. Ths rovs to b a usful rsult for th rmandr of th ar. 4.2 Asymmtrc rluctanc to trad How dos th ntroducton of moral concrns affct th global amount of rmts ssud nto th markt? W start wth a sml cas basd on th fact that th dscusson on th acctablty of rmt tradng s manly a toc n countrs that ar otntal rmt buyrs. Ths mans that th dntty functon s asymmtrc, whr countrs only suffr an dntty loss f thy buy rmts: 2 ( ( ) ) ( ( ) ) F δ E ρ f < E ρ I(, ; β) = F f > E 0 othrws (13) PROPOSITIO 1 If only buyrs ar rluctant to trad (asymmtrc dntty functon), thn vry ndvdual country wll mt mor and global msson wll b hghr than n th ndognous rmt allocaton qulbrum wthout moral concrns. Proof: Th frst-ordr condtons for govrnmnts ssung rmts ar dffrnt for rmt mortrs ( < E) and xortrs ( E), s (11): [ ] [ ] [ ] 0 B ρ 2δ 1 ρ D + E E E = 0 f < E B D + ρ E = f E 15

19 Summng ovr both tys of countrs and usng th markt clarng condton from (5), t follows that: { } B 2δ mn 0, 1 ρ D E E = 0 Assumng, n contrast to th clam n th rooston, I < o and usng th I o convxty of th damag functons, t follows that: D ( ) < D ( ). Summng ovr th arorat frst-ordr condtons for both qulbra, s (10), t can b shown that (rcall that 0 1 E ρ 1): I o 2δ ρ ρ < mn{ 0, E} 1 ρ E < 0 n Hnc, th qulbrum rmt rc would b lowr wth asymmtrc moral concrns than wthout. Gvn that th qulbrum rc functon s dcrasng n th global rmt allocaton, w gt I > o, whch contradcts th ntal assumton. Thrfor, I o, and moral concrns wll lad to hghr global mssons than wthout such concrns. As w hav shown that th qulbrum rmt rc wll b lowr wth asymmtrc moral concrns than wthout, vry country s rrsntatv frm wll mt mor: ( ) ρ ρ ( ) B E = < = B E E > E du to concavty of th bnft functons. I I o o I o Q.E.D. Th rooston s ntutvly clar. From Lmma 1 w know that rmt buyrs hav an ncntv to ovr allocat thr domstc ndustrs bcaus of 1) stratgc trad consdratons (drvng down th qulbrum rmt rc), and 2) moral concrns (ovr allocatng domstc frms rducs th amount of rmts that has to b mortd). Snc only buyrs moral concrns ar takn nto account n th asymmtrc dntty functon, global mssons n th ntrnatonal ash qulbrum wll b hghr than n th scnaro wthout such consdratons. 16

20 4.3 Symmtrc rluctanc to trad W now turn to th mor comlcatd cas whr both rmt mortrs and xortrs dslk rmt tradng,.., th symmtrc dntty functon. In ordr to fnd th global ffct, w summars all countrs frst-ordr condtons basd on (10) and [ ] I = 2δ 1 E ρ E, to obtan: { ρ E ρ D δ E E ρ } = 0 { } ρ E + nρ D 2δ E + 2δρ E E = 0 nρ D + 2δρ E E = 0 Hnc, (14) nρ = D 2δρ E E As th followng rsult shows, th outcom dnds on th balanc of owr btwn rmt xortrs and mortrs. 16 PROPOSITIO 2 If countrs ar rluctant to trad rmts, dntty s symmtrc, and E E > ( < )0, global mssons wll b lowr (hghr) and vry country wll mt lss (mor) than wthout moral concrns. I Proof: Assum th clam s fals,.., E E > 0 and >, whr s o global mssons and to scrt I and O rfrs to th qulbrum wth moral concrns and wthout such concrns rsctvly. Bcaus of convxty of th damag I o functons f follows that: D ( ) > D ( ). Usng (14) and th arorat condton whn thr s no dntty functon (.., th scond trm of th rght hand sd of (14) s qual to zro), t s asly shown that: 16 ot that n th followng roostons w do not do comarsons to a frst bst socal otmum as n gnral th frst bst soluton wth and wthout moral concrns would dffr. On xcton s th frst bst soluton n scton 4.4 whr th two solutons concd. 17

21 I o nρ + 2δρ E E > nρ I o 2δρ ρ ρ > E E 0 n > Hnc, th qulbrum rmt rc wth moral concrns would b hghr than th rc wthout such concrns. Gvn that th qulbrum rc s dcrasng n th I global rmt allocaton, <, whch contradcts th ntal assumton. o Fnally, as w hav ust shown that f E E > 0, global mssons wll b lowr and, hnc, th qulbrum rc of rmts wll b hghr n cas of moral concrns and, thrfor, vry country s rrsntatv frm wll mt lss: ( ) ρ ρ ( ) B E = > = B E E < E du to concavty of th bnft functons. I I o o I o Q.E.D. Hnc, f E E > 0, rluctanc to trad lads to lowr ovrall msson allocatons, and hnc lowr mssons, than n th absnc of moral consdratons. But how should w ntrrt th condton E E > 0? It can b ntrrtd as a wghtd avrag of all rmt trads, whr rmts xortrs hav E E < 0 and mortrs E E > 0, and whr th wghts, E, ar gvn by th nvrs of th slo of th margnal bnft of mssons functon (rcall that E = 1 B < 0). Thus, n ordr for E E to b ostv, rmt xortrs should, on avrag, hav smallr absolut valus of E than rmt mortrs. ot that hgh absolut valus of B (.., st margnal msson abatmnt cost functons) mly small absolut valus of E. Thrfor, th trm s ostv f rmt sllrs ar rdomnantly countrs wth st margnal abatmnt cost functons (s th Andx). Ths s not vry lkly n th Kyoto rmt markt. Most mrcal modls rdct th contrary,.., that low abatmnt cost countrs (.., countrs wth flat margnal bnft functons, B ) wll xort carbon mssons rmts, s Böhrngr (2002), 18

22 Dn Elzn and d Moor (2002) or Eyckmans and Hagm (2008). Thrfor, t s mor lkly that moral concrns would lad to a hghr numbr of rmts ssud. Ths mans that th soluton wth moral concrns s lkly to to rsult n hghr global mssons than n th absnc of thos consdratons. Th rsult s agan du to th ovr allocaton of rmts n rmt mortng countrs that follows from Lmma Prfrncs for abatmnt at hom Rluctanc to trad s on asct of a country s moral concrns, but th country could also hav rfrncs for dong th abatmnt at hom. To modl ths, w assum that dntty dnds on th rlatonsh btwn actual mssons and th morally dal S mssons,,.., th amount of mssons th country thnks t dally should am for. Ths can b scfd n th followng way: S (, ) 2 S I = γ (15) As th countrs ar concrnd about th global nvronmnt, t s rasonabl to assum that th dal rqurs substantal abatmnt. On way to scfy ths s to follow Brkk t al. (2003) and assum that countrs shar an thcal vw that global socal wlfar should b maxmzd. Thus, dal mssons ar found by maxmzng a utltaran global wlfar functon whr vrybody follows th sam gnral rul, namly to mt th amount that maxmzs global wlfar: max (,,, ) ( ) 1 2 n S 2 B D k γ k Ths gvs rs to th followng frst-ordr condtons: * * * B ( ) 2 S γ = D k k W s that th global wlfar functon s maxmzd for S = *. Thus, n ths cas th dntty trms dsaars, and th frst ordr condtons qual th wll known Samulson rul (s,.g., Eyckmans t al., 1993) that dfns th frst-bst allocaton of mssons wthout moral concrns: * * B ( ) = D k k (16) 19

23 Havng dfnd th dal rfrnc lvl of mssons, w can now wrt th dntty functon n th followng way, whr * s consdrd xognous: (, ) γ ( ρ( )) * * I = E (17) Usng ths functon n th maxmsaton roblm dfnd by (7), w can show that vry country wll mt mor than th dal mssons lvl. LEMMA 2 Evn f countrs car about thr dal mssons, vry ndvdual country wll mt mor than ts dal: E * and, thrfor, total amount of rmts allocatd wll xcd th socally otmal lvl: *. Proof: Assum, on th contrary, that : E < *. From th strct concavty of th mssons bnft functon, t follows that ( ) > ( * ) (17) mls: ( ) ( ) ( ) ( ) ( ) 2 B E B. Usng th (2) and ρ = B E > B = D = ρ < At th sam tm, w can drv: * * * * * * * ( ) + 2γ ρ = ( ) > ( ) = ( ) D E E B E B D > 2 0 ( ) ( ) ( ) ( ) * * D D D D γ E E ρ > Ths contradcts th rvously stablshd nqualty. Thus, for : E *. Gvn that vry country mts mor than th dal lvl, th total mssons n th ndognous rmt allocaton qulbrum wll xcd th frst-bst lvl: Q.E.D. * > As vry country always mts mor than ts dal, w can asly sgn th drvatv of th dntty functon wth rsct to :. * 20

24 * I = 2γρ E E < 0 (18) Basd on ths, w fnd that whn all countrs car about thr dal ffort, th ndognous rmt allocaton qulbrum shfts towards th Parto ffcnt frst-bst allocaton of mssons, and thy wll mt lss than wthout moral concrns. PROPOSITIO 3 If countrs car about thr dal ffort, vry ndvdual country wll mt lss wthout moral concrns and global mssons wll b lowr. I Proof: Assum, n contrast, that >. Usng convxty of th damag functons, o I o t follows that: D ( ) > D ( ). As bfor, usng th arorat frst-ordr condtons for both qulbra, w fnd: ρ 2γρ I * ρ o > E E > n 0 Hnc, th qulbrum rmt rc would b hghr wth moral concrns than wthout. As th qulbrum rc s dcrasng n th global rmt allocaton, w fnd I that I o < whch contradcts th ntal assumton. Thrfor, w gt o. Also, as th qulbrum rc of rmts wll b hghr wth moral concrns, vry country s rrsntatv frm wll mt lss: ( ) ρ ρ ( ) B E = > = B E E < E du to concavty of th bnft functons. I I o o I o Q.E.D. Ths rsult s n contrast to th rvous concluson whn countrs card about thr lvl of mssons tradng and moral concrns could lad to hghr global mssons. Th rason s that, whn countrs car about thr dal lvl of mssons, thy fl a warm glow whn dong mor than what a strctly rvat cost bnft analyss would rscrb. Ths shows that t mattrs what ol s concrns ar about. If th man concrn s dstast aganst tradng msson rmts, th nvronmnt may b harmd, whl f th dsr s to rduc mssons at hom, th nvronmnt wll bnft. ot, that ths lattr concluson w hav assumd that all countrs shar th sam moral standont. Ths wll not ncssary b th cas, and w wll commnt on that at th nd. 21

25 4.5 Combnng both dntty ffcts On may argu that ol s moral concrns follow both from dstast aganst tradng rmts as wll as th dsr to rduc mssons at hom. Thus, t sms arorat to combn th dntty functons from th rvous sctons. Takn togthr, th full dntty functon can b wrttn as: I * (,, ) 2 * 2 ( ( ) ) [ ( ( ) ) ] ( ( ) ) F δ E ρ γ E ρ f E ρ = * 2 γ[ E( ρ( ) ) ] othrws (19) Th nw dntty functon dscrbs an ntrnal conflct; w can hav =, but stll *, thus dong what s bst accordng to on moral dal may not fulfll th othr. W can now charactrz th full macts of th moral concrns. PROPOSITIO 4 If countrs ar rluctant to trad rmts and f thy car about abatmnt at hom, global mssons wll b lowr f thr: E E > 0, or th concrns about abatmnt at hom ar strong nough to comnsat th rluctanc to trad. Proof: Th roof s trval by combnng PROPOSITIO 2 and PROPOSITIO 3. At frst sght, on mght thnk t s obvous that moral concrns would lad to lowr global mssons. Howvr, PROPOSITIO 4 shows that ths dnds crucally on both th form of th dntty functon and th balanc of owr btwn rmt mortrs and xortrs. As w hav argud abov, n th cas of global clmat chang, E E s lkly to b ngatv. W can, thrfor, conclud that th ovrall msson lvl rsultng from th ntrnatonal clmat ngotatons outcom wll b lowr f thr s a rlatvly strong concrn about actual msson lvls n all countrs. If ths concrn s wak, or f fw countrs shar ths concrn, and n addton thr s a strong dstast aganst rmt tradng, mssons may actually b hghr than wthout any 22

26 concrns about rmt tradng. Thus, amng for th good dos not always brng th dsrd outcoms. 5. Rstrctons on rmt tradng As mntond n th ntroducton, rstrctons of rmt tradng as found n th Kyoto Protocol and n th ETS, may hav bn ntroducd du to rluctanc of tradng rmts. From conomc thory w know that rstrctons on fr rmt tradng may ncras th costs of a traty; th cost-ffctv volum may not b wthn rach. Whn th costs ar hghr, th ncntvs to on th traty for ndvdual countrs wll b lowr. As a rsult, th traty may fal or t may consst of fwr countrs. Th consqunc may b hghr global mssons. Howvr, ths rsult follows from standard conomc rasonng whr th rmt allocaton s assumd xognous to ach country, and whr countrs ar assumd to hav no moral concrns about rmt tradng. If ths assumtons do not hold, wll th standard rsult stll rval? Ovr allocaton of rmts was th rason for hghr mssons undr moral concrns about rmt tradng. Thus, w focus on th cas wth symmtrc dntty functon and whr buyrs ar rstrctd from buyng rmts,.., [ ] a ( ) <. (20) Ths mans that th amount of rmt a country can buy should b lss than a crtan shar, a, of th ncssary abatmnt. Assum now that ths rstrcton s bndng,.., countrs would lk to buy a largr shar. In ths cas w fnd: PROPOSITIO 5 If countrs ar rluctant to trad rmts, dntty s symmtrc, and th rstrcton on buyng rmts s bndng, global mssons wll b lowr than n th cas wthout such rstrctons. Proof: Th roof follows th sam ln as th roof of Lmma 1. As th frst ordr condton from (11) gvs [ ] 2 1 B = + D E ρ δ E ρ, + 23

27 w s that an ffctv rstrcton on buyng rmts maks th trm on th rght sd lss ngatv. Thus, th margnal bnft wll b closr to th margnal damag and thr wll b lss of an ovr allocaton. Q.E.D. As thr s a rstrcton on trad, th rmt mortng countrs ar lss tmtd to ovr allocat mssons comard to th stuaton wthout th rstrctons on trad. Ths has a ostv ffct on th nvronmnt. Th rducd ncntv to ovr allocat also als to th stratgc trad motv. Thus, th rstrcton rducs mssons also n absnc of moral concrns as long as th mssons allowancs ar st ndognously. ot, howvr, that whl mssons go down, wlfar wll also go down, othrws th rstrctons would not hav bn bndng. Fnally, n th cas wth moral rfrncs for abatng at hom, a rstrcton on rmt tradng wll also hav a ostv ffct on mssons bcaus, also n ths cas, t rducs th stratgc trad motv n rmt mortng countrs. 6. Dscusson and conclusons In ths ar w hav analysd how moral concrns about rmt tradng affct an ndognous olluton rmt tradng qulbrum, n whch govrnmnts choos noncooratvly thr natonal rmt allocatons, and thrfor also th ovrall nvronmntal obctv. Thr may b dffrnt rasons why ol and thr govrnmnts hav moral concrns about rmt tradng. For nstanc, countrs may b rluctant to trad rmts bcaus thy thnk t s a way to sca thr moral rsonsblty, or bcaus of th assumd ngatv consquncs th trad may hav n dvlong countrs. Hnc, both consquntalst and rocdural thcs argumnts ar usd to ustfy lmts on accss to flxbl mchansms lk CDM n th framwork of th Kyoto Protocol or th Euroan Emsson Tradng Schm. Gvn an ntrnatonally ngotatd rmt tradng systm, w fnd that moral concrns may ncras or rduc global mssons dndng on th rcs formulaton of ths concrns. W consdrd two ways to scfy th moral consdratons. Th frst caturs th da that countrs mght b rluctant to trad. Thy may hav som dstast about tradng and would lk to avod t; thy consdr tradng olluton rmts not a good thng n tslf. If ths vw s hld by rmt 24

28 mortrs only, global mssons wll b hghr than n an qulbrum wthout moral concrns. Th rason s that rmt mortrs ovr allocat thr domstc frms n ordr to rduc th amount of rmts thy hav to mort. Howvr, f th vw s hld by both rmt sllrs and buyrs, ths rsult s not ncssary tru as rmt xortrs would lk to rduc thr xort. Th ovrall ffct on global mssons wll dnd on th balanc of owr (mor rcsly th slo of th margnal abatmnt cost functons n qulbrum) btwn rmt mortrs and xortrs. But undr rasonabl assumton, w conctur that global mssons ar lkly to ncras also n ths cas. Th scond formulaton of moral concrns taks nto account that countrs would lk to avod rmt tradng as thy fl t s thr oblgaton to rduc mssons at hom. Thy tak nto account what thy dally should do, and would strv to mlmnt th corrsondng dal ffort lvl that rqurs substantal msson rductons. W show that global mssons wll always b lowr wth ths ty of moral consdratons f all countrs follow ths rul, as thy all hav an addtonal ncntv to rduc mssons. Howvr, not that ths concluson dndnts on all countrs havng smlar moral concrns. If ths s not th cas, and only a fw countrs hav ths vw, th addtonal abatmnt would shar smlarts to unlatral actons takn by on sngl country. Th ltratur on unlatral actons, such as Hol (1991), concluds that ths olcy may affct th outcom of ngotatons on msson rductons, and t may vry wll mly hghr total mssons du to carbon lakags. Howvr, f th unlatral acton s announcd as a commtmnt to rduc mssons n xcss of th outcom of th ngotaton, total mssons wll lkly b lowr comard to th cas whr all countrs act slfshly. Hol and Golombk (2004) also argu that wth ndognous tchnologs and tchnology dffuson btwn countrs, t s no longr obvous that rducd mssons n som countrs wll ncras mssons n othr countrs. Thus, th global msson mact from th concrn about abatmnt at hom s not clar. Howvr, ths shows that moral concrns about rmt tradng basd on th dsr to rduc natonal mssons to what s dmd morally rght, dos not ncssary hav a sgnfcant mact on global mssons f th concrn s shard among a fw countrs only. Anothr ntrstng rsult from ths study rlats to rstrctons on rmt tradng as has bn ntroducd n th Kyoto Protocol and th ETS. Whl standard conomc 25

29 thory suggsts that such rstrctons may b bad for th nvronmnt as thy ncras th costs of rachng an msson targt, and, thrfor, th ncntv to on a traty, w show that such rstrctons may actually rduc global mssons whn govrnmnts hav moral concrns about tradng rmts. Th rason s that th ncntv of rmt mortrs to ovr allocat domstc ndustrs to rduc rmt urchas wll b rducd. If rstrctons hav bn ntroducd du to moral concrns, global mssons wll actually b lowr, a countrntutv rsult comard to standard conomc thory. ot that ths rstrctons wll also rduc ovr allocaton du to th stratgc rmt tradng ffct. Thus, rmt trad rstrctons may actually b good for th nvronmnt. Dffrnt formulatons of th moral concrns than th ons w consdrd n ths ar ar of cours ossbl. Howvr, w thnk that w covrd two ntrstng cass, on that had a ngatv ffct on th nvronmnt and on that had a ostv ffct. But as argud, also n th lattr cas thr may b rasons why global mssons may ncras. Thrfor, w thnk ths s a rathr strong rsult, vn f t s countrntutv. Thr ar svral ways to follow u ths study. A tmtng task s to rlat th frst ractcal xrncs wth ntrnatonal msson allocatons by govrnmnts, such as ETS and th Kyoto agrmnt, to our thortcal rsults. In artcular, t would b ntrstng to dsntangl moral motvatons for mosng lmts on accss to rmt tradng from stratgc rc manulaton motvs. Our thortcal rsults mght rovd a rfrnc framwork to do mrcal tsts comarng actual ngotaton outcoms wth rsults from smulatons modls of rmt tradng markts for dstngushng btwn th dffrnt motvatons. 26

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