Strategic Behavior and the Environment > Vol 4 > Issue 4

The Role of Emissions Trading and Permit Allocation in International Climate Agreements with Asymmetric Countries

Michael Jakob, Mercator Research Institute on Global Commons and Climate Change (MCC), Germany, , Kai Lessmann, Potsdam Institute for Climate Impact Research (PIK), Germany, Theresa Wildgrube, Fundación IDEA, México
Suggested Citation
Michael Jakob, Kai Lessmann and Theresa Wildgrube (2014), "The Role of Emissions Trading and Permit Allocation in International Climate Agreements with Asymmetric Countries", Strategic Behavior and the Environment: Vol. 4: No. 4, pp 361-392.

Publication Date: 18 Dec 2014
© 2014 M. Jakob, K. Lessmann and T. Wildgrube
Climate change,  Collective action
International environmental agreementsCoalition gameEmissions tradingAllocation scheme


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In this article:
1. Introduction 
2. Links to Previous Literature 
3. A Coalition Model of Emissions Trading Among Asymmetric Countries 
4. Model Outcome: Equilibrium Coalition 
5. Abatement and Payoffs 
6. Discussion and Conclusions 
Appendix: Proofs 


This paper presents a model of international environmental agreements in which cooperation between asymmetric countries can arise through pure self-interest. It demonstrates how emissions trading creates economic surplus by exploiting asymmetries. This surplus can be distributed via the appropriate allocation of reduction commitments, which ensures that membership in the agreement is compatible with countries' incentives to join. While this mechanism improves upon the business-as-usual outcome, it does not solve the underlying collective action problem wherein abatement falls short of the social optimum. We also show that countries' incentives to participate in a global climate agreement crucially depend on the permit allocation schemes, and that allocation schemes that ensure full participation in the global climate agreement might be at odds with fundamental equity considerations.