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Supplementarity: An Invitation to Monopsony?

Article 17 of the Kyoto Protocol allows Annex B parties to meet their greenhouse gas emissions commitments by emissions trading so long as such trading is "supplemental" to domestic abatement actions. Whether and how "supplemental" should be defined is one of the most contentious issues in the post-Kyoto climate negotiations. We demonstrate that implementing supplementarity by imposing concrete ceilings on permit imports in a market for tradable emissions rights gives rise to monopsonistic effects similar to those that characterize a buyers' cartel. We assess the EU proposal on supplementarity in this context. Our results show that, under the most favorable assumptions, the proposal avoids the redistributive effects of an import limit, albeit at added cost. Under less favorable assumptions, namely, that the required demonstrations of verifiable abatement cannot be made, the EU proposal severely limits emissions trading and the associated reductions in the costs of achieving the Kyoto commitments.

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Energy Specializations: Energy and the Environment – Climate Change and Greenhouse Gases; Energy and the Environment – Policy and Regulation

JEL Codes: F18: Trade and Environment, Q54: Climate; Natural Disasters and Their Management; Global Warming, Q48: Energy: Government Policy, C53: Forecasting Models; Simulation Methods, Q58: Environmental Economics: Government Policy, D42: Market Structure, Pricing, and Design: Monopoly

Keywords: Air Pollution, Kyoto Protocol, climate change, Environmental protection, greenhouse gas emissions

DOI: 10.5547/ISSN0195-6574-EJ-Vol21-No4-2

Published in Volume21, Number 4 of the bi-monthly journal of the IAEE's Energy Economics Education Foundation.


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