Internationally Coordinated Emission Permit Policies: An Option for Withdrawers from the Kyoto Protocol?

This paper investigates the welfare costs of unilateral versus internationally coordinated emission permit policies in a two-country overlapping generations model with producer carbon emissions. We show that, for a net foreign debtor country, the domestic welfare costs of a unilateral domestic permit policy are larger than of an internationally coordinated policy if the world economy is dynamically efficient. From the perspective of a net foreign debtor country that has withdrawn from the Kyoto Protocol, an internationally coordinated permit policy is dominated by climate political inaction also in the post-Kyoto era since bearing the costs of foreign actionism is cheaper, in terms of welfare, than agreeing on international policy coordination unless the world economy becomes dynamically inefficient.