Economic efficiency is a major argument for international emissions trading under the Kyoto Protocol. We show that permit trading can be welfare decreasing for countries, even though private trading parties benefit. The result is a case of "immiserizing" growth in the sense of Bhagwati where the negative terms of trade and tax interaction effects wipe out the gains from trading. Simulation and welfare decomposition results based on a CGE model of the global economy show that under EU-wide trading countries that are net permit sellers generally lose, due primarily to the existence of distortionary energy taxes.

The United Nation's Framework Convention on Climate Change (FCCC), signed by more than 150 nations in June 1992, commits signatory countries to limit greenhouse gas (GHG) emissions to 1990 levels by the year 2000. Article 3.3 of the FCCC states that "efforts to address climate change may be carried out cooperatively by interested Parties" and "policies and measures to deal with climate change should be cost-effective so as to ensure global benefits at the lowest possible cost." These statements provide the basis for the concept of Joint Implementation (JI) and the development of an international system in tradeable emissions entitlements. Joint Implementation and tradeable emissions entitlements offer an opportunity to curb GHG emissions at a low-cost through international partnerships and cooperation.
      Title IV of the United States' 1990 Clean Air Act Amendments (CAAA), also known as the Acid Rain Program, is the largest public policy experiment in the use of tradeable permits. It also incorporates two voluntary compliance programs, the substitution and opt-in provisions. These programs are analogous to JI and therefore, provide instructive insight into the potential barriers to broad JI investment.
      The response to the substitution and opt-in programs has been significantly different. Many more units have entered the substitution program than the opt-in program. Based on an analysis of these programs, this paper concludes that high transaction costs, particularly the monitoring costs associated with Title IV compliance, deter potential opt-in participants from entering the Acid Rain Program. The differing response to Title IV's two voluntary programs suggests that transaction costs can be a substantial barrier to JI and that minimizing this cost is necessary for encouraging greater JI participation

Urban air pollution and climate are closely connected due to shared generating processes (e.g., combustion) for emissions of the driving gases and aerosols. They are also connected because the atmospheric lifecycles of common air pollutants such as CO, NOx and VOCs, and of the climatically important methane gas (CH4) and sulfate aerosols, both involve the fast photochemistry of the hydroxyl free radical (OH). Thus policies designed to address air pollution may impact climate and vice versa. We present calculations using a model coupling economics, atmospheric chemistry, climate and ecosystems to illustrate some effects of air pollution policy alone on global warming. We consider caps on emissions of NOx, CO, volatile organic carbon, and SOx both individually and combined in two ways. These caps can lower ozone causing less warming, lower sulfate aerosols yielding more warming, lower OH and thus increase CH4 giving more warming, and finally, allow more carbon uptake by ecosystems leading to less warming. Overall, these effects significantly offset each other suggesting that air pollution policy has a relatively small net effect on the global mean surface temperature and sea level rise. However, our study does not account for the effects of air pollution policies on overall demand for fossil fuels and on the choice of fuels (coal, oil, gas), nor have we considered the effects of caps on black carbon or organic carbon aerosols on climate. These effects, if included, could lead to more substantial impacts of capping pollutant emissions on global temperature and sea level than concluded here. Caps on aerosols in general could also yield impacts on other important aspects of climate beyond those addressed here, such as the regional patterns of cloudiness and precipitation.