INTRODUCTION

Among the many institutional arrangements and policy measures proposed to control the emission of carbon dioxide and other greenhouse gases and effectively abate the processes of global warming, the institution of international markets for tradable emission permits is probably the one that has most attracted the attention of the economist, as typically argued by Tietenberg (1985, 1992), Bertram (1992), and Barrett et al.(1992), Barrett and Taylor (1995) and others.

Bertram, Stephens, and Wallace (1989) argued that a worldwide system of tradable emission permits could be an effective way of advancing the interests of developing countries in harmony with the global community's interest in protecting the atmosphere. This egalitarian view was expounded and reinforced further by Grubb (1989, 1990), Hoel (1991), Tietenberg (1992), Rose and Stevens (1993), and others.

The main advantages of markets for tradable emission permits are their ability to achieve environmental aims with a minimal bureaucratic apparatus. One of the central problems with most such schemes is the allocation of the initial allotments among the countries involved. The “license to pollute” tends to be granted to those countries that are already major polluters with the result that the rents associated with a growing scarcity of pollution entitlements fall into the hands of these countries. However, as argued by Grubb (1989), of all the instruments examined, the system of tradable emission permits is the most promising. It is flexible in operation and effectively and efficiently abates global warming. The costs of alternative permit allocations have been tentatively calculated by Larsen and Shah (1992, 1994), and others.