The political economy of negotiating international carbon markets

International carbon markets are a cost efficient instrument for achieving given CO2 emissions target. This paper identifies the conditions under which participating governments benefit from establishment of such market through Coasean cooperation, in presence strategic considerations negotiations. While negotiations internalize cross-border spillovers, have incentives to send delegates who value environmental damages less than they do themselves. We find – and damage functions typically assumed literature on international agreements that even though total lower non-cooperative regime, high savings trading permits not sufficient all an market. An constitutes Pareto improvement particular if i) marginal substantially differ across countries, ii) abatement costs sufficiently similar countries. Bilateral among large emitters China, EU US would be improving. What is more, bilateral with non-tradable caps may better suited establish mutually beneficial cooperation cases. conclude our analysis robustness check different functional forms.