Emissions trading with non-signatories in a climate

8 We investigate how different designs for a carbon offset mechanism like the Kyoto Protocol’s Clean Development Mechanism (CDM) affect the success of self-enforcing climate treaties. In a game-theoretic numerical model of coalition formation it is shown that effects of emission trading with non-signatories are generally negative if strategic behaviour and free-rider incentives are explicitly considered. Even imposing selling targets on credit supplying countries cannot change this result. Only if the volume of credit trading is sufficiently large (due to a sufficiently high heterogeneity between members and non-members) and hence also the gains from trade, this may be different. This, however, requires that treaty members do not use the gains from credit trading to lower their emission caps but stick to modest abatement targets to keep leakage effects at a minimum. Similarly, when allowing for a limited amount of “hot air” to be traded, the gains from higher participation may outweigh the losses of the diluted abatement target.