Hot Air and Market Power in Internation Emissions Trading

In respect to carbon emission targets set in the Kyoto Protocol in 1997, emission quotas trading will be implemented among the Annex-B participating countries to lower the mitigation costs of the international cooperation on climate change issue. Nonetheless, in the way the market was designed, the States of the Former Soviet Union and Eastern Europe are likely to become large sellers of carbon as a result of the drop in emissions level due to economic downturn, referring to "Hot Air". Indeed, these countries may exert substantially market power in the international permits market since the US had decided to withdraw from the Kyoto Protocol. This paper aims to develop a better understanding of the consequence of "Hot Air" in the international carbon emission trading using some policy variants simulated with the GEM-E3 World model. The present analyse focuses particularly on the measures of "Hot Air" and the implications of potential market power in the emission trading market. Under various scenario options, the exercise of market power lead to a misallocation of abatement effort accross the remaining Annex-B countries as a consequence of permits price and welfare effets.