International emissions trading with endogenous allowance choices

This paper compares endogenous choices of tradable and non-tradable emission allowances by non-cooperative countries. I find that the cost savings of trading do not necessarily lead to less pollution. In particular, environmentally more concerned countries usually choose less allowances if these are tradable, but this may be offset by the choice of more allowances on the side of environmentally less concerned countries. Moreover, if the establishment of a trading system requires the unanimous approval of all countries, there may be no agreement on trading even if it were to lead to less pollution overall. Conversely, a trading system may find unanimous approval even if it induces more pollution.