Roles of Flexible Mechanisms in International Environmental Agreements

Abstract

This paper focuses on the roles of flexible mechanisms in international environmental agreements (IEAs) and investigates the possibility of IEAs to achieve globally optimal transboundary pollution reduction. We first demonstrate that emission trading does not ensure the globally optimal outcome. Then, by introducing the investing schemes (Joint Implementation and Clean Development Mechanism) together with Emissions Trading, we also show that the global optimum can be achieved under a properly designed cost-sharing rule. Moreover, there exists an initial permit allocation with which every country can be better off through the flexible mechanisms. This finding implies that the countries can reach an agreement that can help achieve the globally optimal outcome.