Emissions trading and transaction costs: analyzing the flaws in the discussion

Although emissions trading lowers the costs of climate change mitigation, transaction costs (e.g. to find a trading partner) may reduce its cost-effectiveness. Some economists claim that transaction costs for Joint Implementation (JI) and Clean Development Mechanism (CDM) projects will be higher than for International Emissions Trading (IET) transfers, arguing that projects require advance approval whereas permit transfers can be automatically registered and checked annually. However, this article demonstrates the incompleteness of their views by both analyzing empirical data and discussing the theoretical conditions under which transaction costs decrease for JI and CDM and increase for IET. (C) 2001 Elsevier Science B.V. All rights reserved.