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

Although emissions trading lowers the costs of climate change mitigation, t ransaction costs (e.g. to find a trading partner) may reduce its cost-effec tiveness. Some economists claim that transaction costs for Joint Implementa tion (JI) and Clean Development Mechanism (CDM) projects will be higher tha n for International Emissions Trading (IET) transfers, arguing that project s require advance approval whereas permit transfers can be automatically re gistered and checked annually. However, this article demonstrates the incom pleteness of their views by both analyzing empirical data and discussing th e theoretical conditions under which transaction costs decrease for JI and CDM and increase for IET. (C) 2001 Elsevier Science B.V. All rights reserve d.