Permit Trading: Merely an Efficiency-Neutral Redistribution away from Climate-Change Victims?

In this paper, we present a climate-policy game with international emissions trading, where governments first select their amounts of emissions permits. These permits are transferred to firms, and then traded competitively on an international market. Compared with a game without trading, we find that the potential efficiency gains from permit trading, which have been identified in other studies, are totally undone if governments also employ a tax or subsidy on domestic emissions. The only effect of permit trading in this case is a redistribution of income away from those most affected by climate change.