Frictions in Project-Based Supply of Permits

Emissions trading in climate change can entail large overall cost savings and transfers between developed and developing countries. However, the search for acceptable JI or CDM projects implies a deviation from the perfect market framework used in previous estimations. Our model combines the search market for projects with a frictionless permit market to quantify the supply-side frictions in the CO<Subscript>2</Subscript> market. We also decompose the effects of frictions into the effects of search friction, bargaining, and bilateralism. A calibration using previous cost estimates of CO<Subscript>2</Subscript> reductions illustrate changes in cost savings and allocative implications. Copyright Kluwer Academic Publishers 2004