Why quota trade should be restricted: The arguments behind the EU position on emissions trading

Abstract

In this paper I try to clarify the background and arguments behind the EU position on emissions trading in negotiating the Kyoto Protocol and their suggestions of how the supplementarity cap in the Kyoto agreement can be operationalized. I discuss economic arguments for restricting quota trade with a focus on the market power issue, transaction costs, and ancillary benefits of reducing emissions of climate gases. I also address the problem of hot air as an important argument to restrict quota trade, and arguments for restrictions connected to technological innovation. Finally, I look into the ethical considerations of restrictions.