Emission Trading and the Kyoto protocol: Are they efficient economic instruments?

The Kyoto Protocol establishes a tradeable permits market for green house gases -GHG- emissions to reduce the costs of meeting the Protocol obligations. Economic theory provides the arguments to support the creation of GHG tradeable permits. Several economic researches have shown that vis-a-vis command and control regulations, tradeable permits induce economic agents to achieve environmental goals at a minimum cost. However, the conditions to minimize costs through tradeable permits are stringent. Tradeable permits require well functioning markets, e.g. perfect competition and perfect information. The tradeable permits market created by the Kyoto Protocol hardly meet these necessary conditions. Some countries like Japan, Great Britain and the United Stated are large emitters and thus may exert market power. Price manipulation may have implications over the static and dynamic efficiency of the permits. This paper takes a first look to the consequences of imperfect markets on the tradeable permit system of the Kyoto Protocol