Hot air trading under the Kyoto Protocol: an environmental problem or not?

Abstract:

The EU is expected to be one of the buyers of emission rights on the international carbon market. However, various policymakers, also in the EU, fear that 'hot air' will be sold under the Kyoto Protocol, for instance by the Russian Federation. Based on an institutional law and economics framework, we have tried to find out whether hot air trading should be seen as an environmental problem or not. Two distinctions are crucial: one between a formal and informal interpretation of environmental effectiveness and one between an ex ante and ex post perspective of hot air trading. We conclude that hot air trading only disturbs effectiveness in an informal (or ethical) interpretation. Moreover, the view that hot air trading is undesirable appears to assume an ex post perspective on the negotiated emission targets. Finally, there is evidence that an increasing number of policymakers now perceives hot air trading as de facto unavoidable. We find that these perceptions of hot air trading have shifted, as a result of external and internal pressures, from an ethical and ex post oriented outlook to a more formal and ex ante oriented one.