A Theoretical Inefficiency in the International Marketing of Tradable Global Warming Emission Permits

When the disutility of global pollution is measured in units of a numeraire good that is polluting in consumption, the marginal rates of substitution in consumption are generally weighted differently in each countrys calculation of marginal damages. In that case, it is inefficient to control global warming by tradable emission permits, which in theory trade at a unique international equilibrium price. This conclusion is derived from a model of Shibata (1996) in which consumption is pervasively polluting in global warming gases. Shibata dubiously based the inefficiency he discovered on the reciprocal external damages of global warming emissions rather than on the nullibicity he posed for a non-polluting numeraire good.JEL Classification Numbers: F02, Q4, Q25