In this paper, we study empirically whether uncertainty has an influence on trades in the US SO2 market. We especially investigate the role of uncertainty on banking behavior. We introduce a tractable, structural model of trading permits under uncertainty. The model establishes a relation between banking behavior and risk preferences, especially prudence in the Kimball (1990) sense. Evidence is found of imprudence, namely utilities bank permits, in order to favor higher profits.

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The Kyoto Protocol sets national quotas on CO₂ allowing international emissions trading. We argue that this trade is characterized by asymmetric, identity-dependent externalities, and show that bilateral trade may not be sufficient for, and may even prevent, an efficient allocation of emissions. We derive conditions under which efficient allocations are the only allocations immune to bilateral trade. The conditions are strong. In this sense, we argue that market design matters.

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An international mechanism intended to curb global carbon dioxide emissions, mirrored after the Kyoto Protocol, is composed of decentralized regulatory and enforcement authorities and two supranational agencies that are in charge of promoting international transfers and imposing punitive fines. We show that there is a combination of decentralized emission quotas and centralized income transfers and fines which induces regional regulatory authorities to internalize all externalities.

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Empirical studies suggest the existence of an environmental Kuznets curve (EKC): Pollution increases with economic growth, but eventually the trend is reversed and environmental quality rebounds. This paper develops a neoclassical growth model that provides an explanation for the EKC for both market and transition economies. We derive a policy rule to implement the social optimum. We also solve for the time when environmental quality starts to improve and analyze its determinants.

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In LDCs many plants avoid complying with environmental regulations because monitoring & enforcement are infrequent. But some overcomply because they are affected by factors other than formal regulation. This seems counterintuitive; but firms may comply because they see other incentives. These could be community pressure or sanctions from market agents (informal regulation). This paper uses new evidence to analyse the impact of formal & informal regulation on firms’ environmental performance.

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