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Principles for the design of compliance institutions for international tradeable permit markets: joint implementation of the framework convention on climate change
Abstract
This paper considers the design of a compliance system for a tradeable permit market as an informal mechanism design problem in an international situation with limited information, and weak enforcement. We specifically consider the embryonic tradeable permit market associated with the 1992 UN Framework Convention on Climate Change(FCCC). We outline the practical constraints on the compliance system for this market in terms of information flows, incentives and capacities. Then we use a heuristic contracting model to apply results from contract theory, and find the important elements of an effective system. We conclude that clear definition ex ante of compliance, in terms of verifiable outcomes, is critical to effective monitoring and enforcement. The best way to define compliance will depend on a tradeoff between efficiency, risk and transaction costs, and may vary among different types of project. We also conclude that the buyer country, which is a developed country, should be held solely liable for compliance ex post. This is because of its advantageous position as a monitor and enforcer for the global community in a given project.
Citation
Kerr, Suzi. 2009. "Principles for the design of compliance institutions for international tradeable permit markets: joint implementation of the framework convention on climate change," University of Maryland Manuscript.
Motu code: MEL0500
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