Energy use inflicts costs on society in terms of negative external effects on the environment (pollution and global warming). In this setting economists often talk of market failure, i.e. that competitive markets that otherwise are considered beneficial t o society do not lead to an efficient allocation of resources (including environmental resources). Standards, taxes, environmental markets, and international agreements are in use in a way that forces decision makers to take due account of the environment al cost that their actions lead to. While the policy effects of standards and taxes has been investigated thoroughly the same is not true for environmental markets and international agreements.
The idea behind the various environmental markets that have been established is to create markets for allowing detrimental activities to take place (emission of CO2 for example in the Kyoto agreement). By adding such markets, competitive market forces may again become beneficial to society as the market failure partly is eliminated. However, it is not a matter of indifference as to how these markets are designed. In particular, it is important that these markets are designed in such a way that they function competitively and are free from agents exercising mark et power. In this project we will focus on market power when analyzing environmental markets.
Not all international agreements on environmental issues result in markets of this kind. Still such international agreements may have a sizable impact on the en vironment. However, one of the main problems of international agreements is that they are voluntarily, there is no independent entity that may sanction deviating behavior and that participating countries accept and conform to. This does not mean that inte rnational agreements of this kind are completely without effects. Hitherto little research has been done on the effects such voluntary agreements, and we aim to evaluate such international environmental agreemen