Risk and Transaction Costs
Within the framework of the Kyoto Protocol the industrialised countries committed themselves to a reduction of their greenhouse gas emissions during the period from 2008 to 2012. The flexible mechanisms defined within the Kyoto Protocol are designed to achieve cost-effectiveness of emissions reduction by allowing countries to reduce emissions abroad, either in other Annex B countries, or in non Annex B countries. However, in determining the split of reduction measures between abroad and at home, transaction cost and risk elements that might be associated with the operation of these instruments are not usually taken into account. This paper evaluates the importance of transaction costs and risk premia with respect to the flexibility mechanisms of the Kyoto Protocol. It examines their effect on the up-take of these policy instruments and provides information on how to reduce these cost elements.
KeywordsTransaction Cost Clean Development Mechanism Kyoto Protocol Credit Rating Emission Trading
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