1 Global Trading of Carbon Dioxide Permits with Noncompliant Polluters By

Abstract: We study the optimal assignment of policy instruments at regional and interregional levels, for international carbon emissions trading with noncompliant polluters. We demonstrate that decentralization of regional emission quotas is socially optimal, when fines and interregional income transfers are implemented by intergovernmental authorities after regional policy making, because regional regulators fully acknowledge the externalities of their choices on global income and on all the non-bankruptcy constraints on fines. Regional and interregional inspections have the same welfare impacts when the income redistribution policy is feasible; otherwise they lead to different global emission levels with complete decentralization of regional policy instruments