CLIMATE POLICY AND THE KYOTO PROTOCOL BANKING PROVISION. DOES IT REALLY MATTER?

The extensive empirical literature on the costs of climate policy – whether based on the Kyoto Protocol framework or on alternative policy architectures – has not yet fully taken into account the possibility that regulators in various countries can optimally decide the amount of permits to be banked in the initial commitment periods for future use in the subsequent periods. There are a few attempts in which the quantity of banked permits is exogenously assumed by the modellers. And there are some theoretical analyses of banking in a multi-period permit market. However, at best of our knowledge, there is no empirical analysis in which banking is endogenous and thus its optimal dynamic path can be the result of regulators ’ optimisation behaviour. This paper fills this gap by proposing an intertemporal optimisation model in which the amount of permits to be banked is one of the regulator’s decision variables, jointly with the demand/supply of permits and other economic policy instruments. The goal is to analyse whether the possibility to optimise the allocation of permits both horizontally (by equalising marginal costs across world regions) and vertically (by equalising discounted costs over time) actually changes the impacts and costs of climate policy