183 Global policies and Finland: Environment, energy markets and forest sector PERTTI HAAPARANTA 1* , JUHA FORSSTRÖM 2 , JUHA HONKATUKIA 3 , LEENA KERKELÄ 3 , MATTI LISKI 4 , RAISA MÄKIPÄÄ 5 , JOHANNA POHJOLA 5 , TONI RIIPINEN 6 AND PEKKA SULAMAA 7 1 Department of Economics, Helsinki School of Economics 2 Technical Research Center of Finland 3 Government Institute for Economic Research 4 Academy of Finland and Department of Economics, Helsinki School of Economics 5 Finnish Forest Research Institute 6 Department of Economics, Helsinki School of Economics 7 The Research Institute of the Finnish Economy * Corresponding author, e-mail: pertti.haaparanta@hkkk.fi Abstract The main point raised in the paper is that the costs of implementing the Kyoto agreement depend very much on the international environment where it is implemented. The international framework studied includes the number of countries participating in emission reduction, the extent and design of international emission trading, the size of carbon sinks, the role of international trade in electric- ity, the role of international trade agreements, and finally the working of the world oil market. In general, it is clear that the larger the number of countries reducing emissions and the larger the number of countries participating in emission reduction the lower the costs are. The allocation of sinks as decided upon in Marrakesh is not neutral but favors some countries at the expense of other countries. International electricity trade seems also to reduce costs of emission reduction. Oil markets are naturally important for the costs of implementing the Kyoto agreement. It is argued that if both oil producers and oil consumers behave strategically Kyoto countries could benefit by using coordi- nated emission taxes and tariffs on oil imports. In addition the paper reports research on the long run emissions of carbon dioxide. It turns out that the oil crisis of 1970’s had no significant impact on emissions. Finally, the design of emission trading system turns out to be crucial for the long run emission reduction. Keywords: costs of emission reduction, emission trading, carbon sinks, international trade agree- ments Background Since climate change is at least partly and most likely to a large extent created by human actions it can also be regulated by human actions. The dis- tinguishing feature of climate change is that it is a genuine international phenomenon: emissions of greenhouse gases contribute to it equally no matter where they take place. Increasingly the mankind has been able to form and implement agreements to regulate transboundary environ- mental problems. Examples are the Montreal Protocol on regulating the use of substances that deplete the ozone layer and more local agreements on containing emissions creating acid rain. The same holds also for the climate change where an attempt to reduce emissions of greenhouse gases was incorporated in the Kyoto Protocol. The process leading to the Kyoto Protocol and especially the process of negotiations on how to implement the Protocol until the final agree- ment in Marrakeš shows how difficult it is to