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This book is the result of a four years' research project at the European Uni- versity Institute in Florence, Italy. I am grateful to my supervisor, Mark Salmon, for his many ideas. I am also indebted to my co-supervisor, Aart de Zeeuw, for his and Alister Ulph. unfailing support and to Carlo Carraro, Louis Phlips I gratefully acknowledge the help and assistance of many people that advised at some stage, Scott Barrett, Peter Bohm, Lans Bovenberg, Partha Dasgupta, me Klaus Hasselman, Peter Kort, alIi Tahvonen, Cees Withagen and Clifford Wymer. Thanks also to the faculty and students of the Department of Economics of the European University Institute and especially to Jacqueline, Jessica, Marcia and Barbara for their moral support; my Italian teacher Camilla; my 'Gruppo di Lavoro' Tilman, Peter and Luisa; my dear Dutch friends Yvo, Pieter, Ida and Ellen; international friends Bogdan, Stuart, Melanie, Henning, Anantha, Paolo, Pompeo, Nikos, Christian, Analisa, Dorothea, Valeria and Stefani a; the members of the Working Group of Environmental Studies; and finally my girlfriends who gave up on me because they thought I was working too hard and not spending enough time with them.Also many thanks to my landlady Olga, who taught me the beauty of Italian literature and opera and my landlord Emilio and their dog Igor. I am also greatly indebted to Professor Larry Susskind and to the Massachusetts Institute of Technology where I spent an extremely inspiring semester.