Carbon dating: When is it beneficial to link ETSs?

Luca Taschini, Baran Doda

Research output: Contribution to journalArticlepeer-review

Abstract

We propose a theory of the economic advantage (EA) of regulating carbon emissions by linking two emissions trading systems versus operating them under autarky. Linking implies that permits issued in one system can be traded internationally for use in the other. We show how the nature of uncertainty, market sizes, and sunk costs of linking determine EA. Even when sunk costs are small so EA>0 EA>0 , autarky can be preferable to one partner, depending on jurisdiction characteristics. Moreover, one partner’s permit price volatility under linking may increase without making linking the less preferred option. An empirical application calibrates jurisdiction characteristics to demonstrate the economic significance of our results, which can make linking partner match crucial for the effectiveness and success of the Paris Agreement.
Original languageEnglish
Pages (from-to)701-730
JournalJournal of the Association of Environmental and Resource Economists
Volume4
Issue number3
Early online date2 Jun 2017
DOIs
Publication statusPublished - 30 Sep 2017

Keywords

  • climate change policy
  • emission trading
  • linking
  • market-based regulation

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