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.
|Journal||Journal of the Association of Environmental and Resource Economists|
|Early online date||2 Jun 2017|
|Publication status||Published - 30 Sep 2017|
- climate change policy
- emission trading
- market-based regulation
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- Business School - Senior Lecturer or Reader in Carbon Fiinance
- Accounting and Finance
- Centre for Business, Climate Change and Sustainability
Person: Academic: Research Active