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Carbon dating: when is it beneficial to link ETSs?

Doda, Baran and Taschini, Luca (2017) Carbon dating: when is it beneficial to link ETSs? Journal of the Association of Environmental and Resource Economists, 4 (3). pp. 701-730. ISSN 2333-5955

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Identification Number: 10.1086/691975

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, 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.

Item Type: Article
Official URL: http://www.journals.uchicago.edu/toc/jaere/current
Additional Information: © 2017 The Association of Environmental and Resource Economists
Divisions: Grantham Research Institute
Subjects: G Geography. Anthropology. Recreation > GE Environmental Sciences
JEL classification: H - Public Economics > H2 - Taxation, Subsidies, and Revenue > H23 - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
Q - Agricultural and Natural Resource Economics; Environmental and Ecological Economics > Q5 - Environmental Economics > Q58 - Government Policy
Sets: Research centres and groups > Grantham Research Institute on Climate Change and the Environment
Date Deposited: 25 Nov 2016 12:18
Last Modified: 26 Aug 2019 23:06
Projects: ES/K006576/1
Funders: Economic and Social Research Council
URI: http://eprints.lse.ac.uk/id/eprint/68379

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