The European Union's Potential for Strategic Emissions Trading Through Minimal Permit Sale Contracts

37 Pages Posted: 12 Oct 2009

See all articles by Johan Eyckmans

Johan Eyckmans

Catholic University of Leuven (KUL) - Center for Economic Studies

Cathrine Hagem

Center for International Climate and Environmental Research (CICERO)

Date Written: September 2009

Abstract

Strategic market behavior by permit sellers will harm the European Union as the EU as a whole is expected to become a large net buyer of permits in a follow-up agreement to the Kyoto Protocol. In this paper we explore how the EU could benefit from making permit trade agreements with non-EU countries. These trade agreements involve a minimum permit sales requirement complemented by a financial transfer from the EU to the other contract party. Such agreements enable the EU to act strategically in the permit market on behalf of its member states, although each member state is assumed to behave as a price taker in the permit market. Using a stylized numerical simulation model we show that an appropriately designed permit trade agreement between the EU and China can cut EU’s total compliance cost significantly. This result is robust for a wide range of parameterizations of the simulation model.

Keywords: emissions permit, post-Kyoto climate agreement, strategic permit trade

JEL Classification: Q54

Suggested Citation

Eyckmans, Johan and Hagem, Cathrine, The European Union's Potential for Strategic Emissions Trading Through Minimal Permit Sale Contracts (September 2009). CESifo Working Paper Series No. 2809. Available at SSRN: https://ssrn.com/abstract=1484566

Johan Eyckmans

Catholic University of Leuven (KUL) - Center for Economic Studies ( email )

Naamsestraat 69
Leuven, B-3000
Belgium

Cathrine Hagem (Contact Author)

Center for International Climate and Environmental Research (CICERO) ( email )

P.O. Box 1129 Blindern
Oslo, N-0317
Norway

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