What to Expect from Sectoral Trading: A US-China Example

Climate Change Economics (CCE), Vol. 2, Issue 1, February 2011

Posted: 30 May 2011

See all articles by Niven Winchester

Niven Winchester

University of Otago - School of Business

Henry D. Jacoby

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Sergey Paltsev

Massachusetts Institute of Technology (MIT)

Date Written: February 1, 2011

Abstract

In the recent United Nations Framework Convention on Climate Change (UNFCCC) negotiations, sectoral trading was proposed to encourage early action and spur investment in low carbon technologies in developing countries. This mechanism involves including a sector from one or more nations in an international cap-and-trade system. We analyze trade in carbon permits between the Chinese electricity sector and a US economy-wide cap-and-trade program using the MIT Emissions Prediction and Policy Analysis (EPPA) model. In 2030, the US purchases permits valued at $42 billion from China, which represents 46% of its capped emissions. In China, sectoral trading increases the price of electricity and reduces aggregate electricity generation, especially from coal. However, sectoral trading induces only moderate increases in generation from nuclear and renewables. We also observe increases in emission from other sectors. In the US, the availability of cheap emissions permits reduces the cost of climate policy and increases electricity generation.

Keywords: Climate, sectoral agreements, emissions trading, carbon leakage

Suggested Citation

Winchester, Niven and Jacoby, Henry D. and Paltsev, Sergey, What to Expect from Sectoral Trading: A US-China Example (February 1, 2011). Climate Change Economics (CCE), Vol. 2, Issue 1, February 2011. Available at SSRN: https://ssrn.com/abstract=1854130

Niven Winchester

University of Otago - School of Business ( email )

Dunedin
New Zealand
+64 (03) 479 8648 (Phone)
+64 (03) 479 8174 (Fax)

Henry D. Jacoby (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

E52-444
Cambridge, MA 02142
United States
617-253-6609 (Phone)
617-258-6855 (Fax)

Sergey Paltsev

Massachusetts Institute of Technology (MIT) ( email )

77 Massachusetts Avenue
50 Memorial Drive
Cambridge, MA 02139-4307
United States

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