Carbon Dating: When Is It Beneficial to Link ETSs?

39 Pages Posted: 25 May 2015 Last revised: 11 Jan 2017

See all articles by Baran Doda

Baran Doda

London School of Economics & Political Science (LSE) - Grantham Research Institute on Climate Change and the Environment

Luca Taschini

London School of Economics & Political Science (LSE) - Grantham Research Institute on Climate Change and the Environment; University of Verona - Department of Economics

Date Written: December 9, 2016

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.

Keywords: Emission Trading, Climate Change Policy, Market-based Regulation, Linking

JEL Classification: Q58, H23

Suggested Citation

Doda, Baran and Taschini, Luca, Carbon Dating: When Is It Beneficial to Link ETSs? (December 9, 2016). Available at SSRN: https://ssrn.com/abstract=2610076 or http://dx.doi.org/10.2139/ssrn.2610076

Baran Doda

London School of Economics & Political Science (LSE) - Grantham Research Institute on Climate Change and the Environment ( email )

Houghton Street
London, WC2A 2AE
Great Britain

Luca Taschini (Contact Author)

London School of Economics & Political Science (LSE) - Grantham Research Institute on Climate Change and the Environment ( email )

Houghton Street
London, WC2A 2AE
Great Britain

University of Verona - Department of Economics ( email )

Via Cantarane 24
Verona, Verona 37129
Italy

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