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Carbon Dating: When Is It Beneficial to Link ETSs?Baran DodaLondon School of Economics & Political Science (LSE) - Grantham Research Institute on Climate Change and the Environment Luca TaschiniLondon School of Economics & Political Science (LSE) - Grantham Research Institute on Climate Change and the Environment November 2, 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.
Number of Pages in PDF File: 38 Keywords: Emission Trading, Climate Change Policy, Market-based Regulation, Linking JEL Classification: Q58, H23 Date posted: May 25, 2015 ; Last revised: November 4, 2016Suggested CitationContact Information
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