Linking Carbon Markets with Different Initial Conditions

Resources for the Future Working Paper 17-16

41 Pages Posted: 5 Sep 2017

See all articles by Dallas Burtraw

Dallas Burtraw

Resources for the Future

Clayton Munnings

Resources for the Future

Karen L. Palmer

Resources for the Future

Matt Woerman

University of Massachusetts Amherst - Department of Resource Economics

Date Written: July 24, 2017

Abstract

Linkage of emissions trading systems theoretically minimizes total abatement costs by allowing fungibility of emissions reductions across jurisdictions. We develop a theoretical framework to investigate the implications of linking systems with unique designs. We qualitatively assess the California and the Regional Greenhouse Gas Initiative systems, which we find to be nearly ready to link despite some differences in their initial conditions, including design and stringency. We use a simulation model of regional electricity markets to investigate market outcomes under such a linked system. We consider possible exchange rates for allowances to adjust for differences in program stringency, and we examine how they interact with price floors and ceilings while explicitly representing other program features (e.g., leakage policies, companion policies, and allowance allocation). We find that aggregate emissions and emissions in each jurisdiction change in ways predicted by theory but that efficiency gains can be distributed in nuanced and nonintuitive ways.

Keywords: greenhouse gas, climate change, climate policy, policy coordination

JEL Classification: Q58, H77

Suggested Citation

Burtraw, Dallas and Munnings, Clayton and Palmer, Karen and Woerman, Matt, Linking Carbon Markets with Different Initial Conditions (July 24, 2017). Resources for the Future Working Paper 17-16, Available at SSRN: https://ssrn.com/abstract=3029647 or http://dx.doi.org/10.2139/ssrn.3029647

Dallas Burtraw (Contact Author)

Resources for the Future ( email )

1616 P Street, NW
Washington, DC 20036
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202-328-5087 (Phone)

Clayton Munnings

Resources for the Future ( email )

1616 P Street, NW
Washington, DC 20036
United States

Karen Palmer

Resources for the Future ( email )

1616 P Street, NW
Washington, DC 20036
United States

Matt Woerman

University of Massachusetts Amherst - Department of Resource Economics ( email )

Stockbridge Hall
80 Campus Center Way
Amherst, MA 01003
United States

HOME PAGE: http://sites.google.com/site/mattwoerman

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