WHAT TO EXPECT FROM SECTORAL TRADING: A US-CHINA EXAMPLE
Henry Jacoby () and
Sergey Paltsev Additional contact information Claire Gavard: Department of Economics, Ecole Polytechnique 91128 Palaiseau Cedex, France
Niven Winchester: Department of Economics, University of Otago, PO Box 56, Dunedin, New Zealand
Henry Jacoby: Joint Program on the Science and Policy of Global Change, Massachusetts Institute of Technology, 77 Massachusetts Ave, E19-411, Cambridge, MA 02139-4307, USA
Sergey Paltsev: Joint Program on the Science and Policy of Global Change, Massachusetts Institute of Technology, 77 Massachusetts Ave, E19-411, Cambridge, MA 02139-4307, USA
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.