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The dynamics of linking permit markets

Katinka Holtsmark and Kristoffer Midttømme

Journal of Public Economics, 2021, vol. 198, issue C

Abstract: This paper presents a novel benefit of linking emission permit markets. We let countries issue permits non-cooperatively, and with endogenous technology we show there are environmental benefits from permit trade even if countries are identical. Linking the permit markets of different countries will turn permit issuance into intertemporal strategic complements. The strategic complementarity arises because issuing fewer permits today increases investments in green energy capacity in all permit market countries, and countries with a higher green energy capacity will respond by issuing fewer permits in the future. Hence, each country faces incentives to withhold emission permits when permit markets are linked.

Keywords: Permit markets; Dynamic games; Green technology investments (search for similar items in EconPapers)
JEL-codes: F Q54 (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:eee:pubeco:v:198:y:2021:i:c:s0047272721000426

DOI: 10.1016/j.jpubeco.2021.104406

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