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Carbon dating: when is it beneficial to link ETSs?

Baran Doda and Luca Taschini

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

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 (search for similar items in EconPapers)
JEL-codes: H23 Q58 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ene, nep-env and nep-reg
Date: 2017-09-01
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Published in Journal of the Association of Environmental and Resource Economists, 1, September, 2017, 4(3), pp. 701-730. ISSN: 2333-5955

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Related works:
Journal Article: Carbon Dating: When Is It Beneficial to Link ETSs? (2017) Downloads
Working Paper: Carbon dating: When is it beneficial to link ETSs? (2016) Downloads
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