Bottom-Up Strategic Linking of Carbon Markets: Which Climate Coalitions Would Farsighted Players Form?

Jobst Heitzig
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Jobst Heitzig: Potsdam Institute for Climate Impact Research, Transdisciplinary Concepts and Methods

No 2013.48, Working Papers from Fondazione Eni Enrico Mattei

Abstract: We present typical scenarios and general insights from a novel dynamic model of farsighted climate coalition formation involving market linkage and cap coordination, using a simple analytical model of the underlying cost-benefit structure. In our model, the six major emitters of CO2 can link domestic cap-and-trade systems to form one or several international carbon markets, and can either choose their emissions caps non-cooperatively or form a hierarchy of cap-coordinating coalitions inside each market. Based on individual and collective rationality and an assumed distribution of bargaining power, we derive scenarios of such a climate coalition formation process which show that a first-best state with a coordinated global carbon market might well emerge bottom-up, and underline the importance of coordinating caps immediately when linking carbon markets. Surprisingly, the process tends to involve less uncertainty when agreements can be terminated unanimously or unilaterally, depending on the level of farsightedness.

Keywords: Climate Policy; International Environmental Agreements; Cap and Trade; Coalition Formation; Farsightedness (search for similar items in EconPapers)
JEL-codes: D85 Q5 (search for similar items in EconPapers)
Date: 2013-05
New Economics Papers: this item is included in nep-cdm, nep-ene and nep-env
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:fem:femwpa:2013.48

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