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

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  • Heitzig, Jobst

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.

Suggested Citation

  • Heitzig, Jobst, 2013. "Bottom-Up Strategic Linking of Carbon Markets: Which Climate Coalitions Would Farsighted Players Form?," Climate Change and Sustainable Development 151376, Fondazione Eni Enrico Mattei (FEEM).
  • Handle: RePEc:ags:feemcl:151376
    DOI: 10.22004/ag.econ.151376
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    File URL: https://ageconsearch.umn.edu/record/151376/files/NDL2013-048.pdf
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    Cited by:

    1. Matthew Ranson & Robert N. Stavins, 2016. "Linkage of greenhouse gas emissions trading systems: learning from experience," Climate Policy, Taylor & Francis Journals, vol. 16(3), pages 284-300, April.
    2. Baran Doda & Simon Quemin & Luca Taschini, 2017. "A Theory of Gains from Trade in Multilaterally Linked ETSs," Working Papers 1706, Chaire Economie du climat.

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    Keywords

    Environmental Economics and Policy;

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