Global trading versus linking: Architectures for international emissions trading
International emissions trading is widely seen as an indispensable policy pillar of climate change mitigation [Stern, N., 2007. The Economics of Climate Change. The Stern Review. Cambridge University Press, New York]. This article analyzes five different types of trading architectures, classified into two top-down (UNFCCC driven) and three bottom-up (driven by individual countries or regions) approaches. The two types of approaches are characterized by a trade-off between environmental effectiveness and political feasibility, respectively, whereas their relative cost-effectiveness depends on implementation details. Bottom-up architectures constitute imperfect substitutes for top-down architectures in terms of environmental effectiveness, and thus remain mere fallback options. However, especially the 'formal linking' architecture can act as complement in terms of cost-effectiveness.
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