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Sectoral linking of carbon markets: A trade-theory analysis

  • Marschinski, Robert
  • Flachsland, Christian
  • Jakob, Michael

The linking of emission trading systems (ETS) is a widely discussed policy option for future international cooperation on climate change. Benefits are expected from efficiency gains and the alleviation of concerns over competitiveness. However, from trade-theory it is known that due to general equilibrium effects and market distortions, linking may not always be beneficial for all participating countries. Following-up on this debate, we use a Ricardo-Viner type general equilibrium model to study the implications of sectoral linking on carbon emissions (‘leakage’), competitiveness, and welfare. By comparing pre- and post-linking equilibria, we show analytically how global emissions can increase if one of the ‘linked’ countries lacks an economy-wide emissions cap, although in case of a link across idiosyncratic sectors a decrease of emissions (‘anti-leakage’) is also possible. If – as a way to address concerns about competitiveness – a link between the EU ETS and a hypothetical US system is established, the partial emission coverage of the EU ETS can lead to the creation of new distortions between the non-covered domestic and international sector. Finally, we show how the welfare effect from linking can be decomposed into gains-from-trade and terms-of-trade contributions, and how the latter can make the overall effect ambiguous.

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Article provided by Elsevier in its journal Resource and Energy Economics.

Volume (Year): 34 (2012)
Issue (Month): 4 ()
Pages: 585-606

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Handle: RePEc:eee:resene:v:34:y:2012:i:4:p:585-606
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505569

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