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To link or not to link: benefits and disadvantages of linking cap-and-trade systems

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  • CHRISTIAN FLACHSLAND
  • ROBERT MARSCHINSKI
  • OTTMAR EDENHOFER

Abstract

A framework was devised for policy-makers to assess direct bilateral cap-and-trade linkages. A systematic analysis of the economic, political and regulatory implications indicates potential benefits along with a number of potentially negative sideeffects. Theoretically, economic benefits are expected from quasi-static short-term and dynamic efficiency gains. However, a careful review of these arguments indicates that, due to the presence of market distortions or terms-of-trade effects, international emissions trading may not be welfare-enhancing for all countries. Political benefits are derived from the reinforced commitment to international climate policy and the elimination of competitiveness concerns among linking partners, but this must be weighed against the possible incentive to adjust national caps in anticipation of linking. Regulatory disadvantages may arise from the linked system's inconsistency with original domestic policy objectives, and from the partial de facto cession of discretionary control over the domestic emissions trading system. Finally, as an illustration, a link between the EU ETS and a prospective US trading system is assessed, and the major trade-offs identified.

Suggested Citation

  • Christian Flachsland & Robert Marschinski & Ottmar Edenhofer, 2009. "To link or not to link: benefits and disadvantages of linking cap-and-trade systems," Climate Policy, Taylor & Francis Journals, vol. 9(4), pages 358-372, July.
  • Handle: RePEc:taf:tcpoxx:v:9:y:2009:i:4:p:358-372
    DOI: 10.3763/cpol.2009.0626
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    References listed on IDEAS

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    1. repec:cup:cbooks:9780521700801 is not listed on IDEAS
    2. Jaffe, Judson & Stavins, Robert N., 2008. "Linkage of Tradable Permit Systems in International Climate Policy Architecture," Climate Change Modelling and Policy Working Papers 46624, Fondazione Eni Enrico Mattei (FEEM).
    3. Graciela Chichilnisky & Geoffrey Heal, 1995. "Markets for Tradeable CO2 Emission Quotas Principles and Practice," OECD Economics Department Working Papers 153, OECD Publishing.
    4. Frank Jotzo & Regina Betz, 2009. "Linking the Australian Emissions Trading Scheme," Environmental Economics Research Hub Research Reports 0914, Environmental Economics Research Hub, Crawford School of Public Policy, The Australian National University.
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