Expanding international GHG emissions trading: The role of Chinese and U.S. participation

Marked-based emission trading systems are a cost effective way to facilitate emissions abatement and are expected to play an essential role in international cooperation for global climate mitigation. Starting from the planned linkage of the European Union’s Emissions Trading System with a new system in Australia in 2015, this paper simulates the impacts of extending this international emissions market to include China and the US, which are the largest and second largest CO2 emitters in the world. We find that including China and the US will have significant impacts on the price and the quantity of permits traded internationally. In most scenarios considered, China exports emissions right while other regions import permits. When China joins the EU-Australia/New Zealand (EU-ANZ) linked market, the prevailing global carbon market price falls from $33 per ton of carbon dioxide (tCO2) to $11.2/tCO2, while adding the US to the EU-ANZ market increases the price $46.1/tCO2. If both China and the US join the linked market, the global price is $17.5/tCO2 and 608 million metric tons (mmt) are traded, compared to 93 mmt in the EU-ANZ scenario. The US and Australia would transfer, respectively, 55% and 78% of their domestic reduction burden to China (and a small amount to the EU) in return for a total transfer payment of $10.6 billion. International trading of emissions permits also leads to a redistribution of renewable energy production. When there is permit trading between all regions considered, relative to when all carbon markets operate in insolation, renewable energy in China expands by more than 20% and shrinks by 48% and 90% in, respectively, the US and Australia-New Zealand. In all scenarios, global emissions are reduced by 5% relative to a case without climate policies.