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Linking Permit Markets Multilaterally

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  • Baran Doda
  • Simon Quemin

Abstract

Linkages between emissions trading systems (ETSs) are crucial for the cost-effective implementation of the Paris Agreement. Yet we know little about the determinants of economic gains in a multilaterally linked system, how they are shared among participating jurisdictions and less still about their magnitude. We characterize these gains for an arbitrary linkage group, decompose them into gains in the group's internal bilateral linkages and prove linkage is superadditive. Relative to autarky linkage reduces permit price volatility on average but not necessarily for individual linkage group members. In a quantitative application calibrated to five hypothetical ETSs covering the power sectors in Canada, continental Europe, South Korea, the UK and the USA, linking generates gains of up to $370 million (constant 2005US$) per year relative to autarky. Focusing on linkage groups with two and three members which are themselves not linked, we find that maximum aggregate gains decline by $43-178 million.

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  • Baran Doda & Simon Quemin, 2018. "Linking Permit Markets Multilaterally," Working Papers 1804, Chaire Economie du climat.
  • Handle: RePEc:cec:wpaper:1804
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    Cited by:

    1. Simon Quemin & Christian Perthuis, 2019. "Transitional Restricted Linkage Between Emissions Trading Schemes," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 74(1), pages 1-32, September.
    2. Marc Baudry & Anouk Faure & Simon Quemin, 2020. "Emissions Trading with Transaction Costs," Working Papers 2007, Chaire Economie du climat.
    3. Fabio Antoniou & Efthymia Kyriakopoulou, 2019. "On the Strategic Effect of International Permits Trading on Local Pollution," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 74(3), pages 1299-1329, November.
    4. Arvaniti, Maria & Habla, Wolfgang, 2020. "The political economy of negotiating international carbon markets," ZEW Discussion Papers 20-020, ZEW - Leibniz Centre for European Economic Research.

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    Keywords

    Climate change policy; International emissions trading systems; Multilateral linking; Effort and risk sharing;

    JEL classification:

    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • F15 - International Economics - - Trade - - - Economic Integration

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