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The European Union's Potential for Strategic Emissions Trading through Minimal Permit Sale Contracts

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  • Johan Eyckmans
  • Cathrine Hagem

Abstract

Strategic market behavior by permit sellers will harm the European Union as the EU as a whole is expected to become a large net buyer of permits in a follow-up agreement to the Kyoto Protocol. In this paper we explore how the EU could benefit from making permit trade agreements with non-EU countries. These trade agreements involve a minimum permit sales requirement complemented by a financial transfer from the EU to the other contract party. Such agreements enable the EU to act strategically in the permit market on behalf of its member states, although each member state is assumed to behave as a price taker in the permit market. Using a stylized numerical simulation model we show that an appropriately designed permit trade agreement between the EU and China can cut EU’s total compliance cost significantly. This result is robust for a wide range of parameterizations of the simulation model.

Suggested Citation

  • Johan Eyckmans & Cathrine Hagem, 2009. "The European Union's Potential for Strategic Emissions Trading through Minimal Permit Sale Contracts," CESifo Working Paper Series 2809, CESifo.
    • Handle: RePEc:ces:ceswps:_2809
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    References listed on IDEAS

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    JEL classification:

    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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