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Carbon dating: when is it beneficial to link ETSs?

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  • Doda, Baran
  • Taschini, Luca

Abstract

We propose a theory of the economic advantage (EA) of regulating carbon emissions by linking two emissions trading systems versus operating them under autarky. Linking implies that permits issued in one system can be traded internationally for use in the other. We show how the nature of uncertainty, market sizes, and sunk costs of linking determine EA. Even when sunk costs are small so EA>0, autarky can be preferable to one partner, depending on jurisdiction characteristics. Moreover, one partner’s permit price volatility under linking may increase without making linking the less preferred option. An empirical application calibrates jurisdiction characteristics to demonstrate the economic significance of our results which can make linking partner match crucial for the effectiveness and success of the Paris Agreement.

Suggested Citation

  • Doda, Baran & Taschini, Luca, 2017. "Carbon dating: when is it beneficial to link ETSs?," LSE Research Online Documents on Economics 68379, London School of Economics and Political Science, LSE Library.
  • Handle: RePEc:ehl:lserod:68379
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    Cited by:

    1. repec:eee:eneeco:v:75:y:2018:i:c:p:602-635 is not listed on IDEAS
    2. Baran Doda, Simon Quemin, Luca Taschini, 2017. "A theory of gains from trade in multilaterally linked ETSs," GRI Working Papers 275, Grantham Research Institute on Climate Change and the Environment.
    3. Katinka Kristine Holtsmark & Kristoffer Midttømme, 2019. "The dynamics of linking permit markets," CESifo Working Paper Series 7548, CESifo Group Munich.
    4. Baran Doda & Simon Quemin, 2018. "Linking Permit Markets Multilaterally," Working Papers 1804, Chaire Economie du climat.
    5. repec:wsi:ccexxx:v:09:y:2018:i:03:n:s2010007818500057 is not listed on IDEAS

    More about this item

    Keywords

    emission trading; climate change policy; market-based regulation; linking;

    JEL classification:

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

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