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A theory of gains from trade in multilaterally linked ETSs

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  • Baran Doda, Simon Quemin, Luca Taschini

Abstract

Linkages between emissions trading systems (ETSs) have an important role to play in the successful, cost-effective implementation of the Paris Agreement. While the theory of bilateral linkages is well established, we know relatively little about the gains from trade in a multilaterally linked system, and less still about how they are shared among jurisdictions participating in the system. We characterize these gains for an arbitrary linkage coalition, show how they can be decomposed into gains in the coalition’s internal bilateral linkages, and prove that linkage is superadditive. Our theoretical results imply the global market may not emerge endogenously and a quantitative exercise shows that this concern may have some validity in practice.

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  • 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.
  • Handle: RePEc:lsg:lsgwps:wp275
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