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Towards Global Carbon Pricing: Direct and Indirect Linking of Carbon Markets

Listed author(s):
  • Rob Dellink


  • Stéphanie Jamet


  • Jean Château


  • Romain Duval


Emissions trading systems (ETS) can play a major role in a cost-effective climate policy framework. Both direct linking of ETSs and indirect linking through a common crediting mechanism can reduce costs of action. We use a global recursive-dynamic computable general equilibrium model to assess the effects of direct and indirect linking of ETS systems across world regions. Linking of domestic Annex I ETSs leads to moderate aggregate cost savings, as differences in domestic permit prices are limited. However, the economy of the main seller, Russia, is negatively affected by the real exchange rate appreciation that is induced by the large export of permits. The cost-saving potential for developed countries of well-functioning crediting mechanisms appears to be very large. Even limited use of credits would nearly halve mitigation costs; cost savings would be largest for carbon-intensive economies. However, one open issue is whether these gains can be fully reaped in reality, given that direct linking and the use of crediting mechanisms both raise complex system design and implementation issues. The analysis in this paper shows, however, that the potential gains to be reaped are so large, that substantial efforts in this domain are warranted. Les systèmes d’échange de droits d’émission peuvent jouer un rôle considérable dans le cadre d’une politique climatique efficace par rapport aux coûts. Le couplage direct de ces systèmes, aussi bien qu’indirect à travers un mécanisme commun d’attribution de crédits, peut réduire les coûts de l’action. Nous utilisons un modèle mondial dynamique récursif d’équilibre général calculable pour évaluer les effets du couplage direct et indirect des systèmes d’échange de droits d’émission dans les différentes régions du monde. Le couplage des systèmes d’échange nationaux des pays visés à l’annexe I entraîne de faibles économies dans l’ensemble, car les différences de prix entre permis nationaux sont limitées. Cela étant, l’économie du principal vendeur - la Russie - est mise à mal par l’appréciation du taux de change réel due aux fortes exportations de permis. Les économies que pourraient réaliser les pays développés grâce à des mécanismes efficaces d’attribution de crédits d’émission semblent très importantes. Un recours même limité à ces crédits permettrait en gros de réduire de moitié les coûts de l’atténuation ; les économies à forte intensité de carbone sont celles qui feraient le plus d’économies. Il reste à savoir cependant si, concrètement, ces avantages pourraient être exploités en totalité, compte tenu des problèmes complexes de conception et de mise en oeuvre que posent tant le couplage direct que les mécanismes d’attribution de crédits. L’analyse présentée dans ce rapport montre toutefois que les avantages à en tirer peuvent être si grands qu’il se justifie de déployer des efforts considérables dans ce domaine.

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Paper provided by OECD Publishing in its series OECD Environment Working Papers with number 20.

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Date of creation: 04 Aug 2010
Handle: RePEc:oec:envaaa:20-en
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