Getting Married (and Divorced): A Critical Review of the Literature on (De)linking Emissions Trading Schemes

Abstract

Carbon pricing in general and emissions trading in particular are gaining momentum at the world level. In recent years increasing attention has been devoted to the possibility of linking Emissions Trading Schemes (ETSs). The purpose of the present paper is to critically discuss the main findings emerging from the theoretical economic literature on linking and to draw lessons from the practical experiences of linking (and delinking). Both theoretical and empirical studies suggest that linking ETSs implies strategic interaction and requires substantial coordination between participants. Based on the theoretical literature and on the (un)successful attempts of linking existing ETSs, the present paper provides policy insights into the opportunity of linking in the real world, highlighting the similarity between linking/delinking and getting married/divorced.

The International Dimension of the EU Emissions Trading System: Bringing the Pieces Together

“…Several studies analyse their various implications. See, e.g., Lazarus et al 2015, Borghesi et al 2016, Schneider et al 2017, Quemin and de Perthuis, 2017, Borghesi and Zhu 2020 Over 80 national governments declared that they intend to use carbon pricing for meeting their NDCs (Marcu and Sugathan, 2018). The share of global emissions covered by ETSs has tripled since the launch of the EU ETS in 2005 (ICAP 2021).…”

Strategic Export Motives and Linking Emission Markets

“…7 Grandfathering still takes place to some extent in di¤erent ETS (ICAP, 2020), so our analysis provides an argument against this practice.…”

“…Hence, if one country deviates by non accepting the scheme it will end up with lower welfare. Note that even if we do not allow for a tradable permits scheme the cooperative level of pollution in the symmetric case is the one implied by equation (7). This is because in the non-tradable permits case, the term @e @e P e is replaced by the e¤ect of a change on pollution e over marginal abatement costs, i.e., @e @e q e , where @e @e = 1.…”

“…In a related extension in Section 7, we relax this assumption and show that the main results carry over. Moreover, price-taking behavior in a thick permits market is commonly used in the existing literature(Sartzetakis, 1997;Malueg and Yates, 2009;Meunier, 2011;Antoniou et al, 2014; Antoniou and Kyriakopoulou, 2019; Lapan and Sikdar, 2020) 7. The corresponding Foreign welfare is: W = (X; x; a; P e ; E) + P e E D(E + e).…”