Sectoral Linking of carbon markets: A trade-theory analysis

  • The linking of emission trading systems (ETS) is a widely discussed policy option for future international cooperation on climate change. Benefits are expected from efficiency gains and the alleviation of concerns over competitiveness. However, from trade-theory it is known that due to general equilibrium effects and market distortions, linking may not always be beneficial for all participating countries. Following-up on this debate, we use a Ricardo-Viner type general equilibrium model to study the implications of sectoral linking on carbon emissions (‘leakage’), competitiveness, and welfare. By comparing pre- and post-linking equilibria, we show analytically how global emissions can increase if one of the ‘linked’ countries lacks an economy-wide emissions cap, although in case of a link across idiosyncratic sectors a decrease of emissions (‘anti-leakage’) is also possible. If – as a way to address concerns about competitiveness – a link between the EU ETS and a hypothetical US system is established, the partial emission coverage of the EU ETS can lead to the creation of new distortions between the non-covered domestic and international sector. Finally, we show how the welfare effect from linking can be decomposed into gains-from-trade and terms-of-trade contributions, and how the latter can make the overall effect ambiguous.

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Metadaten
Document Type:Article
Language:English
Author(s):Christian FlachslandORCiD, Robert Marschinski, Michael Jakob
Parent Title (English):Resource and Energy Economics
ISSN:1873-0221
Publisher:Elsevier
Place of Publisher:Mexico
Publication year:2012
First Page:585
Last Page:606
DOI:https://doi.org/10.1016/j.reseneeco.2012.05.005
Release Date:2015/10/29
Tag:Competitiveness; Emission trading; Leakage; Linking; Trade theory
Volume:34
Issue:4
Hertie School Research:Centre for Sustainability
Licence of document (German):Metadaten / metadata
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