Linking the EU emissions trading scheme: economic implications of allowance allocation and global carbon constraints

Original Article

Abstract

We investigate the role of domestic allowance allocation and global emissions constraints for the carbon-market impacts of linking the EU Emissions Trading Scheme (ETS) internationally. Employing a quantitative simulation model of the global carbon market, we find that the economic benefits from connecting the European ETS to emerging non-EU schemes strongly depend on the regional allowance allocation of the linking participants: In a world of moderate carbon constraints, an economically efficient regional allowance allocation induces a much stronger fall in total compliance costs than a sub-optimal (i.e. too high) domestic allocation of emissions permits. However, a more efficient (i.e. stricter) allocation shifts abatement efforts and compliance costs to energy-intensive industries which are covered by the domestic ETS. We further find that committing to ambitious global emissions reduction targets (compatible with stabilizing CO2 concentrations at 450 ppm) induces much stronger regional abatement efforts and substantially higher compliance costs for the abating regions. In such an ambitious climate policy regime, an efficient domestic allocation of allowances is even more important from an economic perspective: Here, linking emissions trading schemes diminishes the associated compliance costs on the largest scale.

Keywords

EU ETS Emissions trading Allowance allocation Climate policy Linking of domestic emissions trading schemes 

Notes

Acknowledgements

Financial support from the German Federal Ministry of Education and Research is gratefully acknowledged. The authors are grateful to Christoph Böhringer and Tim Hoffmann for valuable scientific advice and would like to thank Patrick Criqui and Detlef van Vuuren for helpful data support. Suggestions of the participants at the 3rd World Congress of Environmental and Resource Economists in Kyoto, 3–7 July 2006, are gratefully acknowledged.

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Copyright information

© Springer Science+Business Media B.V. 2009

Authors and Affiliations

  1. 1.Centre for European Economic Research (ZEW)MannheimGermany
  2. 2.Fraktion DIE LINKE. im BundestagBerlinGermany
  3. 3.Center for Environmental Systems Research (CESR)University of KasselKasselGermany

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