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

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.

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Notes

  1. 1.

    Note that the region Central Europe essentially represents new EU member states plus Bulgaria and Romania and that the region Pacific OECD (without Japan) is primarily represented by Australia and New Zealand. Both regions are based on the regional disaggregation of the POLES model (Criqui et al. 1999, see below).

  2. 2.

    The procedure of setting up “Kyoto” reduction commitments is explained in greater detail in Schüle et al. (2006).

  3. 3.

    The procedure of setting up “450 ppm” reduction commitments is explained in greater detail in Onigkeit et al. (2006).

  4. 4.

    In contrast to our specification for CDM imports, no transaction costs of international emissions trading are assumed here. Moreover, emissions permits allocated within the different regional trading schemes are assumed to be exchangeable on a one-to-one basis by means of international emissions trading.

  5. 5.

    The simulation model builds on Böhringer et al. (2005) who also provide the corresponding analytical framework for the European emissions trading scheme.

  6. 6.

    The detailed least-square estimates of marginal abatement cost coefficients for various regions in 2010 and 2020 can be found in Anger et al. (2006).

  7. 7.

    A more elaborate development of the policy scenarios described in this section can be found in Schüle et al. (2006).

  8. 8.

    For assessments of the “Hot Air” effect at the country-level see Bernard et al. (2003) as well as Böhringer and Löschel (2003). For an analysis of strategic behaviour options of the Former Soviet Union in the context of European emissions trading see Böhringer et al. (2007).

  9. 9.

    Note that in the simulation results the region EU-27 is approximated by EU-15 regions without Luxemburg and the POLES model region Central Europe.

  10. 10.

    These results are in line with the findings of Böhringer et al. (2005).

  11. 11.

    In subsequent figures the following abbreviations are used: JAP (Japan), CAN (Canada), FSU (Former Soviet Union), AUS (Pacific OECD without Japan), USA (United States).

  12. 12.

    A comprehensive discussion of fairness aspects of linking the European emissions trading system under a long-term stabilization target for CO2 concentrations can be found in Onigkeit et al. (2006).

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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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Anger, N., Brouns, B. & Onigkeit, J. Linking the EU emissions trading scheme: economic implications of allowance allocation and global carbon constraints. Mitig Adapt Strateg Glob Change 14, 379–398 (2009). https://doi.org/10.1007/s11027-009-9180-y

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Keywords

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