Exploring U.S.–China climate cooperation through linked carbon markets

Abstract

Emissions trading systems (ETSs) are a widely used policy tool for driving emissions reductions and serve as an avenue for international climate cooperation. Following the recent global agreement on carbon market standards at COP26, this study explores linked ETSs as an avenue for the U.S. and China to cooperate on climate action. The emissions, energy, and economic effects of linked ETSs are analyzed through the China-in-Global Energy Model (C-GEM), a multi-regional, computable general equilibrium model. Assuming the development of national economy-wide ETSs, two scenarios are developed linking China and the U.S.: 1) a bilateral U.S.–China ETS linkage 2) a multilateral ETS linkage that includes China, the U.S., and nations in Southeast Asia. Results indicate that emissions and energy consumption outcomes would be similar in the bilateral and multilateral scenarios. However, economic outcomes are more favorable in the multilateral linkage scenario. When China and the U.S. engage in bilateral ETS linkage, China predominantly benefits from additional support for domestic decarbonization while the U.S. benefits from increased GDP compared to without ETS linkage. Adding Southeast Asia to establish multilateral linkage improves GDP outcomes for all participants, reducing adverse effects on China's GDP while boosting GDP for the U.S. and Southeast Asia. For policymakers considering the design and implementation of international ETSs, this study presents updated modeling on the effects of ETS linkage on each country as well as the economic benefits of expanding participation to additional regions.