Abstract
Central to the aims of the Paris Agreement, an integrated carbon market could potentially be a practical bottom-up option for effective and efficient mitigation. This paper quantifies the welfare effects of integration of Emission Trading Scheme (ETS) between the European Union (EU) and China. Using the European version of the computable general equilibrium model GEMINI-E3, our assessment reveals that integrating trading markets benefits both regions through the decrease welfare costs from abatements. China’s welfare improves through net gain of selling the allowance, while the EU experiences lower deadweight loss. This effect is stronger to some notable countries in the EU, with high energy-intensive industries such as Poland and the Czech Republic. While a few others, such as Netherlands and Ireland, face higher welfare costs from negative trade gain. Limiting the trade quotas to 40% captures most of the EU welfare gain coming from CO2 trading. Further analysis at the sectoral level reveals that market integration significantly minimizes the loss of competitiveness of European energy-intensive industries and reduces international leakage. Our finding thus confirms the potential of the emissions trading market as an effective instrument to facilitate multilateral coordination in global mitigation.
Highlights
The Emission Trading Scheme (ETS) is widely known as a cost-effective means for mitigation
This paper complements the existing literature by re-assessing and evaluating the potential integration between China and the European Union (EU) ETS. It starts with a brief discussion on climate change policy, leads to the design of this potential linkage market.The analysis will be based on emission trajectories and economic forecasts up to the year 2040 using an adaptation of a recursive dynamic general computable equilibrium model of GEMINI-E3
These scenarios assume that the EU and China implement their climate policies without integrating their ETS markets, and no emissions constraint in the Rest of the World (ROW)
Summary
The Emission Trading Scheme (ETS) is widely known as a cost-effective means for mitigation. It starts with a brief discussion on climate change policy, leads to the design of this potential linkage market.The analysis will be based on emission trajectories and economic forecasts up to the year 2040 using an adaptation of a recursive dynamic general computable equilibrium model of GEMINI-E3. This ensures the dynamic efficiency and its welfare implications to be fully captured.
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