Potential trading partners of a brazilian emissions trading scheme: The effects of linking with a developed region (Europe) and two developing regions (Latin America and China)

Abstract

• An ETS linkage of brazil with a developed region (Europe) and two developing regions (Latin america and China) would increase opportunities for mitigation at lower cost. • Brazil exhibits a permit-importer profile in all linkage scenarios. • The magnitude of the ETS linkage effects varies according to the partner energy profile, macroeconomic development and mitigation commitments. • Matching with a trading partner suitable in the selected priorities (economic performance, environment outcomes and political acceptance) is recommended. • Brazil should consider including land use and forestry-related emissions in ETS policy and linkage agreement. The Paris Agreement has recently underlined the relevance of international cooperation via carbon pricing to tackle climate change. With Emissions Trading Schemes (ETS) emerging in developed and developing regions worldwide, linking ETS systems is likely to be necessary in the future. This raises the question as to the appropriateness of linking ETS systems from the perspective of each trading partner. This paper analyses the impact of a hypothetical ETS, covering the electricity and energy-intensive sectors of Brazil, using a global economy-wide model - the EPPA6. We simulate links for Brazil with a developed region (Europe) and two developing regions (Latin America and China). Linking Brazil with a heterogeneous partner such as Europe results in more substantial emissions reductions, a movement towards low carbon energy and losses in GDP and welfare, as both regions assume ambitious targets. Linking with China is less costly due to less stringent targets. A link with Latin America, a region of similar energy and economic profile to Brazil, produces moderate reductions. Accordingly, there are advantages and disadvantages associated with each proposed trading situation. An ETS with a less stringent cap, or one that encompasses additional sectors, might allow for mitigation opportunities at lower costs for Brazil.