The Economic and Energy Effects of Carbon Dioxide Emissions Trading in the International Market: New Challenge Conventional Measurement

Abstract

Starting from the planned linkage of the European Union’s Emissions Trading System with a new system in Australia in 2015, this paper simulates the impacts of expanding this international emissions market to include China and the USA, which are respectively the largest and second largest carbon dioxide emitters in the world. The findings suggest that including China and the USA significantly impacts the price and the quantity of permits traded worldwide. When China joins the EU-Australia-New Zealand (EU-ANZ)-linked market, we find that the prevailing global carbon market price falls significantly, from $35/tCO2 to $11.4/tCO2. In contrast, adding the USA to the EU-ANZ market increases the price to $48/tCO2. If both China and the USA join the linked market, the market price of an emissions permit is $18.1/tCO2 and 610 million metric tons are traded, compared to 95 million metric tons in the EU-ANZ scenario. When permit trading between all countries is considered, relative to when all carbon markets operate in isolation, renewable energy in China expands by more than 22 % and shrinks by 50 and 95 % in the USA and ANZ, respectively. In all scenarios, global emissions are reduced by around 5 % relative to a case without climate policies. Such results may attract the attention of the policy makers as well as the stakeholders for future investment in energy and environmental technology.