GEP Research Paper 08/27
Partial International Emission Trading
Bouwe R. Dijkstra, Edward Manderson and Tae-Yeoun Lee
Summary
We model countries’ noncooperative decisions on how to allocate their national emissions between the internationally trading and the non-trading sectors. We analyze the welfare effects of expanding the international trading scheme.
Abstract
In a model inspired by the EU Emissions Trading Scheme, non-cooperative countries allocate their emissions to internationally trading and non-trading sectors. Each country is better off with trading than without, and aggregate welfare is maximized with all sectors in the trading scheme. We simulate the effects of expanding the trading scheme in a two-country model with quadratic abatement costs. If only the original trading sector is asymmetric between countries, the welfare change is always positive and the same in both countries. If only the additional trading sector is asymmetric, one country might lose, but there is an aggregate welfare gain. If only the non-trading sector is asymmetric, both countries always gain.
Issued in September 2008
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