S-WoPEc
 
Scandinavian Working Papers in Economics
HomeAboutSeriesSubject/JEL codesAdvanced Search
Department of Economics, University of Oslo Memorandum

No 02/2015:
The Dynamics of Linking Permit Markets

Katinka Holtsmark () and Kristoffer Midttømme ()

Abstract: We present a novel benefit of linking emission permit markets. We consider a dynamic setting, and let the countries issue permits non-cooperatively. With exogenous technology levels, there are only gains from permit trade if countries are different. With endogenous technology, however, we show that there are gains from trade even if countries are identical. In this case, linking the permit markets of different countries will turn permit issuance into intertemporal strategic complements: If one country issues fewer permits today, other countries will respond by issuing fewer permits in the future. This happens because issuing fewer permits today increases current investments in green energy capacity in all permit market countries, and countries with a higher green energy capacity will respond by issuing fewer permits in the future. Hence, each country faces incentives to withhold emission permits. Even though countries cannot commit to reducing their own emission, or punish other countries that do not, the outcome is reduced emissions, higher investments, and increased welfare, compared to a benchmark with only domestic permit trade. The more frequently participating countries reset their caps, the higher the gain from linking permit markers.

Keywords: International agreements; permit markets; dynamic games; green technology investments; (follow links to similar papers)

JEL-Codes: F53; H87; Q54; (follow links to similar papers)

63 pages, January 30, 2015

Before downloading any of the electronic versions below you should read our statement on copyright.
Download GhostScript for viewing Postscript files and the Acrobat Reader for viewing and printing pdf files.

Full text versions of the paper:

memo-02-2015.pdf    PDF-file
Download Statistics

Questions (including download problems) about the papers in this series should be directed to Magnus Gabriel Aase ()
Report other problems with accessing this service to Sune Karlsson () or Helena Lundin ().

Programing by
Design by Joachim Ekebom

Handle: RePEc:hhs:osloec:2015_002 This page was generated on 2016-01-06 15:32:32