Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/198908 
Year of Publication: 
2019
Series/Report no.: 
CESifo Working Paper No. 7548
Publisher: 
Center for Economic Studies and ifo Institute (CESifo), Munich
Abstract: 
This paper presents a novel benefit of linking emission permit markets. We let countries issue permits non-cooperatively, and with endogenous technology we show there are gains from permit trade even if countries are identical. Linking the permit markets of different countries will turn permit issuance into intertemporal strategic complements. The intertemporal strategic complementarity arises because issuing fewer permits today increases 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 when permit markets are linked. Even though countries cannot commit to reducing their own emissions, 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. We also show that permit market linking can arise as an equilibrium outcome.
Subjects: 
international agreements
permit markets
dynamic games
green technology investments
JEL: 
F55
Q54
Document Type: 
Working Paper
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