Working Paper: NBER ID: w25001
Authors: Martin L Weitzman; Bjart Holtsmark
Abstract: Linkage of cap-and-trade systems is typically advocated by economists on a general analogy with the beneficial linking of free-trade areas and on the specific grounds that linkage will ensure cost effectiveness among the linked jurisdictions. An appropriate and widely accepted specification for the damages of carbon dioxide (CO2) emissions within a relatively short (say 5-10 year) period is that marginal damages for each jurisdiction are constant (although they can differ among jurisdictions). With this defensible assumption, the analysis is significantly clarified and yields simple closed-form expressions for all CO2 permit prices. Some implications for linked and unlinked voluntary CO2 cap-and-trade systems are derived and discussed.
Keywords: linkage; cap and trade; pollution; climate change
JEL Codes: Q50; Q51; Q52; Q54; Q58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| linking cap-and-trade systems (Q58) | cost-effectiveness (D61) |
| linked cap-and-trade system (Q58) | higher total emissions (Q49) |
| lower marginal damages (D40) | higher total emissions (Q49) |
| linkage (Y80) | ambitious caps for some jurisdictions (K16) |
| linkage (Y80) | less ambitious caps for other jurisdictions (H79) |
| absence of strong governance structure (H11) | diminishes cost-effectiveness (D61) |
| linkage (Y80) | ambiguous overall emissions outcomes (F64) |