On Monday, 28th January, Dr. Luca Taschini associate professorial research fellow at the Grantham Research Institute (LSE) is presenting part of his research on market-based instruments and climate finance. He will be discussing a co-authored paper titled: ‘Linking Permit Markets Multilaterally’
We develop a general model to analyze multilateral linkages between permit markets and characterize the determinants, magnitude and distribution of efficiency gains in an arbitrary linkage group. We decompose these gains into gains in the group’s internal bilateral linkages and quantify those that are attributable to effort and risk sharing. We also characterize individual preferences over possible groups and analyze the relationship between autarky and linking prices. In a quantitative illustration we calibrate the model’s autarky equilibrium to match the implications of the Paris Agreement pledges for the power sectors of five jurisdictions which use or have considered both emissions trading and linking. We show that linking can generate gains of up to 3.26 billion 2005US$ per year relative to autarky, split roughly equally between effort and risk sharing. These gains are reduced by about 20% in the presence of banking and borrowing.