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The dynamics of linking permit markets

Link to article:

[DOI]

Authors:

Holtsmark, Katinka K., Kristoffer Midttømme

Year:

2021

Reference:

Journal of Public Economics

Vol 198

Summary

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 environmental benefits from permit trade even if countries are identical. Linking the permit markets of different countries will turn permit issuance into intertemporal strategic complements. The 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.

JEL:

F 55; Q54

Keywords:

Permit markets; Dynamic games; Green technology investments

Project:

Oppdragsgiver: Norges Forskningsråd
Oppdragsgivers prosjektnr.: 268174
Frisch prosjekt: 3185 - Sustainable transformation to sustainability