EU Emissions Trading - International Linkage Induces Only Minor Economic Benefits

In providing a framework for the exchange of emissions rights among firms, the EU emissions trading scheme introduced in 2005 carries great significance with respect to the climate protection goals of the Kyoto Protocol. As part of the 12th world climate conference to be held from 6.-17. November 2006 in Nairobi, Kenya negotiations are to take place concerning a follow-up agreement to the Kyoto Protocol as of 2012.

In order to realise future climate protection goals in an economically feasible manner firm-level emissions trading may soon extend beyond the borders of the European Union. Indeed, states such as Canada, Japan or Australia are planning the introduction of similar emissions trading schemes trade mechanisms which could be linked to the operating European system already in place. As a consequence, the international market for emission certificates would see be further growthenlarged. A recent study by the Centre for European Economic Research (ZEW) in Mannheim, Germany reveals however that under the existing certificate allowance allocation practices design only little utility economic benefits would arise form such linkages. Yet, by simultaneously using flexible mechanisms instantiated established already as part ofby the Kyoto Protocol and set to play a significant role also in any follow-up agreement, the attractiveness of international linkages would greatly increase. In particular, international emissions trading at the country level and the use of the Clean Development Mechanism would improve the cost efficiency of climate protection due to the wider range of abatement trading options available to participating states.

Contact

Niels Anger, E-mail: anger@zew.de