Sectoral Trading between the EU-ETS and Emerging Countries

In international negotiations on climate change, sectoral trading has been proposed as a way to encourage investment in low carbon technologies in developing countries. In the main report(MIT Joint Program Report 193), we analyzed the impacts of sectoral trading between the U.S. and China. As the U.S. is unlikely to implement a cap-and-trade regime in the near future and a carbon market has existed in Europe since 2005, sectoral trading could be used to extend the European Emission Trading Scheme (EU-ETS) to electricity sectors in some developing countries. Our analysis seeks to quantify the effects of sectoral trading between the EU-ETS and four emerging countries: China, India, Brazil and Mexico. Applying the same EPPA version as in the main report, we analyze sectoral trading between the EU-ETS and each country individually and all four nations simultaneously. We find that the impacts change significantly with the size and number of countries involved. Under sectoral trading with China, the European Union (EU) buys $1.5 billion of carbon permits and the EU carbon price decreases by 88% in 2030. Sectoral trading has a small impact on Chinese electricity generation but reverses changes in EU electricity generation driven by the EU-ETS. Under sectoral trading with Mexico, the EU buys $0.6 billion of permits and the carbon price decreases by 8% in 2030. Moderate impacts on Mexican electricity generation are observed while changes in EU electricity generation induced by the EU-ETS persist. Sectoral trading between the EU and the four countries simultaneously reduces the carbon price by more than 90% and the EU buys $1.2 billion dollars of permits, mostly from India and China.

Gavard, Claire, Niven Winchester, Henry Jacoby and Sergey Paltsev (2011), Sectoral Trading between the EU-ETS and Emerging Countries, Cambridge