A patchwork of emissions trading systems (ETSs) currently operate in several jurisdictions, including the EU, Switzerland, South Korea and several US states and Canadian provinces. China has also been experimenting with emissions trading in seven provinces and cities and is setting up a national system that will be much larger than the current largest system, the EU ETS. A multilateral linking arrangement allows an emission permit issued in one jurisdiction to be used in any of the participating jurisdictions. This spreads emission abatement efforts cost-effectively and generates economic gains relative to a situation in which ETSs are kept separate.
This paper develops a novel theoretical tool with which a jurisdiction can evaluate the economic gains it can expect to obtain by linking its ETS to one, two or many ETSs at the same time, and proposes a reason why the global market remains a distant dream.
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