IMPLICATIONS OF CARBON TRADE WITH ENDOGENOUS PERMITS FOR POST-PARIS CLIMATE AGREEMENTS

Abstract

With an intention to pursue an international carbon trade system and to find its implications for post-Paris climate agreements, we develop in this paper an international climate policy game with a mitigation agreement and a carbon market with endogenous permits choice. We explore incentives in a game-theoretic model for market participation, incentives to join a mitigation agreement and the interlinkages between the two. Our numerical results show that the presence of a carbon market with endogenous permits choice could improve the single mitigation coalition by engaging more regions with climate mitigation actions and inducing the Pareto improvement to some specific mitigation coalitions. Yet, more alternative strategic options offered by carbon trade are a disincentive for some regions to join a mitigation coalition. Nonetheless, this minor negative influence can be overwhelmed by more involvement in climate actions, higher global mitigation level and welfare gains resulted from an extra carbon market.