Linking Emission Trading Schemes: A Short Note

In principle, linking emission trading schemes would favour the depletion of low-cost abatement opportunities that are geographically spread over the globe. However, this would only be possible if the price of the emission permits in the different schemes converge to one price. Using a simple model-free structure, the paper first assesses how a unilateral link between two schemes or a bilateral link between schemes with restrictions on the amount of imported permits preempt a correct price convergence. Second, it shows under which conditions bilateral links between schemes with price containment mechanisms allows permit price convergence.