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Is broader trading welfare improving for emission trading systems?

Author

Listed:
  • Long, Xianling
  • Astier, Nicolas
  • Zhang, Da

Abstract

Emission trading systems are cornerstone policies to reduce carbon emissions. Although economic intuition suggests that broader allowance trading should be welfare improving, this paper proves that view can be wrong. Under an increasingly popular type of emissions trading scheme — tradable performance standards (TPS), multiple narrow markets can decrease emissions relative to a single unified market, so that restricting trade does not always harm welfare. We show analytically that, when intensity benchmarks are heterogeneous within a sector, this result can hold even if the well-known “implicit output subsidy” does not impact total output. Finally, we provide evidence that this concern can be of high practical relevance. Using a general equilibrium model of China’s TPS for 2020–2030, we show that broader trading results in significantly higher emissions (up to 10%), and decreases welfare relative to narrower markets when the social cost of carbon exceeds $91/tCO2.

Suggested Citation

  • Long, Xianling & Astier, Nicolas & Zhang, Da, 2025. "Is broader trading welfare improving for emission trading systems?," Journal of Environmental Economics and Management, Elsevier, vol. 130(C).
    • Handle: RePEc:eee:jeeman:v:130:y:2025:i:c:s0095069624001840
    DOI: 10.1016/j.jeem.2024.103110
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    More about this item

    Keywords

    Carbon pricing; Tradable performance standards; Cap and trade; Trading scope; Social cost of carbon;
    All these keywords.

    JEL classification:

    • D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models
    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • Q52 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Pollution Control Adoption and Costs; Distributional Effects; Employment Effects
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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