Gains from linking the EU and Chinese ETS under different assumptions on restrictions, adjusted endowments, and international trade

Linking the EU and Chinese Emission Trading Systems (ETS) increases the cost efficiency of reaching greenhouse gas mitigation targets, but both partners will benefit – if at all - to different degrees. Using the global computable-general equilibrium (CGE) model DART Kiel, we evaluate effects of ETS linking in combination with 1) restricted allowances trading, 2) adjusted allowance endowments to compensate China, and 3) altered Armington elasticities, when Nationally Determined Contribution targets (NDCs) targets are met. We find that the EU prefers full linking, while China prefers restricted allowance trading. Adjusted endowments cannot compensate China sufficiently to make a full link as attractive as restricted trading. Linking can avoid losses from international trade restrictions in the ETS sectors in the sense that gains from linking increase with higher Armington elasticities for China, but decrease for the EU. Welfare losses for China only materialize in one scenario. Overall, the EU and China favor differing options of linking ETS. Moreover, dissimilar impacts on inner-European regions could cause dissent among EU regions which could further increase difficulties in finding a linking solution favorable for all trading partners.