A theory of gains from trade in multilaterally linked ETSs

Published on 12 September 2017

By Baran Doda, Simon Quemin and Luca Taschini


Linkages between emissions trading systems (ETSs) have an important role to play in the successful, cost-effective implementation of the Paris Agreement. While the theory of bilateral linkages is well established, we know relatively little about the gains from trade in a multilaterally linked system, and less still about how they are shared among jurisdictions participating in the system. We characterize these gains for an arbitrary linkage coalition, show how they can be decomposed into gains in the coalition’s internal bilateral linkages, and prove that linkage is superadditive. Our theoretical results imply the global market may not emerge endogenously and a quantitative exercise shows that this concern may have some validity in practice.

Download the article

Revised and updated version WP 2018-04 (March 2018)