Optimal Intervention Policies in International Emissions Trading Considering Ancillary Benefits of Carbon Abatement

Abstract

This paper explores governments’ optimal intervention policies under imperfectly competitive international emissions trading (IET) considering ancillary benefits of carbon abatement (i.e., positive externalities). A sequential game is employed to conduct the analyses. It is found optimal for all countries to intervene in IET by imposing an import tariff (or export subsidy) equal to the marginal ancillary benefit of carbon abatement. Accordingly, the magnitude of ancillary benefits will affect the incentive for domestic abatement and the equilibrium of the IET market. Increasing ancillary benefits will enhance the intervention level and domestic abatement and leads to a fall in the equilibrium allowance price. However, its impact on the emissions for price-making country and that for price-taking countries are somewhat different. If the price-making country has larger ancillary benefit, she will be willing to abate more carbon emissions. By contrast, an increase in the ancillary benefits of a price-taking country will lead to an ambiguous impact on her abatement level.