Terminating links between emission trading programs

Abstract

© 2015 Elsevier Inc.Links between emission trading programs are not immutable, as highlighted by New Jersey's exit from the Regional Greenhouse Gas Initiative in 2011. This raises the question of what to do with existing permits that are banked for future use-choices that have consequences for market behavior in advance of, or upon speculation about, delinking. We consider two delinking policies. One differentiates banked permits by origin, the other treats banked permits the same. We describe the price behavior and relative cost-effectiveness of each policy. Treating permits differently generally leads to higher costs, and may lead to price divergence, even with only speculation about delinking.