Bottom-up linking of carbon markets under far-sighted cap coordination and reversibility

A Publisher Correction to this article was published on 19 April 2018

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Abstract

The Paris Agreement relies on nationally determined contributions to reach its targets and asks countries to increase ambitions over time, leaving open the details of this process. Although overcoming countries’ myopic ‘free-riding’ incentives requires cooperation, the global public good character of mitigation makes forming coalitions difficult. To cooperate, countries may link their carbon markets1, but is this option beneficial2? Some countries might not participate, not agree to lower caps, or not comply to agreements. While non-compliance might be deterred3, countries can hope that if they don’t participate, others might still form a coalition. When considering only one coalition whose members can leave freely, the literature following the publication of refs 4,5 finds meagre prospects for effective collaboration6. Countries also face incentives to increase emissions when linking their markets without a cap agreement7,8. Here, we analyse the dynamics of market linkage using a game-theoretic model of far-sighted coalition formation. In contrast to non-dynamic models and dynamic models without far-sightedness9,10, in our model an efficient global coalition always forms eventually if players are sufficiently far-sighted or caps are coordinated immediately when markets are linked.

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Fig. 1: Illustration of the model in a fictitious situation with three symmetric players A, B, and C, linear mitigation benefits, and quadratic mitigation costs.
Fig. 2: Typical model results for the six major emitters.
Fig. 3: Alternative scenario to Fig. 2 with typical complications occurring if players are highly far-sighted (δ = 0.9) and agreements are irreversible.
Fig. 4: Alternative scenario to Fig. 2 in a world where caps cannot immediately be coordinated when markets are linked but only later in separate moves.

Change history

  • 19 April 2018

    In the PDF version of this Article originally published, in equation (6) \(g^{\prime}_{i}\) was incorrectly formatted as gi′, and at the end of the Methods section w i was incorrectly formatted as wi. These have now been corrected.

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Acknowledgements

The authors thank K. Lessmann, R. Marschinski, O. Edenhofer, the Policy Instruments Group and the COPAN Flagship Project at the Potsdam Institute for Climate Impact Research for many intense discussions; B. Holtsmark, M. Greaker, C. Hagem, R. Schmidt, and the CREW project for inspiring work; and R. Vohra, P. Menck, N. Marwan, J. Donges and C.-F. Schleussner for helpful comments.

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J.H. developed the model and conducted the numerical experiments. Both authors interpreted the study, and wrote and edited the text.

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Correspondence to Jobst Heitzig.

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Supplementary Methods, Supplementary Literature and Approaches, Supplementary Results, Supplementary References, Supplementary Figures 1–10, Supplementary Tables 1–2

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Heitzig, J., Kornek, U. Bottom-up linking of carbon markets under far-sighted cap coordination and reversibility. Nature Clim Change 8, 204–209 (2018). https://doi.org/10.1038/s41558-018-0079-z

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