The most advantageous partners for Australia to bilaterally link its emissions trading scheme

Abstract

The theory of marginal abatement cost (MAC) indicates that if a country has a high MAC, it should link its domestic emissions trading scheme (ETS) with a foreign country, which has either low MAC or low emissions reduction target. This strategy will maximise its economic benefits from the linkage compared to its domestic ETS. On the other hand, if a country has a low MAC, it would seek a partner, which has either a high MAC or a high emissions reduction target. Using a computable general equilibrium model, namely the extended GTAP-E model, we found that Australia could yield the greatest economic benefits by linking its ETS with India. China is the second best alternative for Australia to link its ETS, while the European Union is the most expensive option for Australia. Overall, the results support the contention that any bilateral linkage is always better for Australia than operating its own domestic ETS alone.