A multinational carbon-credit market integrating distinct national carbon allowance strategies

Abstract

We study the potential role and advantages of a multinational carbon-credit (CC) market allowing a set of countries to procure CCs for their domestic producers. We study the interaction of such a market with renewable portfolio standards, specifically regarding whether a country’s government or its energy producers are responsible for upholding the renewable portfolio standards (RPS), and how this impacts total emissions and energy mix. Implementing uniform carbon tax policies or cross-border emission trading systems hinders individual countries’ autonomy while strictly segregated carbon markets suffer from the tragedy of the commons. We develop a model where countries can have their own policies to allocate the CCs, which may include taxes or subsidies depending upon the country’s choices. We use a special form of equilibrium programs with equilibrium constraints (EPEC) game – Nash Among Stackelberg Players (NASP) – and recent algorithmic advances to identify equilibria for these games to identify the effect of such a common CC market, and the regional governments’ individualized interests on the resulting energy production patterns and emissions. We observe that countries could retain their autonomy and have reasonable freedom to set national policy by acting as intermediaries between the CC market and the producers. We carry out a case study using historical data and projections of energy production for the US and Canada, and observe the varying effects of such a common CC market on government policy and the behavior of energy producers. Establishing a common CC market could significantly reduce global emissions without infringing on national autonomy. Such a market helps governments to motivate producers to uphold renewable standards because if the producers do not voluntarily reduce emissions, then the government could enforce the obligation through its national policies, generally leading to a revenue loss for producers.