We propose a theory of the economic advantage (EA) of regulating CO2 emissions by linking two emissions trading systems versus operating them under autarky. Linking implies one jurisdiction’s permits can be traded internationally for use in the other. We show how jurisdictions’ shocks, size and sunk costs of linking determine EA. Even when sunk costs are small so EA>0, autarky can be preferable to one partner depending on jurisdiction characteristics and unilateral tax distortions. An empirical application calibrates jurisdiction characteristics to demonstrate substantial variation in EA which makes linking partner match crucial for Paris Agreement’s cost effectiveness and success.


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