Potential trading partners of a brazilian emissions trading scheme: The effects of linking with a developed region (Europe) and two developing regions (Latin America and China)

The Paris Agreement has recently underlined the relevance of international cooperation via carbon pricing to tackle climate change. With Emissions Trading Schemes (ETS) emerging in developed and developing regions worldwide, linking ETS systems is likely to be necessary in the future. This raises the question as to the appropriateness of linking ETS systems from the perspective of each trading partner. This paper analyses the impact of a hypothetical ETS, covering the electricity and energy-intensive sectors of Brazil, using a global economy-wide model - the EPPA6. We simulate links for Brazil with a developed region (Europe) and two developing regions (Latin America and China). Linking Brazil with a heterogeneous partner such as Europe results in more substantial emissions reductions, a movement towards low carbon energy and losses in GDP and welfare, as both regions assume ambitious targets. Linking with China is less costly due to less stringent targets. A link with Latin America, a region of similar energy and economic profile to Brazil, produces moderate reductions. Accordingly, there are advantages and disadvantages associated with each proposed trading situation. An ETS with a less stringent cap, or one that encompasses additional sectors, might allow for mitigation opportunities at lower costs for Brazil.

Automated summary

The Paris Agreement highlights the importance of international cooperation through carbon pricing, and the necessity of linking Emissions Trading Schemes (ETS) systems in the future. This study analyzes the impact of linking Brazil's hypothetical ETS with different trading partners, finding that linking with regions like Europe leads to significant emissions reductions but also GDP and welfare losses, while linking with regions like China is less costly. Each proposed trading situation has its own advantages and disadvantages, and a less stringent ETS may offer mitigation opportunities at lower costs for Brazil.