The marked-based emission trading system is regarded as a cost effective way to facilitate emission abatement and is expected to play an essential role in international cooperation for global climate mitigation. The European Union Emissions Trading System (EU-ETS) has been fully operation since 2007. In 2012, Australia announced its intention to link to the EU-ETS starting in 2015. This research considers the implications of expanding these linkages further to include China and (or) the United States. We simulate an extended international emission market, beginning by analysing the implications of the EU-Australia/New Zealand (NZ) linkage (assuming New Zealand links to the Australian market) based on currently announced policy targets. We then extend the system to include China, and compare it to an Australia/NZ-EU-US linkage in terms of the impact on greenhouse gas (GHG) emissions at the global, national and sectoral level, the carbon-equivalent price by region (or for the ETS linked regions), and primary energy use at the global sectoral level, with attention to quantifying any leakage effects.

We employ the China-in-Global Energy Model (CGEM) for this analysis. The CGEM is a multi-regional, multi-sector, recursive-dynamic computable general equilibrium (CGE) model of the global economy that separately represents 19 regions and 18 sectors. For this work, we use the Global Trade Analysis Project 2007 data set (GTAP 8), which was released in the spring of 2012. To analyse the individual and combined impact of including China and US in an integrated global emissions trading market, we develop several scenarios, including a No-ETS scenario to serve as a baseline “No Policy” scenario, and a “reference” scenario that imposes emissions trading in each region without linkages. These scenarios include: EU-Australia/NZ, EU-Australia/NZ-China, EU-Australia/NZ-US, and EU-Australia-China-US. Other scenarios involve simulating the these cap-and-trade policies...