How to boost countries’ climate ambitions: Turning gains from emissions trading into gains for climate

Abstract

The Nationally Determined Contributions (NDCs) under the Paris Agreement fall short of the emissions reductions needed to reach the 2 ${}^{\circ }$C target. Emissions trading could be a “costless" means to reduce this gap if countries used their cost savings for additional emissions abatement. However, this requires cooperative behavior. We show that with emissions trading countries’ non-cooperative choices of emissions reduction contributions can lead to even more abatement, provided that these contributions may not be lower than their initial NDCs. Intuitively, countries with high climate damages raise their contributions if they can fulfill them partly through emissions reductions in countries with low abatement costs.