The dynamics of linking permit markets

This paper presents a novel benefit of linking emission permit markets. We let countries issue permits non-cooperatively, and with endogenous technology we show there are environmental benefits from trade even if identical. Linking the markets different will turn issuance into intertemporal strategic complements. The complementarity arises because issuing fewer today increases investments in green energy capacity all market countries, higher respond by future. Hence, each country faces incentives to withhold when linked.