Carbon markets in space and time

Working Paper 3

Abstract

We analyse the design of carbon markets in time (intertemporally) and space (geographically) from first principles, starting initially with a relatively clean slate and asking what an optimal global carbon market would look like by around 2030.

Our focus is on firm-level trading systems, although much of what we say would also apply to government-level trading (e.g. AAU trading under the Kyoto Protocol).

We examine:

• the ‘first principles’ of design to maximise flexibility and to minimise costs;
• temporal design, including banking and borrowing and other mechanisms to provide greater carbon price predictability and credibility over time;
• spatial elements, looking at the key design issues in linking national and regional carbon markets together to create a global carbon market.

Samuel Fankhauser and Cameron Hepburn