Abstract

Many carbon markets have emerged worldwide, but their poor sector coverage generates economic inefficiency. This is the first study that quantifies the efficiency gains of expanding the sectoral coverage of an Emissions Trading System (ETS) through an optimization model calibrated with microdata. For the above, the behavior of Chilean thermoelectric and industrial sources that participate in two independent ETSs is simulated, and then the effects of integrating both carbon markets are analyzed. The model minimizes the costs of meeting an aggregate emissions target subject to the abatement options for regulated sources. The results show that if a target of 30 % is established, the price of the allowances would be 36.2 USD/tCO2 in the ETS for thermoelectric sources and 17.4 USD/tCO2 in the ETS for industrial sources. The difference in the prices of both ETSs reflects that their merger would lead to efficiency gains. In fact, the price would be 34.4 USD/tCO2 if both types of sources participate in a single carbon market, implying a saving of USD 30.7 million, equivalent to 9.7 % of the total cost of compliance obtained with independent carbon markets. Thus, it is concluded that expanding the sectoral coverage of an ETS promotes efficiency through lower prices.