Linking Emissions Trading Systems in China, Japan, and South Korea: The Potential for Cooperation

Climate change poses significant challenges to global sustainability, necessitating coordinated efforts among the major economies. As key global players, China, Japan, and South Korea have announced climate plans to reduce greenhouse gas emissions. Beyond individual efforts, they have the potential to enhance global climate action through the cooperation of their Emissions Trading Systems (ETSs). This chapter examines the diverse impacts and potential benefits of integrating the ETSs of these three countries using a dynamic Global Trade Analysis Project model. We simulated multiple scenarios of ETS integration by considering all possible combinations of linkages. The results suggest that integrating the ETSs of China, Japan, and South Korea could lead to cost-effective emission reductions and enhanced economic efficiency through the optimal reallocation of emission permits. Compared with the individual ETS cases, Japan's GDP increased by 0.20% to 0.37% when integrated with China or South Korea. However, China’s GDP is lower when connected with Japan. South Korea’s GDP will never benefit from linking it to China or Japan. This chapter highlights the discrepancy between joint and individual welfare. A transfer mechanism can enable a Pareto improvement of the ETS linkage. Furthermore, bilateral linkage scenarios help clarify the source of welfare gains within the ETS linkage. These results can facilitate the negotiations in of transfer payments under a cooperative game settings. China and South Korea may form a coalition to negotiate with Japan for a higher transfer payment.