Where are CO2 Emission Allowance Prices Heading? The Ambiguous Role of Capital Mobility

As a consequence of the missing global agreement in the fight against Climate Change, several independent emissions trading schemes are coming into operation. From an economic perspective it would be desirable if prices of CO2 emission allowances were the same in each scheme, as this would ensure cost effectiveness and avoid competitive distortions. There are several factors that could lead to price convergence, one of them being capital mobility. The purpose of this paper is to reveal what impact capital mobility has on the CO2 price levels. Based on a simple economic model, I derive a short-term and a long-term general equilibrium for which five scenarios, covering all possible combinations of capital endowment and CO2 emission cap, are analyzed. The results reveal that the role of capital mobility is ambiguous and that depending on the initial situation capital mobility can lead to both price convergence and price divergence