International market mechanisms under the Paris Agreement: A cooperation between Brazil and Europe

Using the Economic Projection and Policy Analysis (EPPA6) model, this paper assesses Emissions Trading Scheme (ETS) cooperation between Brazil and Europe, using harmonised sectoral coverage (electricity generation and energy-intensive sectors). Land Use, Land-Use Change and Forestry (LULUCF) related emissions, which are significant in Brazil, are excluded from trading in the analysis, for two main reasons: (i) in an effort to closely align with existing provisions of the EUETS and (ii) to encourage other sectors of the economy to broaden their mitigation effort to comply with national climate targets. As a result, the relatively decarbonised electricity sector and the energy-intensive sectors in Brazil adopt ambitious targets under the proposal. The effects of the proposal are examined under three scenarios: a national ETS policy, a bilateral cooperation, and a global cooperation. Results show that a domestic ETS reduces emissions and promotes technological substitution towards alternative energy for both participants. Cooperation scenarios imply lower emission reductions in Brazil compared to a domestic ETS, where importing allowances from Europe is more cost-effective. For Europe, cooperating with Brazil has very limited impact on further mitigation. The global scenario sees both regions opt to acquire carbon permits from other regions where abatement costs are lower.