Emission Trading between Two Countries (South Africa and Malta) in a Global Cap and Trade Game

Abstract

Effective climate change mitigation requires innovative, scalable policy solutions, with market-based mechanisms like cap-and-trade systems playing a pivotal role. This study critically examines the effectiveness of emissions trading through a case study of South Africa and Malta, two fossil fuel-dependent nations with differing marginal abatement costs. Using 2013 data, the analysis demonstrates how emissions trading optimizes cost-efficiency by capitalizing on these differences—Malta, with a marginal abatement cost of €21 per ton of CO 2 , generates a surplus of 887 million tons (Mt) of CO 2 reductions, which it trades with South Africa, where abatement costs are €38 per ton. A market price of €29.5 per ton incentivizes both nations, reducing total compliance costs and generating net economic benefits of €40278.5 million for Malta and €67389.5 million for South Africa. While the findings confirm the economic efficiency of cap-and-trade systems in reducing emissions at minimal cost, they also expose significant equity concerns. The disparity in net benefits between nations raises questions about the fairness of trading systems, particularly for smaller economies. Furthermore, the system’s limitations in addressing diffuse emissions and achieving transformative decarbonization underscore the necessity for complementary policies, such as targeted technology investments, carbon pricing mechanisms, and stringent regulatory frameworks. This research contributes to the evolving literature by providing empirical insights into the complexities of market-based climate policies, emphasizing the need for adaptive governance structures that ensure inclusivity, equity, and long-term sustainability in global climate governance.