Suppose two countries with domestic cap and trade policies are considering linking their two systems. country A has a cap of 30 tons of emissions, a domestic marginal cost of abatement of $12 and uncontrolled emissions level of 70 tons, while country B has a cap of 50 tons, a domestic marginal cost of abatement of $0.5a, where a is tons of emissions abatement, and an uncontrolled emissions level of 90 tons.
a. Before linkage what would be the prices in the two separate markets and how much abatement would each country choose?
b. If these two markets were linked by allowing each country to buy from and sell allowances to the other, what would be the prices in the two markets? How much would each country abate? Describe the transfer of allowances, if any, that would take place between the two countries.