Linkage of greenhouse gas emissions trading systems: learning from experience

Abstract

The last ten years have seen the growth of linkages between many of the world's cap-and-trade systems for GHGs, both directly between systems, and indirectly via connections to credit systems such as the Clean Development Mechanism. If nations have tried to act in their own self-interest, this proliferation of linkages implies that for many nations, the expected benefits of linkage outweighed expected costs. In this article, we draw on the past decade of experience with carbon markets to examine why systems have demonstrated this revealed preference for linking. Linkage is a multi-faceted policy decision that can be used by political jurisdictions to achieve a variety of objectives, and we find qualitative evidence that many economic, political, and strategic factors – ranging from geographic proximity to integrity of emissions reductions – influence the decision to link. We also identify some potentially important effects of linkage, such as loss of control over domestic carbon policies, which do not appear to have deterred real-world decisions to link.

Policy relevance

These findings have implications for the future role that decentralized linkages may play in international climate policy architecture. The Kyoto Protocol has entered what is probably its final commitment period, covering only a small fraction of global GHG emissions. Under the Durban Platform for Enhanced Action, negotiators may now gravitate toward a hybrid system, combining top-down elements for establishing targets with bottom-up elements of pledge-and-review tied to national policies and actions. The incentives for linking these national policies are likely to continue to produce direct connections among regional, national, and sub-national cap-and-trade systems. The growing network of decentralized, direct linkages among these systems may turn out to be a key part of a future hybrid climate policy architecture.

Keywords:

• cap-and-trade
• climate change
• climate policy architecture
• linkage

Acknowledgements

We are grateful for research assistance provided by John Agan, and helpful comments from Gilbert Metcalf, William Pizer, and participants at a presentation of the paper at the Nineteenth Conference of the Parties of the United Nations Framework Convention on Climate Change in Warsaw, Poland. The authors are responsible for any remaining errors.

Funding

This work was supported by a grant from the Harvard Project on Climate Agreements.

Disclosure statement

M. Ranson has no financial interest in nor will receive any benefit from the direct applications of this research. R.N. Stavins has no financial interest in nor will receive any benefit from the direct applications of this research.

Notes

1. Because some aspects of the design of China's pilot cap-and-trade systems were still unclear at the time this article was written, we do not examine potential of linkages involving these systems.

2. For the purposes of this analysis, we include each nation or state in a multilateral linkage as making a decision, but do not treat the system as a whole (e.g. RGGI or the EU ETS) as a decision maker. However, for bilateral linkages, we treat both partners as decisions makers (including, for example, the EU ETS decision to negotiate a link with Australia).