The political roots of divergence in carbon market design: implications for linking

ABSTRACT

There is a substantial literature on optimal emissions trading system (ETS) designs, but relatively little on how organized political interests affect the design and operation of these economic instruments. This article looks systematically at the political economy of the diffusion of ETS designs and explores the implications for carbon-market linking. Contrary to expectations of convergence – as has been observed in many areas where economic policy diffuses across markets – we found substantial divergence in the design and implementation of ETS across the nine systems examined. The architects of these different systems are aware of other designs, but they have purposely adjusted designs to reflect local political and administrative goals. Divergence has sobering implications for visions of ubiquitous linkages and the emergence of a global carbon market that, to date, have been predicated on the assumption that designs would converge. More such ‘real world’ political economy analysis is needed to understand how political forces, mainly within countries, act as strong intervening variables that affect instrument design, implementation and effectiveness.

Key policy insights

• Our finding of design divergence indicates that policy efforts aimed at achieving integrated international markets are unlikely to be successful.

• Visions of carbon market linkage will need to confront the reality that there are well-organized political coalitions, anchored in the status quo, that prefer divergence.

• In linking ETS, policy-makers should devote more attention to preventing excessive capital flows that can undermine political support for linkage, while also creating incentives for convergence in trading rules over time.

KEYWORDS:

• Cap-and-trade
• climate policy architecture
• emissions trading
• linkage
• policy diffusion

Acknowledgements

The authors would like to thank the anonymous reviewers and the editor for very helpful comments on earlier versions of this paper. This work was supported by the Research Council of Norway under Grant number 235618.

Disclosure statement

No potential conflict of interest was reported by the authors.

ORCID

Lars H. Gulbrandsen http://orcid.org/0000-0002-7006-3336

Notes

1 Main systems that we did not cover at the time of writing were those in Saitama (Japan), Switzerland, and Ontario and Quebec (Canada). Switzerland has linked to the EU; Ontario and Quebec created markets that operated in parallel with California—although Ontario, for internal political reasons, has since withdrawn.

2 The Australian Carbon Pricing Mechanism (CPM) was repealed in 2014. The Kazakhstan ETS was suspended from April 2016 and relaunched on 1 January 2018. The Chinese national system was officially launched in December 2017, but the regulators are still developing the market infrastructure to prepare for simulation trading (2019) and full trading (2020).

3 For elaborations and discussion see Wettestad and Gulbrandsen (2018).

4 In economics, Gresham’s law is a monetary principle saying that ‘bad money drives out good’ if the two forms of commodity money in circulation are accepted by law as having similar face value.

Additional information

Funding

This work was supported by the Research Council of Norway: [Grant Number 235618].