What drives cooperation in carbon markets? Lessons from decision-makers in the Australia-EU ETS linking negotiations

ABSTRACT

The Australia-EU Emissions Trading System (ETS) linking negotiation was the first attempt to link ETSs with substantively different designs, and thus provides insights on the possibilities for heterogenous linking. It offers a case study of how emissions trading can enable cooperation between jurisdictions, while still being designed to fit local circumstances. This flexibility means that heterogeneous linking can accelerate the growth of international carbon markets, in turn enabling enhanced cooperation, reduced mitigation costs and therefore greater climate ambition. There is a range of drivers and facilitators of ETS-linking. Economic and political benefits drive cooperation, and this cooperation can be facilitated by geographic proximity, institutional compatibility, and cultural factors. In this paper, we use interviews with key policymakers from the European Commission and the Australian Government to assess the role of these factors in enabling cooperation. These interviews highlight the importance of domestic and international political considerations in driving cooperation in this case. Further, they show that mutual confidence in the quality of institutions and integrity of allowances was paramount to enabling the linking agreement. Cultural factors also contributed, with affinities built between technical experts facilitating policy and political problem-solving across jurisdictions. Ultimately, this case study shows that cooperation between highly diverse carbon markets is possible and may occur rapidly when the appropriate conditions are in place.

Key policy insights

• Heterogenous linking facilitates cooperation between emissions trading systems and jurisdictions by providing scope for those individual jurisdictions to adopt design features appropriate to their unique local circumstances.

• There are distinct factors that drive and facilitate cooperation. Economic and political factors motivate cooperation but facilitating factors can include geographic links, institutional compatibility and cultural factors.

• The perceived credibility of an ETS is a key factor in identifying cooperative partners for linking, particularly important are measures to ensure environmental integrity and manage potential impacts on competitiveness.

• Aligning institutional elements, such as registry standards or cooperation between financial market regulators, may hasten linking arrangements once political circumstances are conducive to such an outcome.

KEYWORDS:

• Cap-and-trade
• emissions trading
• linkage
• Australia
• EU ETS
• Paris Agreement

Acknowledgments

The authors would like to thank former European Commissioner Connie Hedegaard, former Minister Greg Combet, and the anonymous senior officials from the Government of Australia and the European Commission for their time and cooperation throughout the interview process.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Correction Statement

This article has been republished with minor changes. These changes do not impact the academic content of the article.

Notes

1 The 12.5% limit was designed to ensure price convergence of Australian and EU allowances.

2 This is also distinct from ‘indirect linking’ where ETS are linked through mutual links to a common third system, such as by mutually linking with the Clean Development Mechanism.

3 For instance, Australia’s Carbon Farming Initiative was able to continue operating, despite the EU choosing not to implement a domestic offsets system.

4 In 2012, bilateral trade in all major emissions intensive manufactured commodities was less than 10 percent of exports by HS2 classification for both Australia and the EU (United Nations, 2021).

5 The repeal of the CPM was a major election issue and focus for the subsequent Abbott government, which went to the 2013 election with a promise to ‘axe Labor’s (carbon) tax’ and initiated the repeal as a first order of cabinet business (Crowley, 2017).

6 A full linking agreement would have required a treaty as specified in Article 25(1a) of the EU ETS Directive, see European Commission (2019).

7 Adjusted to include the UK and exclude Croatia, to reflect the composition of the EU27 at the time.