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Our new article with David Victor and Arild Underdal in Climate Policy looks systematically at the political economy of the diffusion of emissions trading system (ETS) designs and has sobering implications for the vision of global carbon-market linking.

Ever since the middle 1990s when serious efforts were made to promote the use of emission trading for carbon, it has been widely assumed that the likely policy outcome would eventually involve extensively linked international carbon markets. By this logic, the many different national and regional emissions trading efforts were merely waystations—eventually to be combined into larger international markets, perhaps even a single global carbon market.

Contrary to these expectations, we find that emissions trading has remained a domestic or regional policy instrument with diverging designs on key features. This finding is based on thorough examination of most of the key ETS that are, or have been, in operation worldwide: the EU ETS, the Regional Greenhouse Gas Initiative (RGGI) on the US East Coast, California, Tokyo, New Zealand, Australia, China (regional/city pilots and forthcoming nationwide system), South Korea and Kazakhstan.

While the architects of these different systems have been aware of other designs—especially the EU ETS, the largest and earliest major carbon market— they have purposely adjusted designs to reflect local political and administrative goals. Different caps and baselines. Different coverages and offset rules. Different price-management mechanisms and monitoring and enforcement rules. These findings have sobering implications for those who had hoped for unfettered linkages and the emergence of a global carbon market. In short, unfettered carbon-markets linking is likely to be very difficult.

What, then, are the implications for future research on carbon-markets linking? First and foremost, the diversity of local politics means that researchers must contend with the fact that there are many complex domestic processes and mechanisms to uncover and understand. There is clearly a need for more research on how design choices are rooted in domestic conditions – and to search for patterns in how those domestic factors shape outcomes. Our research shows that linking faces a considerable political feasibility challenge. Despite the obvious and likely economic benefits, the resistance of central political actors, due to uncertainty about distributional effects, can render linking efforts complicated, even futile.

A second front for new research is to investigate whether one of the central findings – design divergence rather than convergence – holds for cases not analyzed here, like the emerging systems in Thailand, Vietnam and South Africa. Perhaps these new cases—and other systems in small countries that must be price takers in any linked market—will convergence around a better design model that has been refined through more experience. For small markets, just like in any global trade, the costs of not being linked to the outside world are greater. That is why small systems have been the first to link with larger systems, such as Switzerland and the EU ETS. Other examples include the link between Quebec and California and the planned link between the shelved Australian system and the EU ETS.

Third, additional research—with an eye to policy application—is needed to know more about the implications for the design of linking mechanisms. Although unfettered linkage is unlikely, there is still pressure for linkage in some jurisdictions, and the economic logic for doing so is powerful. With success in some linking efforts the interest groups that favour linking – along with the evidence and resources they can use to advance their case – can grow.

With that backdrop, we think it would be possible to explore the design of linkage systems that do not attempt full-blown linking but rather aim for political simplicity, such as harmonization of floor prices in systems with price-management mechanisms and the creation of safety valves around linking systems.

Read the full paper HERE

About the Authors

Lars H. Gulbrandsen is a Research Professor at Fridtjof Nansen Institute

Jørgen Wettestad is a Research Professor at the Fridtjof Nansen Institute