To link or not to link? adelphi develops Emissions Trading Linking Manual for policymakers

The Emissions trading manual offers policymakers a tool to assess potential partners before embarking on linking negotiations. It provides a framework to ensure key linking objectives can be met and potential risks of linking emissions trading systems are minimised.

As more emissions trading systems (ETS) start to mature and with policymakers looking for opportunities to reach their mitigation targets in a cost-effective manner, linking ETSs could lead to a larger, more efficient emission market and to more international cooperation on climate change mitigation. Last year saw the expansion of the Western Climate Initiative to include the province of Ontario to form the largest carbon market in North America. Switzerland and the EU also signed a linking agreement at the end of 2017. Before linking negotiations are initiated, the range of potential effects needs to be assessed in a limited and manageable time period – and in more detail than general economic literature reviews offer. The effects will depend on the systems and jurisdictions involved.

On behalf of the German Environment Agency (UBA), adelphi worked together with the Wuppertal Institut für Klima, Umwelt, Energie gGmbH on developing a systematic framework to assess linking and potential linking partners.

Policy guidance: What are the risks and opportunities of the bilateral linking of emissions trading systems?

The project culminated in a linking manual, which focuses on assessing the risks and opportunities of the bilateral linking of emissions trading systems. By creating bigger markets, linkages open up access to more (and potentially cheaper) emissions reduction options and by creating a common carbon price, this establishes a level playing field for companies in both systems. With a bigger market, liquidity is increased and the market can absorb shocks more easily. Finally, linking can also demonstrate climate leadership and encourage other jurisdictions to work together on climate change. However, it is not without risks – partners should ensure the common market still ensures a certain level of abatement and environmental integrity. There may also be concern about ceding some sovereignty to operate a joint market, as well as concerns about the impact on domestic abatement if a large share of emissions reduction takes place elsewhere. This manual aims to provide policymakers with a tool to help them assess potential linking partners and offer suggestions for a joint system design that maximizes their linking objectives.