Linking emissions trading programs can advance climate policy

Despite some modest steps forward, the UN Climate Change Conference in Doha was a reminder of the slow-paced nature of international negotiations. Annual conferences like these aim to achieve international agreement on reducing the man-made emissions causing climate change, but 20 years after the launch of the U.N. climate process, global emissions continue to rise.

Progress is being made at the domestic level, however, and in many cases, the policy of choice is emissions trading. One of the major challenges going forward is linking these emerging trading systems to achieve the efficiencies of an integrated global greenhouse gas market. The European Union and Australia have announced plans to link their trading systems, and California and Quebec are working toward linking theirs.

Thirty-two countries now participate in systems that aim to limit emissions and encourage technological advances by allowing the trading of emissions allowances. Many national governments, including the U.S., have yet to adopt such a system. The Waxman-Markey American Clean Energy and Security Act, which passed the House in 2009, would have established an economy-wide trading program, but failed to pass the Senate. Future U.S. climate policy action remains uncertain. 

Smaller cap-and-trade programs, however, continue to sprout at the subnational level. Rio de Janeiro and Sao Paulo, for instance, announced they would establish separate cap-and-trade systems starting with test phases in 2013. California held its first cap-and-trade auction last month and Quebec’s Carbon Market is scheduled to begin in 2013. Linking the separate trading policies that are emerging around the world would make them even more effective.

 

             Benefits of linking        

  • Stabilizes carbon prices
  • Increases liquidity in the market
  • Allows for cost efficiencies to be realized across borders
  • Creates a gateway to a more widespread international framework for climate action

 

Creating links will require administrative flexibility because each cap-and-trade program has different definitions and market rules. Programs may vary on, for example, which economic sectors are covered or whether emission reduction projects outside of the cap-and-trade system can qualify as “offsets.”

Australia and EU member states are working to set a precedent for successfully linking two independent systems. Australian firms will be able to start buying credits from the EU’s Emissions Trading System in mid-2015, as its carbon trading system begins. The two systems will be completely linked by July 2018, significantly expanding the largest carbon market in the world. After changing  a few minor details in the design of its carbon pricing mechanism (e.g. dropping the price floor), Australia’s system can link relatively easily to the EU’s because both of the programs were modeled after the emissions trading mechanism framework detailed in Article 17 of the Kyoto protocol, using similar rules, definitions, and guidelines..

Just as the Kyoto Protocol made it simpler for Australia and the EU to link, the Western Climate Initiative (WCI) is a platform for partnership for California and Quebec. California’s and Quebec’s programs align in scope and mechanics, but have some different definitions and market rules that need to be addressed before the link becomes finalized. The California Air Resources Board (CARB) also wanted to see how the first quarterly allowance auction proceeded before pursuing links.

Both jurisdictions are moving forward.The first California auction was a success, selling all of the 23 million allowances for 2013 and raising more than $289 million. The Quebecois Cabinet gave the green light to harmonize their program with California’s. The first joint auction is planned for August 2013. The California-Quebec partnership will solidify as soon as CARB assures compatibility with Quebec’s program and Governor Brown signs off.

Governments should continue to work together toward creating links similar to those of California-Quebec and Australia-EU. Several programs are on the horizon and opportunities for linked, efficient systems will be missed if each is crafted in isolation. Seven governments have formally stated that they intend to launch carbon-trading programs. These countries should design their systems using lessons from the California-Quebec and Australia-EU links to ensure compatibility and to move toward a truly international system.