Getting Married (and Divorced): An article on (De)linking Emissions Trading Schemes

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A post by Tong Zhu (WWU Münster)

As one of the most pressing issues of our time, climate change requires a comprehensive response by the international community. The market mechanisms contained in Article 6 of the Paris Agreement inspired renewed interest in international cooperation on carbon markets. Topics regarding linking and delinking have gained fresh prominence among scholars and policy-makers. A newly published study that I recently wrote with Simone Borghesi [1] overviews the state of art on linking and delinking in theory and in practice, and draws lessons from the real-world experiences of initiation and termination of linking.

Using marriage as an analogy, the article introduces readers to linking and its pros and cons. On the one hand, linking has the potential to enhance compliance opportunities and market liquidity, providing platforms to share practices and knowledge. For small economies/markets, linking with large and mature ETSs could be particularly beneficial in terms of experience exchanging and infrastructure sharing. On the other hand, participants may lose some sovereignty as linking carbon markets calls for substantial harmonization and integration of regulatory provisions of individual systems, and the linked market will be regulated jointly by participating jurisdictions. Like in a marriage, both spouses have to compromise and give up some freedom they had as single for the benefit of the family.

The article also takes a close look at the attempts of linking pursued globally until now, covering both successful and unsuccessful cases. Compared to the successful cases, e.g. the prominent California–Québec joint cap-and-trade programme, the unsuccessful linking experiences perhaps deserve more attention and reflection. As it happened in some troubled love story in which partners keep breaking up and getting back together, linking among jurisdictions could also fall into this cycle. As the first mandatory GHG ETS in the U.S., the Regional Greenhouse Gas Initiative (RGGI) came into operation in 2009, covering power sectors in ten states in the Northeastern U.S.. New Jersey was one of the initial founders of RGGI, but in 2011 Governor Christie decided to pull the state out of the scheme. Following the election of a new governor, New Jersey rejoint the RGGI officially on January 1, 2020, after eight years on the outside.

Similar examples include the Ontario case and the Australia-EU case. Given the success of the California–Québec cap-and-trade programme, Ontario joint the California-Québec market as of January 1, 2018, under a harmonization and integration agreement announced in September 2017. But with the newly elected Ontario government, the cap-and-trade programme was canceled in July 2018, and Ontario automatically delinked from the joint market. In September 2013, the European Commission and the Australian government announced their intention to link the respective ETSs. Initial linking was planned to be in 2015, and would move from unilateral linking to bilateral linking gradually. However, the linking proposal was abandoned by the new Australian government, as the wining party of the 2013 election decided to repeal its ETS legislation. In this case Australia actually broke off the engagement with the EU rather than divorced the EU.  Nevertheless, these cases show how long and complex negotiations can be rapidly swept away by domestic electoral results, and highlight the risks of domestic political uncertainties to international climate cooperation.

Overall, linking ETSs represents an interesting opportunity to capture the potential benefits of market-based instruments. Topics regarding (de)linking are of significant interest for researchers and practitioners working on international climate policy cooperation, given the uncertainties we are facing nowadays. In particular, it is important to avoid priori ideological positions in favour or against linking, and to properly evaluate when linking can be beneficial to participants, sufficiently stable in the long run, and effective in reducing emissions for the environment.

[1] This blog post is based on the article:

The views and opinions expressed in this post are solely those of the author(s) and do not reflect those of the editors of the blog of the project LIFE DICET.