Bridging the Atlantic: Linking European and Californian carbon markets?

A post by Manolis Kotzampasakis1 and Edwin Woerdman2 (University of Groningen)

To date, no linking has taken place between Emissions Trading Systems (ETSs) from different continents, but this could change in the future. The EU and the US State of California share a common vision for a decarbonized economy and each has developed an ETS to help achieve it. In a recently published paper,3 we evaluate the legal barriers and policy obstacles to linking the EU ETS with California’s Cap-and-Trade Program and identify concrete legal solutions to possibly overcome them, by taking a law and economics perspective.

Such a transatlantic linkage is not just a theoretical thought experiment, but a tangible prospect that can provide a range of economic and political benefits to both jurisdictions. It can be established on the basis of an informal agreement, due to constitutional constraints for California, and it can take effect through reciprocal amendments of the regulatory frameworks of each ETS. This requires a majority approval via the ordinary legislative procedure in the EU as well as the approval of the Governor in California. The consent of their current linking partners, Switzerland and Québec respectively, is also needed.

Potential barriers can emerge from different design choices, including those regarding offset provisions and, especially, price containment measures. Strengthening California’s Monitoring, Reporting and Verification (MRV) framework for offsets, potentially accompanied by the cooperative application of advanced monitoring technologies, can help alleviate this obstacle. The misalignment of price containment measures may present a greater challenge. On the one hand, California’s hard price ceiling may be considered to contradict with the EU’s political desire and legal requirement for an absolute emissions cap, as it can potentially lead to excess emissions. Its current design allows California’s regulatory authority to sell an unlimited amount of non-transferable compliance units additional to the allowance cap at the ceiling price. On the other hand, the absence of a minimum auction price in the EU ETS could undermine the functioning of California’s allowance price floor.

Reforms in each ETS can be considered, which come at a cost but will also generate benefits, including the prospect of a linked and thus larger ETS market with more abatement opportunities. Such reforms may include the introduction of a price collar in the EU ETS and the application of a maximum limit to California’s hard price ceiling, which would effectively turn it into a soft one. Their gradual implementation, possibly in conjunction with the initial establishment of a restricted linkage, could provide the required impetus for transcending these barriers.

The prospect of an ETS linkage between the EU and California largely depends on the political determination of both jurisdictions to accrue the expected advantages by aligning their programs’ design differences. If successful, this achievement would constitute an example for future linking endeavors and inspire the bottom-up expansion of climate policy through carbon markets worldwide.

1 Manolis Kotzampasakis is an independent legal researcher from Greece. He is also an Attorney-at-Law and Member of the Athens Bar Association. He graduated cum laude at the University of Groningen, the Netherlands, with an LLM in Energy and Climate Law.

2 Edwin Woerdman is Professor of Markets and Regulation at the University of Groningen in the Netherlands since 2018. He is also Co-director of the Groningen Centre of Energy Law and Sustainability since 2007. Woerdman graduated cum laude in political science at Radboud University Nijmegen and defended his PhD on climate law and economics in Groningen in 2002. .

3 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.