Carbon Markets and the Future of International Climate Policy

October 18, 2013
by Kevin Rowe MPP 2014

Even as hopes for a binding international agreement to substantially reduce global greenhouse gas emissions have faded in recent years, a bottom-up international climate policy regime is emerging. Seven countries and the European Union now have regional, national, or sub-national emissions trading schemes (ETS), and similar policies are under consideration in at least five other countries.

As this bottom-up international climate regime evolves, both economists and environmentalists have identified linkages between national and subnational ETSs as a potential area for expanding the impact of domestic carbon markets.

On Wednesday (October 17), during a Regulatory Policy Program Seminar at Harvard Kennedy School, Professor William Pizer of Duke University’s Sanford School of Public Policy responded to the excitement about expanding carbon markets by addressing one of the risks associated with linking programs -- the prospect of delinking linked systems. Pizer’s work drew from recent scholarship with several co-authors and was informed by his tenure as the Deputy Assistant Secretary for Environment and Energy in the US Department of the Treasury from 2008 to 2011.

Delinkage may be likely, Pizer argued, and the consequences could be disruptive and costly. The design and management of ETS policies has been the subject of intense and at times rapidly shifting debates in domestic political systems, and many of these design features—such as price floors and ceiling, banking provisions, and levels of ambition—are transmitted across linked systems. If domestic political forces push to strengthen, weaken, or significantly change their ETS systems, linked systems will be affected in turn.

To illustrate these risks and potential strategies for mitigating them, Pizer described a scenario in which the European Union and Australia, which have agreed to link their respective ETSs after 2015, decide to delink in 2020. He showed how delinkage—or even speculation about delinkage—could result in high transaction costs and economic inefficiencies as regulated firms and investors move their permit holdings back onto their national systems and prices diverge. This suggests the need for governments to consider how to plan for delinking when making arrangements to link, akin to provisions in private contracts that establish terms for withdrawal from an agreement.

The paper that served as the basis of Prof. Pizer’s talk has been posted as a Regulatory Policy Program working paper. For information about the Regulatory Policy Program seminar series, please visit the website. 

Professor William Pizer

Professor William Pizer, Duke University’s Sanford School of Public Policy

Pizer showed how delinkage—or even speculation about delinkage—could result in high transaction costs and economic inefficiencies as regulated firms and investors move their permit holdings back onto their national systems and prices diverge.


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