Linkage of Greenhouse Gas Emissions Trading Systems: Learning from ExperienceCoauthors
Matthew Ranson, Abt Associates Inc.
Global policy responses to climate change have largely centered on top-down approaches. The Kyoto Protocol set emission targets only for industrialized countries. And a new pathway currently being explored—known as the Durban Platform for Enhanced Action—has focused on commitments from all countries. But given the extraordinary difficulty of negotiating global agreements on the reduction of greenhouse gases, are other approaches possible?
For several years, Robert Stavins, Albert Pratt Professor of Business and Government at Harvard Kennedy School, and Matthew Ranson, a 2012 graduate of the school’s PhD Program in Public Policy, now at Abt Associates, have analyzed a potential alternative: the bottom-up linking of existing regional, national, and sub-national cap-and-trade regimes and other policy instruments.
In a recent paper, part of a series of annual discussion papers supported by the Enel Foundation, the researchers took a closer look at the extensive network of linkages that have grown organically among many of the world’s existing cap-and-trade systems. They found that these systems, although imperfect, provide a working alternative in the absence of a broader international agreement. As of September 2013, they write, “there were international, regional, national, or sub-national cap-and-trade systems operating or scheduled for launching in 36 countries.”
These systems include the European Union’s Emissions Trading Scheme (EU ETS), the Regional Greenhouse Gas Initiative in the northeastern United States, seven regional pilot programs in China, and emissions trading systems in California, Kazakhstan, New Zealand, Quebec, Switzerland, and Tokyo. “Of these, most had established or proposed at least one international linkage with another cap-and-trade or credit system,” Stavins and Ranson write.
The most obvious reason for systems linkage is cost-effectiveness, they explain: “The system with the higher marginal cost benefits from purchasing relatively inexpensive allowances from the other system, allowing it to achieve its emission reduction goals at a lower cost. Conversely, the system with the lower marginal cost benefits from selling its allowances at higher prices, resulting in an inflow of revenue.”
For example, the linkage between the EU ETS and the Clean Development Mechanism (CDM), an international emissions credit system that awarded credits to developing countries under the Kyoto Protocol, enabled European firms to purchase offsets from developing countries, saving an estimated $1.2 billion from 2008 to 2011.
But linkages are not without problems. Stavins and Ranson conclude that a “robust, effective, and meaningful global offset market does not appear to be emerging,” mainly because developed countries are moving away from interaction with the CDM. And that underscores an important feature of linkages: They are not permanent. Countries can decide to shelve their cap-and-trade systems, or to withdraw from bilateral relations with other systems.
Differences in regional economic performance are another challenge to using linkage as a basis for an international climate policy architecture. “Linkage is easiest between systems with similar allowance prices, or at least similar abatement ambitions, conditional on their relative levels of economic development,” the authors write.
Finally, lowering the price of carbon allowances in systems that originally had a higher permit price—a key benefit of linkage—may not necessarily be a good thing, as it can reduce incentives to invest in low-carbon infrastructure or carbon-friendly technology innovations.
But despite these shortcomings, linkage may prove to be an invaluable tool. “Developing an effective international policy architecture to address climate change has proven to be exceptionally challenging,” Stavins and Ranson conclude. With the Kyoto Protocol unlikely to be extended beyond 2020, negotiators of a new global climate policy agreement may gravitate toward a “hybrid system”: a combination of top-down elements for establishing or assessing targets, with bottom-up elements of pledge-and-review tied closely to individual national policies and actions.
“Based on recent experience, the incentives for linking such national policies are likely to continue to produce direct connections among regional, national, and sub-national cap-and-trade systems,” the authors argue. “The growing network of decentralized, direct linkages among these systems may turn out to be a key part of a future hybrid climate policy architecture.”
- by Robert O'Neill