Linking emissions trading systems with different levels of environmental ambition

Abstract

The environmental ambition of an ETS may be assessed considering three dimensions: emissions coverage, stringency and determinacy. Allowance prices are an imperfect metric for the stringency of an ETS. Yet, arguably, they are the best proxy for ETS stringency. Beyond the partial equilibrium representation of linking, a range of economic and political factors can diminish a jurisdiction’s willingness or ability to link. When choosing a linking partner, many factors are weighed up which transcend the compatibility of ETS designs and differences in environmental ambition. Linkages between absolute- and relative-cap ETSs are problematic in that overall emissions may increase. In the literature, non-cooperative linking most often leads to higher emissions than if the same ETSs operated under autarky. There is a shortage of studies simulating the economic impacts of linkages between existing ETSs. More work is also needed to identify the desirable content of future linking agreements.