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Towards a global carbon market – Risks of linking the EU ETS to other carbon markets

Executive summary

The number of regions and countries that are putting a price on carbon pollution is vastly increasing. Nearly 40 countries already price carbon or plan to do so, including China that will roll out a national carbon market from 2016 onwards. Linking these different carbon markets is being envisaged by several European policymakers.

For example, the European Commission continues to see the development of an international carbon market as a major way to reduce emissions. Several EU Member States have already mobilized 50 million dollars for the World Bank’s Partnership for Market Readiness (PMR), an initiative for preparatory work and capacity building to establish carbon markets in emerging economies. Concretely, the European Commission aims to initial [1]an agreement to link the Swiss and the EU’s Emissions Trading Systems in the first half of 2015. This is significant because it would be the first time the EU ETS is linked to a carbon market outside the EU’s jurisdiction and would set the precedent for how to link to other carbon markets in the future.

The main benefits of linking are cost-efficiency as a result of increasing the pool of emissions reductions available, which could allow countries to increase their climate ambition. However, if not designed carefully, these lower costs may come at the price of reduced overall emissions abatement, lower domestic investments and co-benefits as well as a loss of public funds.

There are also concerns that linking the EU ETS with foreign trading schemes would allow foreign allowances and credits to enter the EU’s carbon market and undermine the EU’s decision to achieve at least 40% emissions reductions domestically by 2030 (relative to 1990). The decision to achieve the EU’s 2030 climate target wholly through domestic means was announced as part of the EU’s 2030 energy and climate policy framework in October 2014 and confirmed in the latest EU submission of its climate pledge towards the Paris climate treaty.

Finally, current rules do not allow the European Parliament to participate in the linking negotiations and do not provide public access to crucial documents.

The ongoing negotiations to link the EU ETS with the Swiss carbon market and the upcoming proposal to revise the EU’s carbon market, expected in the third quarter of 2015, provide unique opportunities to address unresolved issues outlined in the policy brief.

Key recommendations include:

  • A decision to link the EU ETS with other carbon markets should be accompanied by an increase in the EU’s emission reduction target
  • The upcoming EU ETS revision must introduce safeguards for any decisions to link the EU ETS with other carbon markets, e.g. an assessment of the fair share of the climate ambition of the respective jurisdiction, the inclusion of aircraft operators, the exclusion of international offsets, the existence of equivalent price and supply management and a robust allowance allocation method
  • The upcoming EU ETS revision should introduce public review of linking proposals and rules, including a strengthened role of the European Parliament, improved transparency and public access to relevant documents
  • Ongoing negotiations with Switzerland should set a positive precedent and avoid jeopardizing the EU ETS revision
[1] Initialling happens when the negotiators agree on the wording. They initial each page of the agreement, thus concluding the negotiation stage. The agreement is now available in written form, but it is still confidential and not yet binding. See here

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