Analysis of Risks and Opportunities of Linking Emissions Trading Systems

Linking regional, national, and subnational emissions trading systems offers the opportunity to build a global carbon market from the bottom-up while potentially reducing emissions at lower cost and reducing competitive distortions. However, there are also environmental, economic, and legal risks associated with the linking of systems, which need to be closely examined and evaluated by policy makers when considering such a process. The first real world cases of linking emissions trading schemes occurred across the Atlantic: California and Québec linked their systems as of 1 January 2014, and the EU and Switzerland agreed on linking in 2019. Previous negotiations have also been attempted with Australia. The growing popularity of emissions trading as a policy tool, including in emerging economies expands the number of potential linking partners in the world.

As part of the environment research program, on behalf of the German Environment Agency, adelphi together with the Wuppertal Institut für Klima, Umwelt, Energie gGmbH developed a systematic framework to assess the risks and opportunities of linking systems in order to better evaluate and potentially quantify what such a link would mean. Over the course of the project from fall 2014 to fall 2016, the project consortium reviewed and analysed the theoretical benefits of linking, developed criteria to qualitatively and quantitatively assess the effects of a direct link between systems, and developed a tool to aid policy makers in approaching such a potential link.