After the adoption of the Paris Agreement policy-makers around the world started planning and implementing climate change mitigation policies to achieve their nationally determined contributions (NDCs). Emission trading systems (ETSs) are increasingly embraced as a policy to reduce emissions in a cost-effective manner. When linking ETSs internationally, allowances can flow across international borders. This, in turn, can affect the level of emissions in the linked countries. As such, an important question arises as to whether and how linking affects the achievement of NDCs, and whether and how countries should account for such links under the Paris Agreement.
This discussion paper explores how countries could account for the international linking of ETSs under the Paris Agreement, and how linking could be accounted for in the context of jurisdictional mitigation targets. It identifies four broad approaches to quantify the shift in emissions based on the amount of allowances issued, held in accounts, transferred between jurisdictions, and/or surrendered for compliance.
On this basis, the paper determines and discusses important implications for formulating future NDCs in order to facilitate linking of ETSs. An important challenge is the inherent differences between the design of ETSs and the type of targets, policies and actions communicated in countries’ first NDCs. Whereas ETSs typically set a cap expressed as absolute GHG emissions over a continuous period of time, NDCs often establish mitigation targets for a single year and often include metrics other than GHG emissions. Reconciling these differences is critical in order to ensure robust accounting for the linking of ETSs under the Paris Agreement.