Linking the EU ETS to Other Emissions Trading Schemes

Abstract

This chapter, from a monograph on climate change and European emissions trading, describes the links between the European Union's Emissions Trading Scheme (ETS) and other emissions trading systems, including those in Norway, Iceland, and Liechtenstein. The author discusses the legal possibilities and prerequisites of linking the EU ETS to other domestic ETSs. The author stresses that connections between dETSs cannot be regarded in isolation from the international emissions trading framework (as provided by the Kyoto Protocol), so relationships are described both under the present EU ETS as well as under the Kyoto Protocol. Additional sections survey linking partners, assess the legal possibilities of connecting the EU ETS with other dETSs, and the issues and prerequisites to linking. Specific topics include the mutual recognition of trading units, the currency of trading, the allocation method (auction versus free) of cap-and-trade systems, stringency of targets, absolute versus relative targets, voluntary versus mandatory participation, upstream versus downstream schemes, non-compliance penalties, opt-in and opt-out provisions, monitoring and reporting, banking from one trading period to the next, linking to a non-Kyoto country, and issues for indirect linking through offsets. The author concludes that the environmental effectiveness and economic efficiency of the EU ETS can only reach maximum potential if the design of the scheme is optimized. Linking the EU ETS to other dETSs can improve this effectiveness.