Abstract
Linkages between Emissions Trading Systems are deemed an important element of the future climate policy landscape. They are, however, difficult to agree and remain few and far between. Temporary restrictions on permit trading have potential to facilitate and gradually approach unrestricted, full linkage. We compare the relative merits of several link restrictions in this respect, namely quantitative transfer limits, border taxes on transfers, exchange and discount rates, and unilateral linkage. To this end, we develop a simple model to have a unifying framework which, in conjunction with lessons we draw from real-world experiences, serves as a basis for a broader, policy-oriented discussion. While quantitative restrictions seem to be the natural route to full linkage, they can lead to uncertain distributional effects and weaken price signals. These aspects are mitigated under a border permit tax, but this policy seems harder to implement. Exchange rates have potential to adjust for programmes’ stringencies and raise ambition over time, but can be challenging to select. As experience corroborates, unilateral linkage can be a convenient approach.
Highlights
For many parties to the Paris Agreement, one of the instruments of choice to deliver on the pledged emissions reductions is carbon markets, 21 of which are in operation along with others in the pipeline (ICAP 2018)
Linkage has become high on the climate policy agenda because it has potential to unleash cost-efficiency gains and help ratchet up ambition
There is no ‘ideal’ transitional restricted linkage, we show how experience suggests that unilateral linkage—whereby permits can flow in one direction but not vice versa—can be a practical way of gradually approaching a full, twoway link
Summary
Linkages between Emissions Trading Systems (ETSs) are deemed a key element of the future climate policy landscape (Bodansky et al 2016; Mehling et al 2018). for many parties to the Paris Agreement, one of the instruments of choice to deliver on the pledged emissions reductions is carbon markets, 21 of which are in operation along with others in the pipeline (ICAP 2018). We consider three main types of link restrictions, namely quantitative transfer limits, border taxes on permit transfers and exchange rates on permits’ compliance values. A border tax sets the price ratio but there is uncertainty about the resulting permit transfers In both cases, the restricted link outcomes are comprised between autarky and full linkage, and aggregate emissions are constant. Just like a border tax, an exchange rate specifies the ratio of jurisdictional marginal abatement costs in equilibrium but further alters the relative compliance value of permits. Quantitative restrictions can lead to uncertain distributional effects and weakened price signals, which may impair the transition to a full link Some of these aspects can be mitigated under a border tax on permits. Derivations and proofs (A), numerical simulations (B) and endogenizes domestic cap selection (C)
Sign-in/Register to view highlights & summary Sign-in/Register to access full text options 
Free) 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a call
