Linking Carbon Markets: The Climate Change Silver Bullet?

Abstract

With the rising popularity of emissions trading schemes and the private sector call for a global carbon market, it seems as though there is the chance to solve climate change by simply providing a clear price signal. But how easy will this be, both technically and practically? This paper provides an overview of the challenges in policy design terms involved in directly linking existing emissions trading schemes, and the status of planned emissions trading schemes, in order to set the potential of establishing a policy framework for a global carbon market in a realistic frame. The paper begins by outlining what linking is and setting out the advantages and risks of linking schemes. The key criteria to consider in order to establish compatibility for linking are explored, and then a summary of existing or planned schemes is given to highlight some of the technical challenges involved in linking emissions trading schemes together. The paper goes on to describe how a linked scheme could be set up and then moves on to the political arena, looking more closely at the political benefits and risks of linking and then discussing whether or not linking emissions trading schemes is an element of, or an alternative to, a global climate policy.