One important advantage of emission trading as an instrument to tackle climate change is that it is feasible to connect systems across borders. This ‘linking’ of two or more emission trading systems (ETS) creates a larger carbon market, which can provide the participating regions with more cost efficient options to reduce their emissions.  Linking can be done either directly or indirectly and can lead to price convergence, thus offering efficiency gains. There are however important compatibility issues with corresponding regulatory and governance consequences to be taken into account when considering linking.

Source: ICAP ETS Brief #4 Linking ETS

Through linking, different systems create a direct or indirect connection with each other.  Systems link directly if emission allowances of one scheme can be surrendered in another. This can be done either bilaterally where both systems’ allowances can be used in either system, or unilaterally if this is only the case in one system. Systems can also link indirectly, for example through the common acceptance of an offset standard (such as the CDM). Linking offers the most potential benefit if different systems have different mitigation options and therefore different price levels. Full linking creates a single carbon price in all participating systems and makes the cheapest mitigation options available to all participants in the linked system. While allowance prices would rise in the previously cheaper non-linked system, linking would increase demand to make sure more efficient mitigation options are exploited. A larger market will also tend to be more liquid, which may increase resilience to manipulation and external shocks.

While a larger linked system would be able to take advantage of more mitigation options, all design elements, but also other factors such as political decisions and economic developments in every jurisdiction become variables in the larger market. Ensuring compatibility of design features across systems is therefore very important. Monitoring, reporting and verification standards to ensure that ‘a ton is a ton’ are a key prerequisite for a common market.  Other important issues include the use of offsets and so called safety valves (e.g. price ceiling/ floor) to regulate allowances prices. Differences regarding other design features, such as cap stringency, allocation/ revenue provisions, or sector coverage can more readily be accommodated. For policy makers, linking means a loss of regulatory flexibility and control on a regional level, emphasizing the need for close coordination between linked systems.

Prominent examples for planned linkages between are the EU ETS with the Swiss Scheme and the California Cap-and-Trade Program with the Québec Cap-and-Trade System.

Source: ICAP ETS Brief #4 Linking ETS

 

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Enforcement
Canada - Ontario Cap-and-Trade Program

If an entity fails to surrender sufficient allowances to cover their emissions, they must surrender four times the number of missing allowances (three times the shortfall plus the original shortfall, i.e., four times the number of the shortfall).

Failure to surrender allowances also renders the entity liable to a minimum fine of CAD 25,000/day (EUR 16,971/day) until the remaining allowances are surrendered (with a maximum fine of CAD 6 million [EUR 4.07 million]). Subsequent offences attract higher fines.

Individuals (persons) are liable for at least CAD 5,000/day (EUR 3,394) with a maximum fine of CAD 4 million (EUR 2.72 million) and imprisonment for up to five years.  Subsequent offences attract higher fines.

Penalties apply for other violations.

Canada - Québec Cap-and-Trade System

For non-compliance, entities can be fined CAD 3,000-500,000 (EUR 2,145-357,564) and spend up to 18 months in jail in the case of a natural person, and CAD 10,000-3,000,000 (EUR 7,151-214,538) in the case of a legal person.

Fines are doubled in the case of a second offense. In addition, the Minister of Sustainable Development, the Environment and the Fight against Climate Change may suspend the allocation to any emitter in case of non-compliance.

A covered entity that fails to cover its real and verified GHG emissions with enough allowances on 1 November following the end of a compliance period, must remit each missing allowance and will have to remit three additional allowances for each allowance it failed to remit to the Minister.

The emitter responsible for that entity would also be committing an infraction, subject to financial penalties, for each compliance instrument not surrendered as part of the compliance obligation.

China - Beijing pilot system

Penalties for failing to submit emissions or verification reports on time can result in fines up to 50,000 CNY (EUR 7,34). Furthermore, companies failing to surrender enough allowances to match their emissions are fined three to five times the average market price over the past six months for each missing allowance.

China - Chongqing pilot system

According to the ‘Interim Administrative Measures for the Chongqing ETS’ published in May 2014, there are no financial penalties for non-compliance. The punishments may include media reporting and public exposure of the non-compliance; disqualification from the energy saving and climate subsidies and associated awards for three years; and a record entered on the State Owned Enterprise (SOE) performance assessment system.

China - Fujian pilot system

Penalties for failing to submit an emissions or verification report on time, providing fake information, or disturbing the verification process range from CNY 10,000 to CNY 30,000 (EUR 1,35 to EUR 4,04). Companies failing to surrender enough allowances to match their emissions are fined one to three times the average market price of the past 12 months, with the maximum limit of CNY 30,000. Twice the amount of the missing allowances can be withdrawn from the account of the company or deducted from next year's allocation. Penalties for the misconduct of trading entities and their staff, such as not publishing relevant trading info or leaking commercial secrets, could range from CNY 10,000 to CNY 30,000.

China - Guangdong pilot system

Penalties for failing to submit emissions or verification reports on time range from CNY 10,000 (EUR 1,309) to CNY 50,000 (EUR 6,544). Furthermore, companies failing to surrender enough allowances to match their emissions will have twice the amount of allowances deducted from their allocation for the following year and be fined CNY 50,000 (EUR 6,544).

China - Hubei pilot system

Penalties for failing to submit an emissions or verification report on time range from CNY 10,000 (EUR 1,354) to CNY 30,000 (EUR 4060). Trade participants that manipulate the market face up to CNY 150,000 (EUR 20,306) in fines. Furthermore, companies that fail to surrender enough allowances to match their emissions will be deducted twice the amount of allowances from next year's allocation and are fined one to three times the average market price for every allowance, with a maximum limit of CNY 150,000 (EUR 20,306).

China - Shanghai pilot system

Penalties for failing to submit emission report or verification report on time or providing fraudulent information range from CNY 10,000 (EUR 1,309) to CNY 50,000 (EUR 6,544).

Between CNY 50,000 (EUR 6,544) – CNY 100,000 (EUR 13,088) can be imposed for non-compliance, besides surrendering the adequate amount of allowances. On top of the financial sanctions, further sanctions may be imposed, e.g., entry into the credit record of the company, publication on the internet, cancelation of ability to access special funds for energy conservation and emissions reduction measures.

China - Shenzhen pilot system

Institutes providing fake information can be fined for the difference between reported and actual emissions at the price three times of the average of the past six months. Penalties for disturbing the market order can cost up to CNY 100,000 (EUR 13,088). Companies failing to surrender enough allowances to match their emissions are fined three times the average market price of the past six months. The missing allowances can be withdrawn from the account of the company or deducted from next year's allocation.

China - Tianjin pilot system

In case of non-compliance, companies are disqualified for preferential financial support and policies for three years. There are no financial penalties for non-compliance.

EU Emissions Trading System (EU ETS)

Entities must pay an 'excess emissions penalty' of EUR 100/tCO2 emitted for which no allowance has been surrendered in due time. The name of the non-compliant operator is also published. Different penalties exist at the national level for other forms of non-compliances.

Japan - Saitama Target Setting Emissions Trading System

None

Japan - Tokyo Cap-and-Trade Program

In case of non-compliance, the following measures may be taken in two stages:

First stage: The Governor orders the facility to reduce emissions by the amount of the reduction shortfall multiplied by 1.3.

Second stage: Any facility that fails to carry out the order will be publicly named and subject to penalties (up to JPY 500,000 [EUR 4, 113]) and surcharges (1.3 times the shortfall).

Korea Emissions Trading Scheme

The penalty shall not exceed three times the average market price of allowances of the given compliance year or KRW 100,000/ton (EUR 70).

New Zealand Emissions Trading Scheme (NZ ETS)

An entity that fails to surrender emission units when required to, will have to surrender units and pay a penalty of NZD 30 (EUR 19.58) for each unit.

Entities can be fined up to NZD 24,000 (EUR 15,67) for failure to collect emissions data or other required information, calculate emissions and/or removals, keep records, register as a participant, submit an emissions return when required, or notify the administering agency or provide information when required to do so.

Entities can also be fined up to NZD 50,000 (EUR 32,64) for knowingly altering, falsifying or providing incomplete or misleading information about any obligations under the scheme, including emissions return. This penalty and/or imprisonment of up to five years also apply to entities that deliberately lie about obligations under the NZ ETS to gain financial benefit or avoid financial loss.

Swiss ETS

The penalty for failing to surrender sufficient allowances is set 125 CHF/tCO2 (103.89 EUR/tCO2). In addition to the fine, entities must surrender the missing allowances and/or international credits in the following year.

USA - California Cap-and-Trade Program

Penalties may be assessed pursuant to Health and Safety Code section 38580 (misdemeanor, fines, and possibly imprisonment).

There are separate and substantial penalties for mis- or non-reporting under the Mandatory GHG Reporting Regulation.

Under the Cap-and-Trade Regulation, if an entity fails to surrender a sufficient number of compliance instruments to meet its compliance obligation, there is a separate violation of this article for each required compliance instrument that has not been surrendered, or otherwise obtained by the Executive Officer.

A separate violation accrues every 45 days after the end of the Untimely Surrender Period for each required compliance instrument that has not been surrendered.

Adjustment to Compliance Obligation: Outside of enforcement, there is also an automatic adjustment to the compliance obligation due equal to the number of allowances short for that compliance surrender deadline multiplied by four. A quarter of that amount is retired and the remaining amount is auctioned by the state.

USA - Regional Greenhouse Gas Initiative (RGGI)

Penalties for non-compliance are set by each state; in case of excess emissions, compliance allowances for three times the amount of excess emissions have to be surrendered in future periods.

Canada - Nova Scotia
China
Kazakhstan Emissions Trading Scheme (KAZ ETS)

In 2013, penalties for non-compliance were waived. The current non-compliance penalty is approximately EUR 30/tCO2.

Ukraine
Brazil
Chile
Japan
Mexico
Russia
Taiwan
Thailand
Turkey

Entities that fail to comply with the Turkish MRV regulation are subject to the generic data reporting requirements and related sanctions under the Turkish Environmental Law No. 2872.

USA - Oregon
USA - Washington
Vietnam

Studies

Kachi, A. et al. (2015), Linking Emissions Trading Systems: A Summary of Current Research. International Carbon Action Partnership.

Hawkins, S., Jegou, J. (2014). Linking Emissions Trading Schemes – Considerations and Recommendations for a joint EU-Korean Carbon Market. ICTSD

Haites, E. (2013). Lessons learned from linking emissions trading systems: General principles and applications. PMR Technical Note.

Ahlberg, M. et al. (2013) Linking Different Emissions Trading Systems – Current  State and Future Perspectives. German Emissions Trading Authority (DeHSt).

Burtraw, D. et al. (2013) Linking by Degrees: Incremental Alignment of Cap-and-Trade MarketsDiscussion Paper 13-04. Resources For the Future (RFF).

Zetterberg, L. (2012). Linking the Emissions Trading Systems in EU and California. Swedish Environmental Research Institute.

Flachsland, C., Marschinski, R., Edenhofer, O. (2009) To link or not to link: benefits and disadvantages of linking cap-and-trade systems. Potsdam Institute for Climate Impact Research.

Türk, A. et al. (2009) Linking Emissions Trading Schemes. Climate Strategies. 

Ellis, J., Tirpak, D. (2006) Linking GHG Emission Trading Schemes and Markets. OECD/IEA.

Sterk, W. et al. (2006). Ready to Link Up? Implications of Design Differences for Domestic Emissions Trading Schemes. Wuppertal Institute, Center for Environmental Systems Research, Zentrum für Wirtschaftsforschung, Institut für sozial-ökologische Forschung, Institut für Energie- und Umweltforschung.