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 successful linkages are those of 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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Links with other systems
Canada - Nova Scotia

Nova Scotia does not plan to link at this time.

Canada - Québec Cap-and-Trade System

Québec linked with California’s ETS in January 2014. The two extended their joint market by linking with Ontario in January 2018 until the termination of Ontario’s system in mid-2018.

China - Beijing pilot ETS
China - Chongqing pilot ETS
China - Fujian pilot ETS
China - Guangdong pilot ETS
China - Hubei pilot ETS
China - Shanghai pilot ETS
China - Shenzhen pilot ETS
China - Tianjin pilot ETS
China National ETS
EU Emissions Trading System (EU ETS)

Following final regulatory changes in the design of the Swiss ETS, a link between the Swiss ETS and the EU ETS took effect on 1 January 2020. The link allows covered entities in both systems to use allowances from either ETS for compliance. A provisional link was implemented in September the same year, enabling the transfer of allowances between registries on pre-announced dates. This system is set to be replaced with an electronic link that would facilitate transfers of emission allowances between both ETS registries on a continuous basis.

The link caps a ten-year process of reaching an agreement on regulatory alignment. Formal negotiations began in December 2010, culminating in the conclusion of a linking agreement in late 2017*. Both sides announced on 12 December 2019 that the link would become operational in January 2020.

*Agreement between the European Union and the Swiss Confederation on the linking of their GHG emissions trading systems, OJ L 322, 12 December 2017, p. 3.

German National Emissions Trading System

The long-term goal is to establish emissions trading in the transport and heating sectors at the EU level.

Japan - Saitama Target Setting Emissions Trading System

Linking with the Tokyo Cap and Trade Program started in April 2011. Tokyo and Saitama credits are officially eligible for trade between the two jurisdictions. During the first compliance period, 15 credit transfers took place between the Saitama Prefecture and Tokyo (nine cases from Tokyo to Saitama, six cases from Saitama to Tokyo).

Japan - Tokyo Cap-and-Trade Program

Linking with the Saitama Prefecture ETS started in April 2011 when the Saitama program was launched. Tokyo and Saitama credits are officially eligible for trade between the two jurisdictions. During the first compliance period, 15 credit transfers took place between the Saitama Prefecture and Tokyo (nine cases from Tokyo to Saitama, six cases from Saitama to Tokyo).

Kazakhstan Emissions Trading Scheme
Korea Emissions Trading Scheme

No linkage is currently considered.

Mexico

The ‘General Law on Climate Change’ foresees possible linkages between the Mexican ETS and ETSs in other countries. Various cooperation activities have taken place in recent years. Mexico signed a Memorandum of Understanding with California in 2014 and with Québec in 2015 that includes cooperation on ETS. In August 2016, Mexico, Québec, and Ontario issued a joint declaration on carbon markets collaboration. Additionally, in December 2017, Mexico—together with four countries and seven subnational governments—issued the Paris Declaration on Carbon Pricing in the Americas for carbon pricing implementation, which creates a platform for cooperation among countries in the region.

New Zealand Emissions Trading Scheme

Until 1 June 2015, the NZ ETS was indirectly linked to other systems (e.g., the EU ETS) via the international Kyoto Protocol flexible mechanisms. Since then, the NZ ETS has been a domestic-only system.

The recent reforms make the NZ ETS more similar to ETSs in other countries, making it more compatible for international linking in the future.

Swiss ETS

Switzerland concluded negotiations with the EU on linking the Swiss ETS to the EU ETS in 2015 and signed the concluded agreement in 2017. Following legislative approval and ratification in 2019, the link entered into force on 1 January 2020. Prior to that, revisions were made to align with the EU ETS legislative framework.

In March 2019, the Swiss Parliament approved legal changes to the ‘CO2 Act,’ the core framework of Swiss climate legislation. In November 2019, the Federal Council made the necessary amendments to the ‘CO2 Ordinance’ which specifies regulations and implementation; these amendments expanded ETS coverage to civil aviation and fossil-thermal power plants. Under the link, covered entities in the Swiss ETS can use allowances from the EU ETS for compliance, and vice versa. The two systems run separate auctions. Market participants from the EEA need an account at the Swiss Emissions Trading Register in order to participate.

United Kingdom

No link with another system is currently in place. The UK government has indicated it is open to the possibility of internationally linking the scheme in the future, but has not made any decision on preferred linking partners. The post-Brexit Trade and Cooperation Agreement between the EU and UK stipulates that the jurisdictions “shall give serious consideration to linking their respective carbon pricing systems in a way that preserves the integrity of these systems and provides for the possibility to increase their effectiveness.”

USA - California Cap-and-Trade Program

California linked with Québec’s ETS on 1 January 2014. The two extended their joint market by linking with Ontario on 1 January 2018 until the termination of Ontario’s system in mid-2018.

USA - Massachusetts Limits on Emissions from Electricity Generators
USA - Regional Greenhouse Gas Initiative (RGGI)
Colombia
Indonesia
Montenegro

As part of EU accession talks, Montegro has opened chapter 27 of the acquis in December 2018 and continues to align with the EU’s legislative framework on climate change; notably by adopting legislation on the EU ETS, the EU ETS Directive 2003/87/EC, subsequent amendments and secondary legislation such as on allocation rules, MRVA, auctioning and the Union Registry.

Russian Federation - Sakhalin
Ukraine
USA - Pennsylvania
USA - Transportation and Climate Initiative Program (TCI-P)
USA - Washington
Vietnam
Brazil
Chile
Japan
Pakistan
Philippines
Taiwan, China
Thailand
Turkey
USA - New Mexico
USA - New York City
USA - North Carolina
USA - Oregon

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.