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 - Nova Scotia

Participants who do not surrender enough allowances at the end of the compliance period will pay three times the latest auction settlement price per allowance they are short.

Administrative penalties for violations of other cap-and-trade regulations will be determined in further regulations.

Canada - Québec Cap-and-Trade System

For noncompliance, entities can be fined CAD 3,000500,000 (USD 2,315-385,875) and spend up to 18 months in jail in the case of a natural person, and CAD 10,000-3,000,000 (USD 7,718-2,315,252) in the case of a legal person.

Fines are doubled in the case of a second offence. In addition, the Minister of the Environment and the Fight against Climate Change may suspend the allocation to any emitter in case of noncompliance.

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 person with legal responsibility 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 ETS

Penalties for failing to submit emissions or verification reports on time can result in fines up to 50,000 CNY (USD 7,558). Furthermore, companies failing to surrender enough allowances to match their emissions are fined up to five times the average market price over the past six months for each missing allowance. Other nonfinancial penalties include negative impacts on access to bank loans and subsidy programs.

China - Chongqing pilot ETS

There are no financial penalties for non-compliance. Non-financial penalties may include public reporting, disqualification from the energy saving and climate subsidies and associated awards for three years, and a record entered in the State Owned Enterprise performance assessment system.

China - Fujian pilot ETS

Penalties for failing to submit an emissions or verification report on time, providing false information, or disturbing the verification process range from CNY 10,000 (USD 1,512) to CNY 30,000 (USD 4,535). Companies failing to surrender enough allowances to match their emissions are fined between one to three times the average market price of the past 12 months, with the maximum limit of CNY 30,000 (USD 4,535). 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 information or leaking commercial secrets, could range from CNY 10,000 (USD 1,512) to CNY 30,000 (USD 4,535).

China - Guangdong pilot ETS

Penalties for failing to submit emissions or verification reports on time range from CNY 10,000 (USD 1,512) to CNY 50,000 (USD 7,558). Furthermore, companies failing to surrender enough allowances to match their emissions will be deducted twice the amount of allowances from the following year’s allocation and are fined CNY 50,000 (USD 7,558). Other non-financial penalties include negative impacts on access to bank loans and subsidy programs.

China - Hubei pilot ETS

Penalties for failing to submit an emissions or verification report on time range from CNY 10,000 (USD 1,512) to CNY 30,000 (USD 4,535). Trade participants that manipulate the market face up to CNY 150,000 (USD 22,673) 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 (USD 22,673).

China - Shanghai pilot ETS

Penalties for failing to submit an emissions report or verification report on time or providing fraudulent information range from CNY 10,000 (USD 1,512) to CNY 50,000 (USD 7,558).
Between CNY 50,000 (USD 7,558) and CNY 100,000 (USD 15,115) can be imposed for non-compliance, besides surrendering the adequate amount of allowances. Further sanctions may also be imposed, such as 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 ETS

Institutes providing false information can be fined for the difference between reported and actual emissions at three times the average allowance price of the past six months. Penalties for disturbing the market order can cost up to CNY 100,000 (USD 15,115). 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. Other nonfinancial penalties include public reporting, reporting to relevant credit information of public banks, disqualification from financial subsidies (for five years), and a record entered in the State Owned Enterprise performance assessment system.

China - Tianjin pilot ETS

In case of noncompliance, companies are disqualified for three years for preferential financial support and other national supporting policies, i.e., on recycling economy, energy-saving measures, and emission reductions. 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 (USD 118/tCO2) for each tCO2 emitted for which no allowance has been surrendered. The name of the noncompliant operator is also published. Different penalties exist at the national level for other forms of noncompliance.

Japan - Saitama Target Setting Emissions Trading System

None

Japan - Tokyo Cap-and-Trade Program

In the case of noncompliance, the following measures may be taken:

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 [USD 4,528]) and surcharges (1.3 times the shortfall).

Kazakhstan Emissions Trading Scheme

The non-compliance penalty equals five monthly standard units for each tonne (approximately KZT 10,605/tCO2 [USD 31/tCO2]). In 2013 and in 2014, penalties for non-compliance were waived.

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 (USD 90.85)/tonne.

New Zealand Emissions Trading Scheme

An entity that fails to surrender emissions units when required to must surrender the units and pay a penalty of NZD 30 for each unit (USD 20.76) that was not surrendered by the due date. In certain circumstances the penalty may be reduced.

Entities can be fined up to NZD 24,000 (USD 16,607) on conviction 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 (USD 34,598) on conviction 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.

A new “infringement offence regime” is expected to be established from 2020 for minor offences. Infringement offences will result in financial penalties for offenders but not convictions.

Swiss ETS

The penalty for failing to surrender sufficient allowances is set at CHF 125/tCO2 (USD 127.82/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 Greenhouse Gas Reporting Regulation.’

USA - Massachusetts Limits on Emissions from Electricity Generators

If the MassDEP establishes that an entity is in violation of compliance, this will be presumed to constitute “a significant impact to public health, welfare, safety or the environment.” In addition to penalties, the regulated entity has to submit three allowances for each tonne of noncompliance.

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.

China National ETS

Noncompliance would result in punishment, which may include recording the noncompliance information in the national credibility information sharing platform*, although details are yet to be developed.

*The national credibility information sharing platform, developed in 2015, integrates credibility information provided by various departments and regions across the country. As of 2018, it has achieved interconnection with 44 ministries, 31 provinces and autonomous regions, and 65 market institutions.

Colombia
Mexico
Ukraine
USA - New Jersey
USA - Virginia
Brazil
Chile
Indonesia
Japan
Russia
Taiwan, China
Thailand
Turkey
USA - New Mexico
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.