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STUDY: Options and Issues for Restricted Linking of Emissions Trading Systems

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A study released by ICAP in partnership with SEI explores alternate forms of linking.

In a study commissioned by the International Carbon Action Partnership (ICAP), the Stockholm Environment Institute (SEI) looks at options for the restricted linking of emissions trading systems (ETS).

Linking ETS can offer many potential benefits. For instance, it gives regulated entities a greater range of abatement options and may reduce the risk of carbon leakage. A larger carbon market also increases market liquidity. However, linking can be a complicated process and also carries potential risks for the linking partners. Full linking requires a certain level of harmonization and partners may have to compromise on certain design elements to create a fully fungible carbon market.

This paper assesses four options for restricted linking: quotas, one-way linking, exchange rates and discount rates. These ‘restricted linking’ options allow units to flow among jurisdictions but with certain limitations. They can still deliver some of the economic, environmental and political benefits of full linking whilst also addressing some of the concerns raised by full harmonization. As such, it may also be a useful step for potential linking partners to consider as part of the process of establishing a full link.

The study can be found here.