Transitional restricted linkage between Emissions Trading Schemes
by Simon Quemin and Christian de Perthuis
Linkages between Emissions Trading Systems are deemed to play an important role in implementing the Paris Agreement. However linkages have been few and far between. This is attributable to their multi-faceted nature and growing heterogeneity in policy designs. This article compares various link restrictions in facilitating linkage negotiations, namely quantitative restrictions, border permit taxes, exchange and discount rates, and unilateral linkage. These restrictions undermine cost-efficiency and generate rents and should thus be used as a transitory mechanism to full linkage. Trial restricted-link periods may allow to test the effects of the link while containing its reach, spur cooperation and provide more time and flexibility in circumventing impediments to full linkage.
There is no ideal transitional restricted link as each has its relative merits and weaknesses. While quantitative restrictions seem to be the natural route to a full link, their implications can be misleading. While those of a border tax are more manageable, this policy seems harder to pursue. Exchange rates adjust for programmes’ stringencies and have potential to increase overall ambition, but are challenging to select. As experience corroborates, unilateral linkage may constitute a practical and promising approach.
Emissions trading, Linkage, Trade restrictions