Good COP, Bad COP

Market linkage – a European perspective
by -- December 16th, 2009

Jos Delbeke, Deputy Director-General for the Environment for the European Commission, described three elements that he sees as necessary if we want to link national and/or regional carbon markets with one another.

Jos Delbeke, Deputy Director-General for the Environment for the European Commission, was one of the panelists at the Nicholas Institute/German Marshall Fund UNFCCC side event on market design. Mr. Delbeke highlighted three elements that he sees as necessary if we want to link national and/or regional carbon markets with one another:

First and foremost, each program must include a robust and ambitious emissions cap. Those caps need to be roughly compatible, which is best facilitated at the international level. Leaving countries or regions to decide their caps on their own is sub-optimal because the parties will question whether the differences put them at a disadvantage compared to their counterparts.

The second element is compatible offsets policies. Multiple standards for offsets within national markets would create fragmented marketplaces. For example, the EU does not accept offsets from avoided deforestation because of concerns with verification and monitoring. Current climate legislation before the U.S. Congress does not allow offsets under the Clean Development Mechanism.

The third element is consistency with price management mechanisms. In the U.S., the Waxman-Markey bill includes a strategic reserve auction to introduce additional allowances into the market if prices rise above a set level. In the Senate debate, there is discussion of setting a price cap and a price floor. The EU finds this approach problematic for a market-based system. The current price of allowances in the EU is around 13-15 Euros – a low price for the EU Emission Trading System but a relatively high price for the U.S. debate. Linking one market with price controls with another market that does not would be a complicated process.

Delbeke concluded his remarks by pointing out that market linkage does not require identical systems, but rather compatible systems.

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