Linking Carbon Markets Offers More Than Economic Benefits

Economists have long recognized that linking carbon markets reduces the overall cost of achieving emissions reductions. This economic benefit originates from allowance flows between previously isolated markets that help identify and achieve emissions reductions in the most efficient way. Linking, however, provides non-economic benefits that can be just as important as efficient mitigation.

In a recent report, we refer to authorization of allowance flows between two carbon markets as “formal linking.” We distinguish formal linking from “linking by degrees,” a process during which regulators incrementally align program elements between markets. For example, regulators from two markets participate in linking by degrees when they share protocols for a certain offset type or when one regulator replicates another regulator’s standards for measuring, reporting and verifying carbon emissions. We argue that linking by degrees can provide at least three categories of non-economic benefits, even if incremental alignment does not result in a formal link.

The first benefit is building greater political confidence. Market alignment signals cooperation and a common and joint effort to reduce carbon emissions. This signal might enable more aggressive mitigation targets and could convince other jurisdictions to introduce a price on carbon.

The process of linking by degrees also provides administrative benefits. Linking by degrees enhances opportunities for regulators to share best practices and learn from one another. Alignment, in addition, might simplify compliance for businesses covered by both carbon markets.

Lastly, the process of linking by degrees benefits states by boosting their influence in shaping national policy. In the contemporary climate, expected Clean Air Act rules for power plants require states to submit implementation plans to the Environmental Protection Agency (EPA) for approval. We anticipate states that have already incrementally aligned markets will earn greater deference from the EPA.

In our report, we apply the framework of linking by degrees to California’s cap-and-program and the Regional Greenhouse Gas Initiative (RGGI). We find that these two programs are already aligned in significant ways and that the two markets are nearly ready to formally link. Further research will apply this framework to international carbon markets.

About Clayton Munnings

Clayton Munnings is a research associate at Resources for the Future.

About Dallas Burtraw

Dallas Burtraw is one of the nation’s foremost experts on environmental regulation in the electricity sector. For two decades, he has worked on creating a more efficient and politically rational method for controlling air pollution. He also studies electricity restructuring, competition, and economic deregulation. He is particularly interested in incentive-based approaches for environmental regulation, the most notable of which is a tradable permit system, and recently has studied ways to introduce greater cost-effectiveness into regulation under the Clean Air Act.

Views expressed above are those of the author. Resources for the Future does not take institutional positions on legislative or policy questions. All information contained on Common Resources is intended for informational and educational purposes and may only be used for these purposes. Please see RFF's Terms of Use for further information.

3 Responses to “Linking Carbon Markets Offers More Than Economic Benefits”
  1. photographer says:

    Incredible, you write some good words!

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  1. […] Linking Carbon Markets Offers More Than Economic Benefits / Dallas Burtraw and Clayton Munnings,  Common Resources, 10/04/2013 […]

  2. […] RFF’s Dallas Burtraw, Karen Palmer, Clayton Munnings, and Matt Woerman, along with Paige Weber from Yale University, recently introduced a framework to help policymakers who are working to link cap-and-trade markets. They note: “The incremental alignment of program elements—which we call ‘linking by degrees’—can capture benefits in program administration, build institutions and political support, and may influence the design of expected rules governing greenhouse gas emissions under the US Clean Air Act.“ They also apply the framework to California’s cap-and-trade program and the Regional Greenhouse Gas Initiative, finding that “the two markets are nearly ready to formally link.” […]

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