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.