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Linkage and Global Climate Architecture Jessica Green, Thomas Sterner & Gernot Wagner

Top-down, RIP*

Bottom-up

Unequal targets and costs before linkage Large potential Pareto improvements from trade across domestic efforts

Large costs without linkage

Source: Green, Sterner & Wagner (2014) discussion draft

Linkage has potential to decrease abatement costs Higher ambition in low-cost countries, supported by funds from high-cost countries

Equal total abatement, lower total cost

Source: Green, Sterner & Wagner (2014) discussion draft

Significant gains from trade Potential Pareto improvements, supported by monetary transfers

Need stable targets & financial flows

Total costs before linkage:

Total costs after linkage:

Source: Green, Sterner & Wagner (2014) discussion draft

Linkage promises

same abatement

at lower cost*

* Or more abatement at equal cost, or anything in between

Linkage creates winners and losers Potential Pareto improvements through linking need financial transfers for win-win

• Within a cap-and-trade system

– Net buyers gain from lower price

– Net sellers gain from higher price

• Across cap-and-trade systems

– Total costs to low-cost country rise

– Total costs to high-cost country fall

Solid economics, uncertain politics

Source: Green, Sterner & Wagner (Nature Climate Change, 2014)

Four political considerations for successful linkage Both domestic and cross-jurisdictional issues as possible obstacles

1. Different levels of ambition

– Prospect of linkage may influence levels of ambition

2. Competing domestic objectives

– Desire for higher carbon prices vs cost-effectiveness

3. Need for supporting financial flows

– Domestic political support key

4. Loss of regulatory autonomy

– From the mundane (short vs. metric tons)…

– … to the more fundamental (which offset credits to allow)

Successful linkage requires balance of econ. efficiency & political feasibility

Source: Green, Sterner & Wagner (Nature Climate Change, 2014)

Keep linking simple There’s nothing simple about global climate architecture

• Focus on direct links

• Consistent rules

• Strong coordination

• Sign ‘pre-nups’ in case of ‘de-linking’

Build, test, and prove viability of strong domestic systems

vs Leverage existing systems for broader

carbon market sooner

Source: Green, Sterner & Wagner (Nature Climate Change, 2014)

Small symbolic linkages good step but large ones elusive

• California Quebec great learning experience

• EU-US-India – Well…..

Small symbolic linkages good step but large ones elusive

• California Quebec great learning experience

• EU-US-India – Well…..

• ALL THE PROBLEMS OF TOP DOWN COME

BACK TO BITE

• All details of banking, definitions, commitment

periods…

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Costs of Formal Linking

Alignment costs – Misalignments can result in perverse outcomes

A ton must be a ton

Price floors and ceilings must be aligned

– Administrative effort in negotiating how to align disparate C&T designs

– Political cost in losing partial control of domestic C&T design, which reflect stakeholder preferences

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Table 1: Evaluation of Design Alignment

Requirements for Formally Linking C&T

Programs

Difficulty to

Align?

Important for

Functioning of

Markets?

Important for

Political Economy?

Technical Issues

1. Measurement, Reporting, and Verification

a. Measurement methods Easy Yes Yes

b. Reporting of process emissions Medium No Maybe

c. Reporting of emissions from imported

power

Medium No Yes

2. Allowance Tracking System

a. Registries (serial number systems) Easy Yes Yes

b. Identification of compliance instruments

(type, origin)

Easy No Yes

c. Data collection on transactions Medium No Maybe

d. Public access to data Easy Maybe Yes

Emissions Reduction Goal

1. Emissions Cap

a. Are caps absolute or intensity based? Medium Maybe Maybe

b. Coordination of stringency (marginal

costs, other metrics)

Hard Maybe Yes

c. Accounting for associated programs in

baseline

Medium Maybe Maybe

d. Aggregate goal across programs Hard No Maybe