Thursday, September 6, 2012

UK and Australia to "Link" Emissions Trading Systems

If states are viewed as individuals in international law, then the establishment and subsequent linkage of national emissions trading systems may be viewed as a bottom-up approach to climate change mitigation, in contrast to the top-down approach of globally negotiated treaties. The advantage of linked emissions trading system is to increase the number of potential traders, which (all else being equal) should improve the liquidity of the larger market.

The EU established the world's first trading system for carbon dioxide in 2005. Australia's own system is just getting off the ground. Last week, the two agreed to link up their carbon markets as of 2018 at the latest (see here). In the meantime, substantial changes will have to be made to the structure of Australia's system to make it compatible with the bigger and well-established EU system. This is a potentially significant step towards a operational global market in carbon dioxide (and possibly other greenhouse gases). It is only an incremental step, however, because a truly global and effective carbon market would require the participation of all the world's largest emitting countries, including China, the US, Russia, and India.

The US came close to enacting an emissions trading system for greenhouse gas emissions in 2010; the House passed the bill, but the Senate failed to follow suit. The mid-term elections later that same year put paid to any such possibility. At this point, it seems likely that China will establish a cap-and-trade system for carbon dioxide long before the US does, which is not to say that it is likely to happen any time soon in China. Meanwhile, an electoral change in Australia's political leadership could easily derail it's own nascent commitment to its own carbon market, let alone linkage with the EU scheme. (The EU's own system is so well established at this point that it could be immune to dismantling, unless China and the US continue to do little or noting to mitigate CO2 emissions over the next decade or so).

Still, last week's agreement between the EU and Australia must be taken for the good news that it is. Such incremental, regional agreements (even if they emerge only slowly) may be the best hope for real, measurable carbon emissions reductions over the next 20-30 years.

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