eu version: the weakest link: problems and perils of linking carbon markets

8/12/2019 EU Version: The Weakest Link: Problems and Perils of Linking Carbon Markets

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Proponents of cap and trade increasingly seek to create a global carbon market

and better emissions reductions than individual markets alone, because carbon dioxide(CO

2) is spread globally throughout our atmosphere.

Since no new inernaional agreemen, like he Kyoo Proo-

col, has maerialised afer he irs Kyoo agreemen ran ou

in 2012, he ocus has now shifed owards creaing a global

carbon marke.1 Doing so requires linking exising botom-up,

regional and sub-naional carbon markes in places like Cali-ornia, China, he European Union, Qebec and elsewhere.

While promoed as a way o reduce carbon emissions, he

main drive behind linking is economic efficiency and cos

reducion. Focusing on economic concerns downplays he

real prioriy o reducing emissions.

Unorunaely, companies will coninue o pollue as long as

i is cheaper o buy carbon credis han o make he inves-

mens needed o reduce emissions direcly. And, i compa-

nies can creae markes and link hem ouside o regulaions

ha would acually lead o meaningul emissions reducions,

hey will do ha. Carbon markes are no abou emissionsreducions — hey are abou inding he cheapes way o

keep on polluing.

BackgroundCap and rade markes are no he soluion o emissions

reducions ha hey preend o be. Insead o requiring

polluers o sop or signiicanly reduce emissions wihou

excepions, cap and rade allows polluers o pay o keep onpolluing and mainains he saus quo.

This is made worse as numerous examples o raud, corrup-

ion, oversupply o emissions credis and lack o enorcemen

o he cap coninue o plague hese markes.2 These prob-

lems have been so sysemic ha he Inernaional Criminal

Police Organizaion (INTERPOL) is invesigaing carbon

rading crimes and published an exensive repor on his in

June 2013. 3 As a resul o hese myriad problems, permanen

reducions o greenhouse gas emissions may or may no

be achieved. Cap and rade markes are a pay-o-pollue

scheme, no a legiimae soluion o emissions reducionsand climae change.

www.foodandwatereurope.org

THE WEAKEST LINK Problems and Perils of Linking Carbon Markets



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Wih his in mind, he idea o linking carbon markes is be-

yond counerinuiive; combining several auly markes does

no make one uncional marke. Linking carbon markes

poses many problems, no leas o which is he signiican

impac ha his will have on democraic processes and do-

mesic conrol o carbon markes. Oversigh and regulaion

are required o make emissions reducions a prioriy overeconomic efficiency.

Moreover, linking means ha volailiy and liabiliy rom

one marke becomes shared across all linked markes.4 The

risks o leakage, increased emissions and minimal emissions

reducions become serious problems when linking carbon

markes as well.

In January 2014, Caliornia and Qebec signed a bilaeral

agreemen linking heir carbon markes.5 Paricipans in

Caliornia’s marke can now buy credis rom Qebec’s

marke, and vice versa. Oher markes also have expressed

ineres in linking, including he Regional Greenhouse GasIniiaive (RGGI), he European Union Emissions Trading

Sysem (EU ETS), pilo projecs in China and several ohers

around he world.

The ac ha carbon dioxide is a globally pervasive polluan

does no mean ha he only soluion o reducing i lies in a

global carbon marke. Signiican emissions reducions rom

cap and rade have ye o be seen.6 In addiion, he larges

carbon marke, he EU ETS, is currenly on lie suppor afer

he price o carbon allowances collapsed o €2.46 per ono CO

2 in April 2013, rom a high o €29.69 per on o CO

2

in July 2008.7 Because o his collapse, he European Union

has had o inervene and will wihhold 900 million emissions

permis in hopes o saving he marke and propping up he

price o emissions permis.8

How Does Linking Work andWhy Do Proponents Favour It?In a direc, bilaeral link beween wo carbon markes

(marke A and marke B, or example), allowances or credis

rom marke A can be used o mee he reducion arges inmarke B, and vice versa. Links can also be unilaeral, which

is a one-way link where marke A can use allowances rom

marke B, bu marke B canno use allowances rom marke

A.9 Mulilaeral links are a possibiliy as well, wherein more

han wo markes become linked and share credis.10

In addiion o direc linkages, indirec links can occur. This

ypically happens by linking wo carbon markes via a hird

marke, such as an offse marke or he Clean Develop-

men Mechanism (CDM).11 “I neiher sysem recognizes he

oher’s allowances, wo sysems can become indirecly linked

hrough direc links wih a common hird sysem.”12

However, offse markes like he CDM have become noori-

ous or raud, corrupion, no emissions reducions, increased

emissions and several oher signiican problems.13 As a

Current and potential linked CO2 markets

Smog hangs over Los Angeles, California and Montreal, Quebec. California and Quebec just linked their carbon marketsin January 2014. PHOTO SOURCE: (LEFT) CC-BY-SA © MASSIMO CATARINELLA; (RIGHT) CC-BY © JUSTIN QUINTAL



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resul, any linkage wih he CDM or anoher offse marke

would be disasrous. Indirec linking can also happen when

several direc bilaeral links evenually creae indirec links.14

The recen linking o Caliornia and Qebec is a direc, bila-

eral link. I is also reerred o as botom-up linking, because

hese are regional, sub-naional markes. Anoher charac-erisic o botom-up linking is ha rading occurs beween

companies wihin he respecive counry and marke, no

beween he counries.15 This linking archiecure ypically

has a decenralised decision-making srucure, which has

negaive implicaions or oversigh, accounabiliy and demo-

craic processes.16

The ineres in botom-up linkages o regional and sub-

naional carbon markes sems in par rom he lack o a

new inernaional agreemen, such as he Kyoo Proocol,

which ended in 2012.17 Bu he real drive or hese linkages is

ha botom-up linking presens a more inormal, poliically

easible opion because a bilaeral link only requires ha womarkes agree on linking, whereas a ormal inernaional

agreemen has o gain he suppor o numerous counries;

botom-up linkages can ge under way much sooner.18 This

kind o linking also aces less red ape, which is atracive o

hose players ha do no like he resricions pu orward in

ormal agreemens like he Kyoo Proocol.

Oher reasons ha proponens avour his approach is he

claim ha i will lead o economic efficiencies such as price

equalisaion o carbon credis and allowances, which will

supposedly lead o increased cos-effeciveness and marke

liquidiy, as well as eliminae inormaion asymmeries.19

Linking allegedly leads o price equalisaion and cos savings

because i allows companies o buy allowances wih lower

abaemen coss. I marke A has a higher price per allow-

ance, bu marke B has a lower price, companies rom mar-

ke A can hen buy allowances rom companies in marke B,

allowing reducions o occur a a lower cos.20

The atracion o increased marke liquidiy comes rom

he claim ha by linking markes and increasing he overall

number o allowances in he marke, his will decrease marke

volailiy.21 However, his can also have he reverse effec o

inroducing volailiy ino a previously non-volaile marke.

22

Why Linking Is Not the KeyThe argumen or linking carbon markes assumes ha cap

and rade achieves he oucome ha i promises: emissions

reducions. I also assumes ha cap and rade is a good solu-

ion. This remains o be seen, however, especially in ligh o

he EU ETS’s all bu complee collapse.

The price or carbon in he EU ETS has been incredibly

volaile. I reached €29.69 in July 2008.23 I languished below

€10 or mos o 2012, hiting a low o €2.46 in April 2013. 24

This kind o volailiy undermines economic planning, while

allowing some companies o reap a windall wih over-

allocaion.25 And i has atraced hackers and ourigh raud,

culminaing in shuting down he spo marke in 2011 afer a

group o Easern European hackers cos EU governmens up

o €5 billion in an atack.26

From solen and raudulen credis o sockpiling, plunging

demands and miscalculaed caps, he carbon cap and rade

program has more problems associaed wih i han anyradiional regulaory program could.

Moreover, cap and rade is a pay-o-pollue scheme. I allows

polluers o avoid direcly reducing heir emissions and ceas-

ing polluing aciviies, so long as hey pay or he necessary

amoun o credis o keep on polluing. Thus, cap and rade

will no lead o he necessary emissions reducions o com-

ba climae change. Linking carbon markes is jus anoher

way o coninue and expand hese pay-o-pollue schemes.

The Environment LosesDespie claims ha linking brings economic efficiency, cos

reducions and oher economic oucomes, a lieraure review

shows ha many papers, such as hose rom Jaffe e al.

(2009), Zeterberg (2012) and Flachsland e al. (2009), exam-

ine linking rom an economic perspecive bu pay very litle

atenion o he implicaions o linking rom an environmen-

al perspecive. The rheoric is ocussed primarily on how

linking will make paricipaing in carbon markes cheaper,

bu no necessarily on how hey will lead o beter environ-

menal oucomes.

In addiion, botom-up linkages are a second-rae opion or

effecively reducing emissions.27 This is because regional and

secoral markes cover only a small area o emissions, andhe areas no covered by hese markes risk acing emissions

leakage.28 Leakage occurs when regulaing emissions in one

area leads o increased emissions in an unregulaed region.29

Increased emissions could also occur rom linking markes.

Increases could happen i a low-damage marke — a marke or

region wih low emissions — decides o relax is cap on emis-

sions in order o sell more permis o a high-damage marke.30

Relaxing he cap increases he oal amoun o allowed emis-

sions under he cap, and is counerproducive o reducions.31

Linking carbon markes could also creae a siuaion wherein

linking is similar o offses, bu on a larger and more un-sable scale. Wihin a cap and rade marke, polluers can

purchase offse credis ha represen an emissions reducion

made elsewhere — no a he source o polluion — and his

couns owards he polluer’s oal reducions.

Wih linking, here is ofen a difference in permi prices

beween wo linked markes. I permis in marke B cos $10

and permis in marke A cos $13, polluers rom marke A

will wan o buy he cheaper permis in marke B, which also

means ha more reducions will occur in marke B han in

marke A. This creaes a back-door offse ha will coninue

unil permi prices equalise beween he linked markes.

This could hen perpeuae exising ho spos and could have

he effec o urning enire carbon markes ino emporary



4

hospos. Such “hospos” orm when emissions reduc-

ions mechanisms, such as offses, allow polluers o make

reducions elsewhere raher han a he source o polluion.

Linking promoes making emissions reducions where i is

cheapes and easies o do so, regardless o wheher his oc-

curs a he source o polluion or in a linked marke.32

This presens a signiican risk, because raher han reducing

emissions in, say, China, emissions reducions can be made

in a linked marke wih he cheapes price.33 So while China

has incredibly high levels o emissions in-counry, linking

could encourage emissions reducions in anoher marke

where credis are cheaper o purchase.34 In he end, China’s

air is as oxic as ever, bu he counry can say ha i has

reduced emissions.

Diminished Democracy Linking has signiican implicaions or regulaory conrol

and democraic processes regarding he managemen olinked carbon markes.35 Where jurisdicion over a marke

was previously he exclusive domain o he localiy or region,

linking means ha par o his conrol is given up. In addi-

ion, “linking involves a rade-off beween increased overall

efficiency and reduced leeway or regulaory inervenions.”36

Who has auhoriy becomes vague and unclear when linking

markes, and also has implicaions or oversigh, accoun-

abiliy and inervenion.

When wo emissions rading sysems link ogeher, he

design and regulaory eaures o one marke affec he oher

marke.37

This is problemaic i marke A has undesirablepolicies ha marke B did no allow on is own; afer linking

A wih B, marke B is now subjec o policies ha i oher-

wise would have rejeced.

For example, one marke migh employ a sringen cap on

emissions, bu i wans o link wih a marke ha uses a

price ceiling mechanism or carbon credis o keep coss

low; i he price ceiling is reached, more emissions credis

are released ino he linked marke, increasing he oal al-

lowed emissions. This undoes he effors o he irs marke

o abide by a sringen cap and place prioriy on emissions

reducions, because he second marke placed greaer impor-

ance on keeping coss low.

Similarly, i one o he markes involved in linking suffers

greaer price volailiy, i is hough ha by linking and creaing

a bigger marke, his volailiy will be spread ou and subse-

quenly miigaed.38 However, or an emissions rading sysem

ha did no originally ace his volailiy, hey now impor ha

when linking.39 “As a consequence, he overall economic effec

[o linking] remains ambiguous: he beneis o spreading do-

mesic price volailiy over a larger marke needs o be weighed

agains he coss o impored addiional volailiy.”40

China’s crippling air polluion problems could have signii-

can impacs i he counry were o link wih oher carbonmarkes. Alhough China has begun emissions rading only

hrough pilo markes, here is already alk o creaing a

naional marke ha could hen link o ohers.41 As he coun-

ry wih he greaes share o global CO2 emissions, China

would inlic a signiican burden on markes ha i poen-

ially links wih.

Wih he recen near-collapse o he EU ETS, he EuropeanUnion has had o sep in and play a regulaory role in order

o reorm he marke. However, as carbon markes orm

botom-up links, who seps in o ix hings when a problem

arises? The botom-up linking archiecure leaves he door

open or signiican lapses in oversigh, accounabiliy and

any kind o regulaion.

Linked carbon markes allow polluers o operae ouside o

oversigh, accounabiliy and democraic paricipaion. I is a

orm o evasion and allows polluers o dicae he rules and

ge away wih coninued environmenal degradaion. Linking

allows polluers o place economic efficiency and cos abae-men above emissions reducions, which will only uphold

he saus quo o pay-o-pollue, and conribue very litle o

addressing climae change.

A satellite photo shows smog blanketing China, thecountry with the largest share of global CO

2

emissions.

PHOTO BY NASA



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The greaes problem wih linking carbon markes is ha i

is a subsandard scheme o address emissions reducions.

The bes and only opion or effecive emissions reducions

is o sop polluing, wihou excepions. Schemes like cap

and rade, linking carbon markes and orming global carbon

markes are designed o be cheap and easy o carry ou, wih

no guaranee o any beneicial environmenal oucomes.

Linking carbon markes perpeuaes he abiliy o chea on

making emissions reducions. Proponens o linking are even

aware ha his opion is a second-rae atemp a any kind

o meaningul or posiive environmenal impacs.42 And, in

he process o linking, democraic paricipaion and legii-

mae oversigh are signiicanly weakened. Linking carbon

markes serves only economic ineress, no public or envi-

ronmenal ineress. I pus prois over people, and i is no

a legiimae soluion o emissions reducions.

1 Flachsland, Chrisian, Rober Marschinski and Otmar Edenhoer.

“Global rading versus linking: Archiecures or inernaional emissionsrading.” Energy Policy , vol. 12, iss. 8. 2009 a 8.

2 Environmenal Crime Programme, Inernaional Criminal Police Organi-zaion. “Guide o Carbon Trading Crime.” June 2013 a 11 o 24.

3 Ibid .

4 Flachsland, Chrisian, Rober Marschinski and Otmar Edenhoer.Posdam Insiue or Climae Impac Research. “To link or no o link:beneis and disadvanages o linking cap-and-rade sysems.” 2009 a 4.

5 “Qebec, Cali. eam up on cap and rade.” E&E Publishing . January 6,

2014.6 See Food & Waer Wach. “Polluion Trading: Cashing Ou Our Clean Air

and Waer.” December 2012.

7 Krukowska, Ewa. “EU Lawmakers Approve Carbon Fix as Glu Widens:Energy Markes.” Bloomberg . December 10, 2013.

8 “EU proposes carbon marke sabilizer.” Reuters published in ClimateSpectator . January 20, 2014.

9 Tuerk, Andreas e. al. Climae Sraegies. “Linking Emissions TradingSchemes.” 2009 a 2.

10 Ibid . a 2 o 3.

11 Ibid . a 3; Jaffe, Judson, Mathew Ranson and Rober N. Savins. “Link-ing Tradable Permi Sysems: A Key Elemen o Emerging InernaionalClimae Policy Archiecure.” Ecology Law Qarterly , vol. 36. 2009 a 798.

12 Ibid . a 798.

13 McCully, Parick. “Discredied Sraegy.” The Guardian . May 20, 2008.

14 Jaffe, Ranson and Savins. 2009 a 798.

15 Babiker, Musaa H., John M. Reilly and Lauren L. Viguier. MIT JoinProgram on he Science and Policy o Global Change. “Is InernaionalEmissions Trading Always Beneicial?” (Repor No. 93). 2002 a 2.

16 Flachsland, Marschinski and Edenhoer. “Global rading versus linking….”2009 a 1.

17 Zeterberg, Lars. Swedish Foundaion or Sraegic EnvironmenalResearch. “Linking he Emissions Trading Sysems in EU and Caliornia.”2012 a 3.

18 Ibid . a 3; Edenhoer, Otmar, Chrisian Flachsland and Rober Marschin-ski. Posdam Insiue or Climae Impac Research. “Towards a globalCO2 Marke.” 2007 a 5 o 6.


20 Edenhoer, Flachsland and Marschinski. 2007 a 7.

21 Tuerk e al. 2009 a 4.

22 Ibid . a 4.

23 Krukowska, 2013.

24 Lewis, Barbara and Nina Chesney. “EU officials hold preliminary alks onpropping up carbon marke.” Reuters . Sepember 19, 2012; Krukowska, 2013.

25 “EU’s ‘Carbon Fa Cas’ Ge Rich Off Trading Scheme: Sudy.” AgenceFrance-Presse. March 5, 2010.

26 Inman, Phillip and Tim Webb. “Seven charged in carbon rading VATraud case.” The Guardian. January 26, 2011.


28 Ibid . a 7; Edenhoer, Flachsland and Marschinski. 2007 a 8.

29 Edenhoer, Flachsland and Marschinski. 2007 a 8.

30 Flachsland, Marschinski and Edenhoer. “To link or no o link….” 2009 a 6.

31 Ibid . a 6; Zeterberg. 2012 a 6.

32 Tuerk e al. 2009 a 4.

33 Jaffe, Ranson and Savins. 2009 a 797.

34 Ibid . a 797.


36 Ibid . a 10.



39 Ibid . a 4.

40 Ibid . a 4.

41 Hornby, Lucy. “China ess waer or carbon marke o discourage emis-sions.” Financial Times . Ocober 10, 2013.


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safe food in Europe and around the world. We challenge the corporate control

and abuse of our food and water resources by empowering people to take action

and transforming the public consciousness about what we eat and drink.

eu version: the weakest link: problems and perils of linking carbon markets

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