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…
14
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
15
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