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EU Version: The Weakest Link: Problems and Perils of Linking Carbon Markets

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 under the false reasoning that doing so will achieve improved economic efficiency and better emissions reductions than individual markets alone, because carbon dioxide (CO2) is spread globally throughout our atmosphere.
Proponents of cap and trade increasingly seek to create a global carbon market under the false reasoning that doing so will achieve improved economic efficiency and better emissions reductions than individual markets alone, because carbon dioxide (CO2) is spread globally throughout our atmosphere.

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Published by: Food and Water Watch on Mar 12, 2014
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06/19/2014

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    
P
roponents 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 inernaional agreemen, like he Kyoo Proo-col, has maerialised afer he irs Kyoo agreemen ran ou in 2012, he ocus has now shifed owards creaing a global carbon marke.
1
 Doing so requires linking exising botom-up, regional and sub-naional carbon markes in places like Cali-ornia, China, he European Union, Qebec and elsewhere.While promoed as a way o reduce carbon emissions, he main drive behind linking is economic efficiency and cos reducion. Focusing on economic concerns downplays he real prioriy o reducing emissions. Unorunaely, companies will coninue o pollue as long as i is cheaper o buy carbon credis han o make he inves-mens needed o reduce emissions direcly. And, i compa-nies can creae markes and link hem ouside o regulaions ha would acually lead o meaningul emissions reducions, hey will do ha. Carbon markes are no abou emissions reducions — hey are abou inding he cheapes way o keep on polluing.
Background
Cap and rade markes are no he soluion o emissions reducions ha hey preend o be. Insead o requiring polluers o sop or signiicanly reduce emissions wihou excepions, cap and rade allows polluers o
pay 
 o keep on polluing and mainains he saus quo. This is made worse as numerous examples o raud, corrup-ion, oversupply o emissions credis and lack o enorcemen o he cap coninue o plague hese markes.
2
 These prob-lems have been so sysemic ha he Inernaional Criminal Police Organizaion (INTERPOL) is invesigaing carbon rading crimes and published an exensive repor on his in  June 2013.
3
 As a resul o hese myriad problems, permanen reducions o greenhouse gas emissions may or may no be achieved. Cap and rade markes are a pay-o-pollue scheme, no a legiimae soluion o emissions reducions and climae change.
www.foodandwatereurope.org
THE WEAKEST LINK 
Problems and Perils of Linking Carbon Markets
 
2
Wih his in mind, he idea o linking carbon markes is be-yond counerinuiive; combining several auly markes does no make one uncional marke. Linking carbon markes poses many problems, no leas o which is he signiican impac ha his will have on democraic processes and do-mesic conrol o carbon markes. Oversigh and regulaion are required o make emissions reducions a prioriy over economic efficiency. Moreover, linking means ha volailiy and liabiliy rom one marke becomes shared across all linked markes.
4
 The risks o leakage, increased emissions and minimal emissions reducions become serious problems when linking carbon markes as well.In January 2014, Caliornia and Qebec signed a bilaeral agreemen linking heir carbon markes.
5
 Paricipans in Caliornia’s marke can now buy credis rom Qebec’s marke, and vice versa. Oher markes also have expressed ineres in linking, including he Regional Greenhouse Gas Iniiaive (RGGI), he European Union Emissions Trading Sysem (EU ETS), pilo projecs in China and several ohers around he world. The ac ha carbon dioxide is a globally pervasive polluan does no mean ha he only soluion o reducing i lies in a global carbon marke. Signiican emissions reducions rom cap and rade have ye o be seen.
6
 In addiion, he larges carbon marke, he EU ETS, is currenly on lie suppor afer he price o carbon allowances collapsed o €2.46 per on o 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 inervene and will wihhold 900 million emissions permis in hopes o saving he marke and propping up he price o emissions permis.
8
How Does Linking Work and Why Do Proponents Favour It?
In a direc, bilaeral link beween wo carbon markes (marke A and marke B, or example), allowances or credis rom marke A can be used o mee he reducion arges in marke B, and vice versa. Links can also be unilaeral, 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
 Mulilaeral links are a possibiliy as well, wherein more han wo markes become linked and share credis.
10
 In addiion o direc linkages, indirec links can occur. This ypically happens by linking wo carbon markes via a hird marke, such as an offse marke or he Clean Develop-men Mechanism (CDM).
11
 “I neiher sysem recognizes he oher’s allowances, wo sysems can become indirecly linked hrough direc links wih a common hird sysem.”
12
 However, offse markes like he CDM have become noori-ous or raud, corrupion, no emissions reducions, increased emissions and several oher signiican problems.
13
 As a
Current and potential linked CO
2
 markets
              
Smog hangs over Los Angeles, California and Montreal, Quebec. California and Quebec just linked their carbon markets in January 2014.
PHOTO SOURCE: (LEFT) CC-BY-SA © MASSIMO CATARINELLA; (RIGHT) CC-BY © JUSTIN QUINTAL
 
3
resul, any linkage wih he CDM or anoher offse marke would be disasrous. Indirec linking can also happen when several direc bilaeral links evenually creae indirec links.
14
 The recen linking o Caliornia and Qebec is a direc, bila-eral link. I is also reerred o as botom-up linking, because hese are regional, sub-naional markes. Anoher charac-erisic o botom-up linking is ha rading occurs beween companies wihin he respecive counry and marke, no beween he counries.
15
 This linking archiecure ypically has a decenralised decision-making srucure, which has negaive implicaions or oversigh, accounabiliy and demo-craic processes.
16
 The ineres in botom-up linkages o regional and sub-naional carbon markes sems in par rom he lack o a new inernaional agreemen, such as he Kyoo Proocol, which ended in 2012.
17
 Bu he real drive or hese linkages is ha botom-up linking presens a more inormal, poliically easible opion because a bilaeral link only requires ha wo markes agree on linking, whereas a ormal inernaional agreemen has o gain he suppor o numerous counries; botom-up linkages can ge under way much sooner.
18
 This kind o linking also aces less red ape, which is atracive o hose players ha do no like he resricions pu orward in ormal agreemens like he Kyoo Proocol.Oher reasons ha proponens avour his approach is he claim ha i will lead o economic efficiencies such as price equalisaion o carbon credis and allowances, which will supposedly lead o increased cos-effeciveness and marke liquidiy, as well as eliminae inormaion asymmeries.
19
 Linking allegedly leads o price equalisaion and cos savings because i allows companies o buy allowances wih lower abaemen coss. 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 reducions o occur a a lower cos.
20
The atracion o increased marke liquidiy comes rom he claim ha by linking markes and increasing he overall number o allowances in he marke, his will decrease marke volailiy.
21
 However, his can also have he reverse effec o inroducing volailiy ino a previously non-volaile marke.
22
 
Why Linking Is Not the Key
The argumen or linking carbon markes assumes ha cap and rade achieves he oucome ha i promises: emissions reducions. 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 complee collapse. The price or carbon in he EU ETS has been incredibly volaile. 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 volailiy undermines economic planning, while allowing some companies o reap a windall wih over-allocaion.
25
 And i has atraced hackers and ourigh raud, culminaing in shuting down he spo marke in 2011 afer a group o Easern European hackers cos EU governmens up o €5 billion in an atack.
26
From solen and raudulen credis o sockpiling, plunging demands and miscalculaed caps, he carbon cap and rade program has more problems associaed wih i han any radiional regulaory program could.Moreover, cap and rade is a pay-o-pollue scheme. I allows polluers o avoid direcly reducing heir emissions and ceas-ing polluing aciviies, so long as hey pay or he necessary amoun o credis o keep on polluing. Thus, cap and rade will no lead o he necessary emissions reducions o com-ba climae change. Linking carbon markes is jus anoher way o coninue and expand hese pay-o-pollue schemes.
The Environment Loses
Despie claims ha linking brings economic efficiency, cos reducions and oher economic oucomes, a lieraure 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 perspecive bu pay very litle atenion o he implicaions o linking rom an environmen-al perspecive. The rheoric is ocussed primarily on how linking will make paricipaing in carbon markes cheaper, bu no necessarily on how hey will lead o beter environ-menal oucomes. In addiion, botom-up linkages are a second-rae opion or effecively reducing emissions.
27
 This is because regional and secoral markes cover only a small area o emissions, and he areas no covered by hese markes risk acing emissions leakage.
28
 Leakage occurs when regulaing emissions in one area leads o increased emissions in an unregulaed region.
29
Increased emissions could also occur rom linking markes. Increases could happen i a low-damage marke — a marke or region wih low emissions — decides o relax is cap on emis-sions in order o sell more permis o a high-damage marke.
30
 Relaxing he cap increases he oal amoun o allowed emis-sions under he cap, and is counerproducive o reducions.
31
Linking carbon markes could also creae a siuaion wherein linking is similar o offses, bu on a larger and more un-sable scale. Wihin a cap and rade marke, polluers can purchase offse credis ha represen an emissions reducion made elsewhere — no a he source o polluion — and his couns owards he polluer’s oal reducions. Wih linking, here is ofen a difference in permi prices beween wo linked markes. I permis in marke B cos $10 and permis in marke A cos $13, polluers rom marke A will wan o buy he cheaper permis in marke B, which also means ha more reducions will occur in marke B han in marke A. This creaes a back-door offse ha will coninue unil permi prices equalise beween he linked markes. This could hen perpeuae exising ho spos and could have he effec o urning enire carbon markes ino emporary

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