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.
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.
This linking archiecure ypically has a decenralised decision-making srucure, which has negaive implicaions or oversigh, accounabiliy and demo-craic processes.
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.
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 wo markes 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.
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.
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.
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.
However, his can also have he reverse eﬀec o inroducing volailiy ino a previously non-volaile marke.
Why Linking Is Not the Key
The 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.
I languished below €10 or mos o 2012, hiting a low o €2.46 in April 2013.
This kind o volailiy undermines economic planning, while allowing some companies o reap a windall wih over-allocaion.
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.
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 any radiional 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 Loses
Despie 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.
This is because regional and secoral markes cover only a small area o emissions, and he areas no covered by hese markes risk acing emissions leakage.
Leakage occurs when regulaing emissions in one area leads o increased emissions in an unregulaed region.
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.
Relaxing he cap increases he oal amoun o allowed emis-sions under he cap, and is counerproducive o reducions.
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