Ecologic Institute

Linking emissions trading schemes has attracted much interest as a means of reducing compliance costs, expanding market size and liquidity, and reducing volatility in the carbon market. It also offers a channel for climate cooperation across jurisdictions to complement the international negotiating process on a future climate regime. But linking also faces a number of barriers and poses potential risks if inadequately designed. In a series of peer-reviewed publications on this issue, Michael Mehling discusses institutional and legal implications, formulates design recommendations, and assesses prospects of a market link over the short term and medium term.

• Tuerk, Andreas; Michael Mehling; Christian Flachsland and Wolfgang Sterk 2009: “Linking Carbon Markets: Concepts, Case Studies and Pathways”. Climate Policy, Vol. 9, No. 4, 341-357.

In this synthesis article introducing a special issue of the journal Climate Policy, Michael Mehling joins co-authors Andreas Tuerk, Christian Flachsland and Wolfgang Sterk in exploring options and barriers for linkages between emissions trading systems. In the short term, they find that direct bilateral linkages will face significant barriers, rendering the stated objective of the European Union to achieve OECD-wide emissions trading by 2015 an ambitious endeavor. Some barriers to linkage are easier to overcome than others, however, including differences in monitoring, reporting, and verification, banking, registries, compliance periods, and allocation methods. Differences in the stringency of targets and enforcement provisions are more difficult to overcome, they argue, as are variations in the eligibility of offset credits, the use of intensity targets, and cost containment measures. In the near future, prospects for links between systems are highest where nations already have close economic ties and a history of policy coordination. Over time, more ambitious long-term reduction targets, rising compliance costs, and impacts on economic competitiveness will refocus attention on linking systems.

A number of studies have explored the compatibility of schemes, although little attention has been devoted to the process of actually implementing a link.

• Mehling, Michael and Erik Haites 2009: “Mechanisms for linking emissions trading schemes”. Climate Policy, Vol. 9, No. 2, 169-184.

In an article also published in Climate Policy, Michael Mehling and Erik Haites identify mechanisms required for the establishment and operation of a trading link over time. In particular, they recommend that unilateral links be implemented through adoption of a schedule that lists the units accepted together with limits on, and adjustments to, imported units. Bilateral links implemented through a binding agreement afford market participants greater certainty. However, it entails cumbersome adoption procedures as well as legal and procedural constraints. Reciprocal unilateral links, possibly accompanied by an informal agreement, may be easier to implement and offer more flexibility while affording similar economic benefits.

• Mehling, Michael 2009: “Linking Emissions Trading Systems” in: David Freestone and Charlotte Streck (eds.): Legal Aspects of Carbon Trading - Kyoto, Copenhagen and Beyond, 108-133. Oxford, U.K.: Oxford University Press.

A more traditionally jurisprudential perspective on linking is provided in this book chapter published in an anthology titled “Legal Aspects of Carbon Trading: Kyoto, Copenhagen and Beyond” published by Oxford University Press. In this chapter, Michael Mehling provides a conceptual framework for the distinction of legal and political criteria for the feasibility of carbon market linkages. Legal considerations, he argues, arise during the process of establishing the link, which necessitates recourse to recognized sources of law and legal procedures; and, second, in the event of a conflict between the link as such with substantive legal norms and principles, whether these originate in international, regional or domestic law. Beyond providing a taxonomy of different forms of linking and their legal implementation, be it a binding international agreement or a less formal political arrangement accompanied by domestic legislation, the chapter also identifies institutional options and normative criteria for the governance of the link. It concludes with case studies identifying relevant legal provisions in the United States and the European Union.

• Haites, Erik and Michael Mehling 2009: “Linking Existing and Proposed GHG Emissions Trading Schemes in North America”. Climate Policy, Vol. 9, No. 4, 373-388.

The US and Canada are developing federal emissions trading systems, and Mexico is developing an emissions cap for its cement and oil sectors. In a further article published in Climate Policy, Erik Haites and Michael Mehling suggest that strong economic ties between these North American neighbors make linking of their emissions trading systems more likely. At present, the Canadian emissions reduction target based on emissions intensity is the biggest obstacle to bilateral linkages between the US and Canada. Moving to a system based on a hard cap in Canada would facilitate links between the systems. North American systems can expand on the present cooperation of regional systems and create bilateral linkages.

Similar case studies on the prospects for a link between emerging trading systems in the United States and the European emissions trading system were prepared by Michael Mehling together with Jason Anderson and Harro van Asselt for the European Parliament and by Michael Mehling, Andreas Tuerk and Wolfgang Sterk for Climate Strategies

• Mehling, Michael, Harro van Asselt and Jason Anderson 2009: “Linking the EU’s Emissions Trading System to any Future US Emissions Trading Scheme”. Study requested by the European Parliament Committee on the Environment, Public Health and Food Safety.
• Sterk, Wolfgang, Michael Mehling and Andreas Tuerk 2009: "Prospects of linking EU and US Emission Trading Schemes: Comparing the Western Climate Initiative, the Waxman-Markey and the Lieberman-Warner Proposals". Climate Strategies Working Paper.

Collectively, these studies affirm that emissions trading systems currently under development in the US raise certain challenges for an operational market link, but are not generally incompatible. Issues that may give rise to concern are those already mentioned above, such as cost containment provisions and borrowing and offset provisions.

• Mehling, Michael 2007: “Bridging the Transatlantic Divide: Legal Aspects of a Link between Regional Carbon Markets in Europe and the United States”. Sustainable Development Law & Policy, Vol. 7, No. 2, 46-52.

An earlier article by Michael Mehling in American University’s Sustainable Development Law and Policy journal  assessed the prospects and legal implications of a link between regional trading systems in the US and the EU emissions trading system, highlighting the relevance of the respective constitutional and legal frameworks for such a link.