To meet decarbonization needs at scale, compliance carbon markets should push for greater integration
At the start of 2023, more than two dozen compliance markets operated around the world, and several more are expected to launch in coming years.29 These include:
Cities such as Shenzhen and Tokyo,States and provinces, such as California, Quebec, and Guangdong,Nations, such as Mexico, South Korea, and New Zealand, andSupranational entities, such as the EU Emissions Trading System (ETS).30
To facilitate greater market integration, many governments are starting to link their compliance markets. This move can bring a number of potential benefits, including expanding their scope of coverage and enabling progress in local jurisdictions, such as states or cities, where national-level mandatory climate action may not be feasible.
Linking markets can also lead to price convergence.31 Establishing a common carbon price across systems can minimize price fluctuations and increase liquidity. Additionally, linkages can cause the overcall cost of emissions to fall by allowing companies in regions with higher abatement costs to purchase allowances from regions where abatement is cheaper. This, in turn, can prompt countries to set more ambitious climate targets for their public and private sectors. In fact, a 2017 study found that an international linkage of worldwide ETSs could reduce the total expense of achieving NDCs by 32% before 2030, and by 54% before 2050.32
The 2014 linkage between the cap-and-trade systems in the state of California and the province of Quebec systems (the first international linkage) is an example of a relationship that delivered value to both entities by significantly reducing emissions while generating billions of US dollars in revenue. The initiative has been so successful that the state of Washington is considering joining, nearly a full decade later.33 These jurisdictions are also considering states and provinces beyond North America and may soon try to recruit additional states within Mexico and Brazil.34
States in the Northeast United States are also espousing the benefits of linkages. New York, for example, is already part of the 12-state Regional Greenhouse Gas Initiative (RGGI), which sets regional caps on emissions from power plants.35 Its forthcoming “cap-and-invest” program