Restricted linking of emissions trading systems: options, benefits, and challenges

With over 17 emissions trading systems (ETSs) now in place across four continents, interest in linking these systems is growing. Linking offers economic, political, and administrative benefits. It also faces major challenges. Linking can affect overall ambition, financial flows, and the location and nature of investments, reduces regulatory autonomy, and requires harmonization of ETS design elements. The authors examine three options that could help overcome challenges by restricting the flow of units among jurisdictions through quotas, exchange rates, or discount rates. The results show that while restricted linking options do not achieve the benefits of full linking, they avoid some major pitfalls, and offer levers that can be adjusted, should linking concerns prove to be more significant than anticipated.

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