Aligning Carbon Markets: The Case of California and the Regional Greenhouse Gas Initiative

WASHINGTON—Although the United States has yet to put a national price on carbon dioxide emissions, individual states have begun to price carbon through cap-and-trade programs. Is there a potential pathway to linking these different subnational carbon trading systems? According to the authors of a new RFF discussion paper, these systems “can realize substantial and immediate benefits by taking concrete, incremental steps toward alignment of program features—a process we call linking by degrees.”

In “Linking by Degrees: Incremental Alignment of Cap-and-Trade Markets,” RFF’s Dallas Burtraw, Karen Palmer, Clayton Munnings, and Matt Woerman, along with Paige Weber from Yale University, identify a framework for assisting policymakers who seek to link systems. In particular, they apply this framework to the opportunity to link California’s cap-and-trade program with the Northeast’s Regional Greenhouse Gas Initiative (RGGI), analyzing the potential economic gains.

The authors note that linking carbon pricing programs offers several potential benefits, such as:

• Enhancing cooperation among jurisdictions and economies that are already taking actions to reduce greenhouse gas emissions;
• Enlarging the portfolio of options available for emissions reductions, thereby better protecting carbon markets against uncertainties;
• Achieving emissions reductions at minimum overall costs;
• Sharing best practices for measurement, reporting, and verification of emissions reductions, as well as understanding differences in technology, program design, and administrative costs; and
• Boosting the leadership role of subnational programs in the shaping of national policy, in the regulation of greenhouse gas emissions under the Clean Air Act in particular.

Overall, the authors observe that California and RGGI already are “linking by degrees” through cooperation and sharing of information, mutual learning, and borrowing from each other’s program design. The authors go further and make an explicit comparison of the readiness for formal linking between the California and RGGI allowance markets. They conclude that they are almost ready for linking when evaluated based on administrative measures. However, the difference in allowance prices remains an issue to be considered before formal linking could occur.

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