Blog Post

Will A Trans-Regional Carbon Market Go Global?

Sep 13, 2011 | Lynann Butkiewicz

Australian Prime Minister Julia Gillard introduced plans for the country’s carbon tax today in Parliament. While Australia’s price on carbon is still struggling to gain public support domestically, elsewhere countries are optimistic about its adoption. The European Union has expressed interest in linking its Emissions Trading Scheme (ETS) with Australia and will meet to discuss the details.

We have been reducing emissions-that is a reality0-but also we believe that this kind of regulation and this kind of market is the most cost-effective way of promoting innovation and [promoting] new business in terms of green growth,European Commission President Jose Manuel Barroso said.

This possible first trans-regional carbon trading scheme may be part of a larger trend in climate policy that has been developing since the United Nations Framework Convention on Climate Change (UNFCCC) Conference of Parties (COP15) in Copenhagen. Instead of one grandiose global deal, countries are looking to lower emissions domestically first. Once this happens, they may be more inclined to then participate in other markets. Colleagues and I have written previously about building blocks at the international negotiations. This takes on the same step-by-step approach, negotiating on smaller deals before a global solution takes shape. While the EU ETS was designed to link up with other trading schemes, it has been alone thus far. The move with Australia can be the first step toward realizing its initial design. While it’s the first time two regions will have a linked carbon market, it is not surprising that it is the EU and Australia. Their renewables targets are similar and schemes are compatible.

Following this trend, it will be interesting to see if other countries join this linked market. China is starting pilot carbon markets in its provinces and should have a fully-fledged national carbon trading scheme by 2015. China has expressed interest in Australia’s carbon price, noting that it will watch and learn lessons for its own scheme.

“What happens in Australia is quite interesting. So we are looking at that and personally I strongly hope that Australia can go ahead fast and take the lead in the world. I think many other countries can really learn from this process,” said Dr. Jiang Kejun from China's Energy Research Institute.

In the past, China has shown restraint when it comes to international emissions monitoring. However, as Frank Jotzo said last week, pairing markets will reduce costs overall, creating more of an incentive for China to take part. Australia already has ties to China with coal and energy, so linking an emissions trading scheme might not be that far-fetched an idea.

As RFF Fellow Harrison Fell said previously , China’s carbon market may provide a boost to the United States to implement a national carbon trading scheme. Furthermore, if China combines its market with the EU and Australia then it is even more of an incentive for a carbon price in the United States. However, given the current political climate, the more probable outcome is California linking its scheme with the EU and Australia, and the EU has already stated interest.

"We told Governor [Jerry] Brown that we would very much like to co-operate with them so that no matter how California constructs their scheme, it is linkable to the way we do things in Europe. It doesn't have to be identical, just compatible,” said EU’s climate commissioner Connie Hedegaard.

If California joins the EU ETS, that is even more of an incentive for the rest of the U.S. to act. However, unlike Australia, the California scheme may not be compatible with the EU market.

Despite these concerns, officials in the EU are still looking into linking California and Australia’s carbon markets to the EU’s scheme. If this happens, it will create the first trans-regional market that could have a domino effect elsewhere.