Carbon Markets 15 Years after Kyoto: Lessons Learned, New Challenges

Carbon markets are substantial and they are expanding. There are many lessons from experiences over the past eight years: fewer free allowances, better management of market-sensitive information, and a recognition that trading systems require adjustments that have consequences for market participants and market confidence. Moreover, the emerging international architecture features separate emissions trading systems serving distinct jurisdictions. These programs are complemented by a variety of other types of policies alongside the carbon markets. This sits in sharp contrast to the integrated global trading architecture envisioned 15 years ago by the designers of the Kyoto Protocol and raises a suite of new questions. In this new architecture, jurisdictions with emissions trading have to decide how, whether, and when to link with one another, and policymakers overseeing carbon markets must confront how to measure the comparability of efforts among markets and relative to a variety of other policy approaches.

Even though a global carbon emissions trading market—as originally envisioned in the Kyoto Protocol— has not been implemented, various types of discrete carbon markets have emerged around the world. Experience in these markets can reveal important lessons and help ensure that future markets can benefit from that experience.

In “Carbon Markets: Past, Present, and Future,” Duke University and RFF authors Richard G. Newell, William A. Pizer, and Daniel Raimi look back at the development of proposed and existing carbon markets to identify “lessons learned” in market design, cost-effectiveness, flexibility, and efficiency. Specifically, they review carbon market theory and practices in the United States, Canada, the European Union, New Zealand, Australia, and other markets. They explore various lessons from these market experiences, including the following:

1. Positive prices imply emissions abatement, but how much is unclear.
2. Despite some rough patches, markets have generally matured and operated effectively.
3. Banking matters.
4. Allowance allocation can involve large revenues and distributional impacts.
5. Significant competitiveness impacts and emissions leakage are not inevitable.
6. Offsets can work, but they are complex.

The authors also identify some key issues facing carbon markets in the future, such as linkage between markets and the new role of international negotiations in focusing on a bottom-up approach (versus the earlier top-down approach). They note:

“In this new architecture, jurisdictions with emissions trading have to decide how, whether, and when to link with one another, and policymakers overseeing carbon markets must confront how to measure the comparability of efforts among markets as well as relative to a variety of other policy approaches.”