Pegger thy neighbour

Why smaller carbon markets link up with larger cap-and-trade schemes

Welcome to Carbon Risk — helping investors navigate 'The Currency of Decarbonisation'! 🏭

If you haven’t already subscribed please click on the link below, or try a 7-day free trial giving you full access. By subscribing you’ll join more than 3,000 people who already read Carbon Risk. Check out what other subscribers are saying.

You can also follow my posts on LinkedIn. The Carbon Risk referral program means you get rewarded for sharing the articles. Once you’ve read this article be sure to check out the table of contents.

Thanks for reading Carbon Risk and sharing my work! 🔥

---

Estimated reading time ~ 7 mins

At least one carbon market is considering linking up with a larger, more established emissions trading scheme.

Washington State has only been in operation for a little over 12 months, but there is already pressure to establish a link with the Western Climate Initiative (WCI) that counts California and Quebec as its members. As discussed in The spectre of 'gilets jaunes' returns, high carbon prices are at least partly to blame for an increase in gasoline prices in the Pacific state. At least until speculation over the future of Washington State’s carbon market sent its carbon price into a tailspin, the price of emission allowances in the state were almost double the prevailing price in California.

Meanwhile, industrial emitters in the UK have been lobbying to link up with the EU ETS. In contrast to the situation in Washington State, UK manufacturers gripe is a function of carbon prices being too low in the UK relative to the rest of Europe. First off they are concerned that low carbon prices could have a detrimental impact on investment in decarbonisation in the UK. Secondly, the low carbon price will also negatively affect UK exports to Europe when the EU’s CBAM is gradually phased in from 2026. Recall that the cost of meeting CBAM is based on the relative difference in carbon prices between the EU and the exporting nation (see No level playing field: Europe's carbon levy will accelerate adoption of carbon pricing, but not everyone will win).¹

An election in the UK is expected to take place in the autumn. The UK and the EU are likely to enjoy a closer relationship under a Labour government, and could look to begin negotiations on linking up. The European Commission would need to get a mandate from the Council and Parliament before negotiations on an international treaty, such as the one agreed with Switzerland, could proceed. Speaking to OPIS, a spokesperson from the Department of Energy Security and Net Zero (DESNZ) stated that the UK maintains an open position to linking to the EU ETS:

“We are open to the possibility of linking the UK ETS internationally and will continue to work collaboratively with other jurisdictions to tackle shared challenges and learn from the experience of others as we develop the scheme.”

Although there only a few examples of carbon markets linking up with another, the limited sample does give an indication of what we might expect.