Linkage of Tradable Permit Systems in International Climate Policy Architecture

Abstract

Cap-and-trade systems have emerged as the preferred national and regional instrument for reducing emissions of greenhouse gases throughout the industrialized world, and the Clean Development Mechanism -an international emission-reduction-credit system -has developed a substantial constituency, despite some concerns about its performance.Because linkage between tradable permit systems can reduce compliance costs and improve market liquidity, there is great interest in linking cap-and-trade systems to each other, as well as to the CDM and other credit systems.We examine the benefits and concerns associated with various types of linkages, and analyze the near-term and long-term role that linkage may play in a future international climate policy architecture.In particular, we evaluate linkage in three potential roles: as an independent bottom-up architecture, as a step in the evolution of a top-down architecture, and as an ongoing element of a larger climate policy agreement.We also assess how the policy elements of climate negotiations can facilitate or impede linkages.Our analysis throughout is both positive and normative.

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