Linking a US Greenhouse Gas Cap-and-Trade System to the EU ETS

James Chapman, New York University

Abstract

Emissions trading is seen as one of the most cost-effective ways to reduce greenhouse gas pollution, and in all likelihood a cap-and-trade scheme will be set up in the US in the next few years. Linking separate emissions trading schemes together can further drive down costs of abating pollution by creating a wider market, but there are a number of issues – political, technical and environmental – which can either prevent a link from being established or can cause a link to have harmful effects. This paper examines how easily a US emissions trading scheme, designed along the lines of recent legislative proposals with input from industry leaders, environmental advocates and the new administration, could be linked to the largest emissions trading scheme, the EU ETS. This paper concludes that very little or no harmonization is required on a number of issues, such as cost containment, allocation methodology, coverage and non-compliance penalties, and the thornier issues of cap and price levels and offset use can either be resolved or do not present insurmountable hurdles given the potential benefits of establishing a link. The political economy of linking, in terms of the domestic pressures affecting governments seeking a link, is examined and, while a complex set of incentives face both the US and the EU, it appears that overall a link is not merely possible but likely within a decade of the creation of the US system.