Climate Law Week 2B

Linking - Definition & Result

• Definition: The formal mutual recognition of compliance instruments (allowances) between two distinct jurisdictions

• The Result: It transforms separate carbon currencies into a single, fungible commodity. An emitter in System A can use an allowance from System B to cover their emissions, and vice versa

Fungibility - Definition

• Definition: The characteristic of allowances that makes them interchangeable and valid for compliance in both linked zones

What are the gains from trade?

• Explanation: Linking allows abatement to occur where it is cheapest, minimizing the total societal cost of meeting climate targets

Market Health

• Benefits: A larger pool of buyers and sellers provides price stability against local economic shocks and increases liquidity, making it harder for single actors to manipulate the market

Efficiency vs. Sovereignty

The Conflict: While linking increases economic efficiency, it requires "pooled sovereignty"

The Sovereignty Barrier: Once linked, a jurisdiction cannot unilaterally change its emissions cap, alter Market Stability Reserve (MSR) rules, or modify penalty structures without affecting the partner.

Safeguard: Delinking (Exit) clauses are included in agreements to allow a return to full sovereignty if the partnership fails, though political costs for firms can make exiting difficult

Types of Linking

• Direct Bilateral: Two-way recognition where allowances are used in either system, leading to full price convergence (e.g., EU-Switzerland)

• Unilateral: One-way recognition where System A accepts System B’s units, but B does not accept A’s (e.g., Norway in its early phases)

• Indirect: Two systems are not linked to each other but both accept credits from a common third system, creating a de facto connection and potential price volatility.

Legal Architecture

• The Treaty: Binding international law that often creates a "Joint Committee" with decision-making power (e.g., EU-Switzerland)

• The MOU (Memorandum of Understanding): A non-binding political agreement; often the only option for sub-national entities like California and Quebec that lack treaty-making powers

Risk Management

1. Environmental Integrity Risk:

• Race to the Bottom: Markets might arbitrage to the lowest common denominator; poor policy in one system can "infect" the other.

• Offset Contagion: If one partner allows low-quality offsets, they flood the shared market, undermining the integrity of the stricter partner.

2. Political & Economic Risk:

• The Asymmetry Dilemma: A small market linking to a giant (e.g., the UK or Switzerland linking to the EU) risks becoming a "policy-taker," where the large market effectively sets the price and rules.

Technical Prerequisites

MRV Systems: Harmonized Monitoring, Reporting, and Verification standards to ensure "a ton is a ton" everywhere.

Registry IT: Secure digital connections to track serialized allowances across borders and prevent double spending.

Cap Strictness: Alignment of ambition; if one system has a "loose" cap (hot air), it will crash the price in the stricter system

Comparative Models (Scenario Drivers)

• Static Equivalence (EU-Switzerland): Essential criteria were fixed at the date of signature; future changes require mutual agreement via a Joint Committee.

• Symmetric Coordination (California-Quebec): Parallel coordination between equal partners using shared technical infrastructure (WCI, Inc.).

• Dynamic Alignment (EU-UK Proposed): A highly asymmetric model where the UK follows EU rule changes and accepts CJEU authority to ensure trade benefits

What is Carbon Border Adjustment Mechanism (CBAM)?

• Definition: A trade tool where EU importers must purchase certificates to cover the difference between the EU carbon price and the exporter's price

Global Accounting (Article 6)

• ITMOs: Internationally Transferred Mitigation Outcomes; the "currency" of international transfers measured in CO2​eq.

• Corresponding Adjustments: To prevent double counting, the selling country adds sold units back to its emissions inventory, while the buying country subtracts them. This ensures one tonne of reduction is only counted once globally