Developing the International Carbon Market

The document analyzes four scenarios for an international carbon market: global trading, formal linking of domestic ETS, indirect linking via credits, and a mixed approach. It focuses on the formal linking of the EU ETS with emerging systems in the US (RGGI, California), New Zealand, and Australia. The authors argue that for linking to be effective and environmentally sound, partners should share similar levels of ambition and strategic climate goals, such as the EU's 2°C target. The report identifies price caps, differing levels of ambition, and the treatment of Assigned Amount Units (AAUs) as primary barriers to linking. It proposes the creation of an international clearinghouse to coordinate regulation and suggests a 'no-regret' working program for the International Carbon Action Partnership (ICAP) focusing on the harmonization of registries, monitoring, reporting, and verification (MRV) standards, and allocation procedures.

• The report identifies four primary scenarios for an international carbon market: a top-down 'Global trading' architecture, a bottom-up 'Formal linking of domestic ETS', 'Indirect linking' through the common acceptance of credits (e.g., CDM), and a 'Mixed approach' combining these elements.
• Formal linking of regional ETS is presented as a strategic fallback for the EU if a global cap-and-trade consensus is not reached via UNFCCC negotiations, as it can maintain political momentum for a global market in the mid- to long-term.
• The EU ETS should preferably link to systems with a comparable level of ambition to avoid incentives for partners to relax their caps to generate revenue and to ensure the overall international cap aligns with the EU's 2°C target.
• A qualitative assessment of abatement costs suggests that New Zealand and California are the most desirable linking partners for the EU ETS due to their high levels of ambition, while RGGI and Australia are less preferable.
• Specific design barriers to linking the EU ETS include the price caps proposed in the Australian system, the lower ambition of RGGI's caps, and the potential inflow of 'hot air' if the EU links to the New Zealand ETS, which intends to allow the use of Assigned Amount Units (AAUs).
• The authors propose an 'international clearinghouse' to coordinate the regulation of linked markets, performing functions such as maintaining a common registry, developing best-practice MRV standards, and reviewing domestic credit systems.
• The International Carbon Action Partnership (ICAP) is identified as an appropriate platform to pursue 'no-regret' harmonization options, specifically the compatibility of registries, MRV standards, treatment of credits, and allocation procedures.

APA

FLACHSLAND, C., EDENHOFER, O., JAKOB, M., & STECKEL, J. (2008). Developing the International Carbon Market. Climate Strategies. https://climatestrategies.org/wp-content/uploads/2014/11/working-paper-linking-1.pdf

Chicago

FLACHSLAND, CHRISTIAN, OTTMAR EDENHOFER, MICHAEL JAKOB, and JAN STECKEL. Developing the International Carbon Market. Climate Strategies, 2008. https://climatestrategies.org/wp-content/uploads/2014/11/working-paper-linking-1.pdf.

Wikipedia

{{cite report |last1=FLACHSLAND |first1=CHRISTIAN |last2=EDENHOFER |first2=OTTMAR |last3=JAKOB |first3=MICHAEL |last4=STECKEL |first4=JAN |title=Developing the International Carbon Market |publisher=Climate Strategies |date=May 2008 |url=https://climatestrategies.org/wp-content/uploads/2014/11/working-paper-linking-1.pdf |access-date=23 October 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{flachsland2008developing, author = {FLACHSLAND, CHRISTIAN and EDENHOFER, OTTMAR and JAKOB, MICHAEL and STECKEL, JAN}, title = {{Developing the International Carbon Market}}, institution = {Climate Strategies}, year = {2008}, month = may, url = {https://climatestrategies.org/wp-content/uploads/2014/11/working-paper-linking-1.pdf}, urldate = {2026-10-23}, note = {Indexed by Climate Insights Directory} }