The dream of a global carbon market

When the European Union launched its Emissions Trading System (ETS) in 2005, it was assumed that it was the first step in what would eventually be a global market. A similar scheme was being prepared in the United States, and both presidential candidates in the 2008 election supported it.

But shortly after his election, Barack Obama saw his proposal for a scheme rejected by Republicans in the US Congress. Left with no other large system to link with, the EU's ETS has languished since then, struggling under the burden of too-low prices on carbon.

But last week, Brussels trumpeted the news that it has inked a deal to establish its first ETS linkage - with tiny Switzerland. It's not exactly the globally linked system that was envisaged.

Cap-and-trade failures 

Emissions trading, also known as cap-and-trade, provides economic incentives for companies to reduce their emissions, by establishing a price for carbon. Companies must turn in allowances to emit carbon, some of which are given to them for free, some of which must be purchased. They can then trade the allowances they don't need on the open market. 

However the EU's ETS hasn't been a flying success. A glut of free allowances, partly due to the industrial slowdown caused by the economic crisis of 2008, has resulted in a carbon price that is far too low to have a significant effect in reducing emissions. Efforts are being made to fix the system. But as other countries have watched Europe's market struggle, few have wanted to follow the EU's lead.

Australia launched a cap-and-trade system in 2007 which was supposed to link with the EU ETS. But the legislation was repealed after a change of government in 2013. A number of small schemes have been set up in countries like South Korea and New Zealand and in some North American states.

But Aki Kachi, a policy director with the analyst Carbon Market Watch, says the success of those systems has also been debatable. Consequently, enthusiasm has waned. Emissions trading was not a central component of the global climate treaty. And no emissions trading system in the world has yet resulted in prices high enough to drive significant emissions reductions.

"About ten years ago, the European Commission had a roadmap of where they wanted an OECD-wide carbon cap-and-trade system by 2015 - that obviously didn't happen," he told DW.

The Chinese giant

But not everyone is so down on cap-and-trade. Later this year, China is set to launch a national emissions trading system similar to the EU's. It will cover about a quarter of the country's industrial emissions, and expand upon the country's existing regional pilot schemes in Beijing, Chongqing, Guangdong, Hunan, Shanghai, Shenzhen and Tianjin.

The new national program will quadruple the scope of these schemes, and will be the largest emissions trading system in the world - far bigger than the EU's ETS.

But Kachi cautions that analysts are treating the new Chinese scheme with some skepticism. Details are still murky, and it is unclear whether the promised size will really be born out. It now looks likely that the government will delay the launch of the scheme until 2018. Most importantly, it remains unclear whether China has learned from the mistakes of the EU ETS.

"The basic details of the Chinese national scheme are not known yet," he says. "So it's too soon to tell whether this will really be effective."

A globally linked system?

Still, the launch of the Chinese scheme will reopen the prospect of a globally linked carbon market, an idea which for many years has seemed dead. At the same time, Donald Trump's decision to pull the US out of the Paris climate agreement has prompted US state governments to accelerate development of their two fledgling regional cap-and-trade schemes.

So does this EU-Switzerland link-up herald more linkages to come? Don't hold your breath, says Kachi. Switzerland's link-up was logical considering it is an island in the middle of the EU ETS. "It's definitely a special case," he says. 

The Swiss model may, however, provide a blueprint for a future linkage between the EU ETS and a UK ETS, if Britain decides to leave the EU scheme and set up its own market post Brexit. 

Going it alone may be best

In the end, many analysts say it may not be a big deal if the EU ETS ends up never linking to any other systems at all. In fact, it may be better that way.

NYU Professor Jessica Green has argued against such linkages, saying a global network of cap-and-trade systems would deliver greater complexity and fewer emissions cuts. "Initial attempts to join up trading schemes in Europe and in California and Quebec have led to price crashes and volatility, not stability," she wrote in an article earlier this year.

For now, policymakers in the EU are waiting to see what changes China's new system brings before they start thinking about possible future opportunities to link to it. But the dream of a global carbon market is not dead in the water - yet.