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Linkage and
Global Climate Architecture
Jessica Green, Thomas Sterner & Gernot Wagner
Top-down, RIP*
Bottom-up
Unequal targets and costs before linkage
Large potential Pareto improvements from trade across domestic efforts
Large cost...
Linkage has potential to decrease abatement costs
Higher ambition in low-cost countries, supported by funds from high-cost...
Significant gains from trade
Potential Pareto improvements, supported by monetary transfers
Need stable targets & financia...
Linkage promises
same abatement
at lower cost*
* Or more abatement at equal cost, or anything in between
Linkage creates winners and losers
Potential Pareto improvements through linking need financial transfers for win-win
• Wi...
Four political considerations for successful linkage
Both domestic and cross-jurisdictional issues as possible obstacles
1...
Keep linking simple
There’s nothing simple about global climate architecture
• Focus on direct links
• Consistent rules
• ...
Small symbolic linkages good step but large ones elusive
• California Quebec great learning experience
• EU-US-India – Wel...
Small symbolic linkages good step but large ones elusive
• California Quebec great learning experience
• EU-US-India – Wel...
14
Costs of Formal Linking
 Alignment costs
– Misalignments can result in perverse outcomes
 A ton must be a ton
 Price...
15
Table 1: Evaluation of Design Alignment
Requirements for Formally Linking C&T
Programs
Difficulty to
Align?
Important f...
Sterner t 20150709_1730_upmc_jussieu_-_room_201
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Sterner t 20150709_1730_upmc_jussieu_-_room_201

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Sterner t 20150709_1730_upmc_jussieu_-_room_201

  1. 1. Linkage and Global Climate Architecture Jessica Green, Thomas Sterner & Gernot Wagner
  2. 2. Top-down, RIP*
  3. 3. Bottom-up
  4. 4. Unequal targets and costs before linkage Large potential Pareto improvements from trade across domestic efforts Large costs without linkage Source: Green, Sterner & Wagner (2014) discussion draft
  5. 5. Linkage has potential to decrease abatement costs Higher ambition in low-cost countries, supported by funds from high-cost countries Equal total abatement, lower total cost Source: Green, Sterner & Wagner (2014) discussion draft
  6. 6. Significant gains from trade Potential Pareto improvements, supported by monetary transfers Need stable targets & financial flows Total costs before linkage: Total costs after linkage: Source: Green, Sterner & Wagner (2014) discussion draft
  7. 7. Linkage promises same abatement at lower cost* * Or more abatement at equal cost, or anything in between
  8. 8. Linkage creates winners and losers Potential Pareto improvements through linking need financial transfers for win-win • Within a cap-and-trade system – Net buyers gain from lower price – Net sellers gain from higher price • Across cap-and-trade systems – Total costs to low-cost country rise – Total costs to high-cost country fall Solid economics, uncertain politics Source: Green, Sterner & Wagner (Nature Climate Change, 2014)
  9. 9. Four political considerations for successful linkage Both domestic and cross-jurisdictional issues as possible obstacles 1. Different levels of ambition – Prospect of linkage may influence levels of ambition 2. Competing domestic objectives – Desire for higher carbon prices vs cost-effectiveness 3. Need for supporting financial flows – Domestic political support key 4. Loss of regulatory autonomy – From the mundane (short vs. metric tons)… – … to the more fundamental (which offset credits to allow) Successful linkage requires balance of econ. efficiency & political feasibility Source: Green, Sterner & Wagner (Nature Climate Change, 2014)
  10. 10. Keep linking simple There’s nothing simple about global climate architecture • Focus on direct links • Consistent rules • Strong coordination • Sign ‘pre-nups’ in case of ‘de-linking’ Build, test, and prove viability of strong domestic systems vs Leverage existing systems for broader carbon market sooner Source: Green, Sterner & Wagner (Nature Climate Change, 2014)
  11. 11. Small symbolic linkages good step but large ones elusive • California Quebec great learning experience • EU-US-India – Well…..
  12. 12. Small symbolic linkages good step but large ones elusive • California Quebec great learning experience • EU-US-India – Well….. • ALL THE PROBLEMS OF TOP DOWN COME BACK TO BITE • All details of banking, definitions, commitment periods…
  13. 13. 14 Costs of Formal Linking  Alignment costs – Misalignments can result in perverse outcomes  A ton must be a ton  Price floors and ceilings must be aligned – Administrative effort in negotiating how to align disparate C&T designs – Political cost in losing partial control of domestic C&T design, which reflect stakeholder preferences
  14. 14. 15 Table 1: Evaluation of Design Alignment Requirements for Formally Linking C&T Programs Difficulty to Align? Important for Functioning of Markets? Important for Political Economy? Technical Issues 1. Measurement, Reporting, and Verification a. Measurement methods Easy Yes Yes b. Reporting of process emissions Medium No Maybe c. Reporting of emissions from imported power Medium No Yes 2. Allowance Tracking System a. Registries (serial number systems) Easy Yes Yes b. Identification of compliance instruments (type, origin) Easy No Yes c. Data collection on transactions Medium No Maybe d. Public access to data Easy Maybe Yes Emissions Reduction Goal 1. Emissions Cap a. Are caps absolute or intensity based? Medium Maybe Maybe b. Coordination of stringency (marginal costs, other metrics) Hard Maybe Yes c. Accounting for associated programs in baseline Medium Maybe Maybe d. Aggregate goal across programs Hard No Maybe

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