A growing number of countries are integrating cap-and-trade schemes into their national climate policies. The European Emissions Trading Scheme (EU ETS), operational since 2005, is one of the frontrunners in this development. The EU ETS is one of the main pillars of the European Union’s climate policy. The economic impact of this measure is unmistakable: during its first year of operation, the market transacted 262 million tonnes of CO2e through brokers and exchanges, equaling a financial volume of € 5.4 billion, and an estimated further 100 million tonnes in the unreported direct bilateral market.

The entry into force of the Kyoto protocol in 2005 has stimulated the development of similar systems, as well as the development of project mechanisms such as the Clean Development Mechanism and Joint Implementation.

A number of emissions trading systems are emerging around the world. In the United States in particular, dynamic initiatives have been launched at the state level, especially on the East cost (RGGI) and the West Coast (California, Western Climate Initiative). In addition, several legislative proposals for a federal system are currently under discussion in Congress. In Australia, a blueprint for a state-initiated countrywide scheme has been worked out, and it is now highly likely that an emissions trading scheme will be implemented at the federal level. In New Zealand such a scheme is also emerging.

Current and planned ETSs vary significantly in size, the design characteristics and geographical scopes. The EU ETS is by far the largest of the current or planned schemes. Some emissions trading schemes are voluntary, while others are mandatory. Some ETSs are designed to be used for compliance with the Kyoto Protocol, while others are planned or in use in non-Kyoto Parties. Some of the existing or planned schemes cover direct emission sources, while others include electricity retailers or users. Also the compliance provisions show significant differences between the different schemes. Differences also lie in the time-period over which the system extends, as well as the time period over which emissions targets are set. Furthermore, there are also differences in the type and amounts of “offset” credits that are allowed.

There are currently only a few links between different trading schemes and markets--they are mainly unilateral links. Linkage of the EU ETS with other comparable schemes is a strategic goal of European climate policy, but also the emerging schemes explicitly emphasize the aim of linking up to other schemes.

Establishing an operational link between such schemes would create a greater diversity of sources and abatement options, leading to improved market liquidity and more efficient allocation of resources. Furthermore, the inclusion of more participants might also prevent distortions of competition and counteract the threat of leakage by preventing entities from relocating their emissions to countries with less stringent or no emission reduction policies. Linking could help make emissions targets and trading more attractive for countries that currently have no Kyoto targets, or have refused to ratify the Kyoto Protocol. Furthermore linking domestic and regional schemes may have a catalytic effect on international negotiations geared toward the future of the international climate regime A link between various ETSs can be established in different ways:

• Directly, by making the allowances from the different ETSs fully fungible and valid for compliance in each ETS,
• Indirectly, by governments acting as mediators that receive allowances from market actors wishing to make a transfer, convert them into AAUs, and transfer them to another government, which then converts them into their respective system’s allowances,
• or indirectly by acceptance of common project mechanisms.

A link of the EU ETS to the market for offset credits already exists via the linking directive (EC 2004). Also emerging ETSs aim at linkages to domestic and international offset credits. Linking to offset credits may lower the costs of reducing GHGs and will help speed the deployment of clean technologies worldwide. Linking to or via offset markets can be an option where formal linkage between systems is not possible due either to substantive differences in design or political constraints

Given the state of international negotiations, linking may be the most feasible way of achieving a truly global carbon market. This may be of great importance for the development of the future international climate regime, which can be based on a global carbon market as one of the main drivers.

The possibility of linking is an important issue within the current review of the EU ETS and for new emissions trading schemes that currently are being designed, such as in California or New Zealand. Linking may act as a driver for a greater standardization of different emissions trading schemes and greenhouse gas offset projects.