This work package aims at addressing the legal options and institutional and regulatory requirements for direct and indirect linking.

• Legal assessment of institutional mandates in existing legislation and other documents (e.g. Article 25 (1) of Directive 2003/87/EC or Executive Order S-20-06 of the Governor of the State of California) and the constitutional framework (including, for instance, the relevance and distribution of legislative powers) in participating jurisdictions
• Assessment of procedural requirements of a linking arrangement, including identification and assessment of institutional participants, voting procedures, expected timelines and potential obstacles
• Assessment of regulatory obstacles and requirements in different areas of international, regional and domestic law affecting the admissibility of a linking arrangement or mandating a specific design (including, inter alia, the applicable free trade disciplines and competition rules under European Community and WTO law, relevant norms in domestic, regional and international environmental law etc.)
• Analysis of the advantages and disadvantages of the identified linking options from a legal, political and economic perspective, also with a view to whether and to what extent such options require a common regulator. Drawing on this description of the legal and regulatory framework of linking, the subsequent work packages can assess how the remaining scope of government action can be used to the greatest advantage, or indeed whether legislative amendments are necessary before a linking scheme can be designed effectively.

• Working Paper outlining theoretical linking options and their respective legal prerequisites and implications for major regional and domestic jurisdictions (EC, USA (federal and regional), Norway, Switzerland, Japan, Australia (NSW), New Zealand)
• A matrix of options in table form, listing permissible design options and their advantages and disadvantages for different constellations of participants
• A model framework for the most likely linking scenarios, including wording proposals for central provisions and different design options

In this work package, barriers to linking will be analyzed depending on which legal and institutional option for linking is chosen (based on WP1). Furthermore, solutions for specific barriers will be elaborated. In addition, a special focus will be set on the role of offsets when linking.

• Analyzing barriers for linking depending on which legal and institutional option for linking is chosen.
  All major currently existing or proposed ETS schemes will be examined and the barriers for linking identified, thereby also examining to what extent the importance of a barrier depends on which legal option for linking is chosen. Policy recommendations will be formulated with respect to the modification of existing and the design of future trading schemes in order to reduce barriers to linking of schemes. This involves an analysis of issues such as the allocation methodology, the stringency of targets, the definition and recognition of trading units, etc.
• Elaborating solutions to specific barriers.
  Specific mechanisms that could be required to overcome differences between trading schemes, such as gateways between schemes that have relative or absolute targets, or between schemes that have ratified the Kyoto Protocol an others that haven’t, will be set out in detail and assessed.
• The role of offsets when direct linking.
  A special focus will also be placed on how offsets are included in ETSs including domestic offset and linking to offset markets. This includes an analysis on the modalities of the inclusion of offsets, on the types of offsets allowed, the monitoring provisions and the extent to which offsets are allowed. Then the implications of different offset provisions for linking will be analyzed. A particular focus will be set on land-use-based offsets. Furthermore, options for a standardization of the modalities of including offsets in ETSs will be elaborated.

• Report on the implications of design differences for linking, taking into account the legal and institutional option chosen and including also mechanisms to address barriers to direct linking (Milestone 1)
• Report on linking the ETS to other emissions trading schemes, depending of their offset provisions
• Report on the role of land based offsets when linking

In this work package, different options for ETSs to link via offsets will be analyzed, barriers for indirect linking identified and the implications for the further development of the carbon market will be assessed. This includes the question to which extent projects and other international offset systems (such as a “US CDM” which might emerge) would be accepted under the CDM and vice versa.

• Analysis of options for indirect linking via common offsets.
  Current ETSs and emerging schemes will be analyzed with a view to their offset provisions in order to draw conclusions on the options and barriers for indirect linking. Different scenarios for indirect linking will evaluated including also a survey of the integration mechanisms and their respective advantages and drawbacks, as well as their legal implications for transactions and a functioning market.
• Elaborating options for standardization of offsets.
  An analysis of the extent of standardization of offsets would be required to address regulatory hurdles of different scenarios for indirect linking via offsets. Recommendations on how guidelines and rules could be altered to increase linkages through offsets will be drawn.
• Analysis of which options of linking - via offsets or to offset markets - are politically viable in the context of a future Global Climate agreement including also the regulatory cost of different options.

• on options, barriers and regulatory costs for indirect linking via offsets.

This work package will assess the opportunities and barriers for linking from the perspective of countries that are newly creating emissions trading systems, especially those that are currently outside of the Kyoto Protocol framework. This includes regional initiatives in the US and federal schemes in Australia and New Zealand. The linking issues discussed in the other work packages will be analyzed in terms of design of domestic emissions trading rules, and the broader economic and political attractiveness. Knowledge from existing literature and gathered within this project should be applied to analyze linking options of selected schemes with the EU-ETS. Barriers of linking the selected schemes with the EU-ETS will be analyzed in detail, followed by an analysis of various degrees of linkage options. The research work will also involve input from policymakers from the chosen systems. At least two case studies will be carried out.

• Barrier analysis.
  In a first step potential barriers to linking will be analyzed in detail taking into account specific provisions and rules of the select schemes.
• Addressing the barriers.
  In a second step, options will be elaborated to overcome some of the identified barriers and to evaluate which barriers remain.
• Elaborating options for different degrees of linking.
  In the third step, options for various degrees of linking will be elaborated including also the assessment of legal challenges.
• Assessing the timeframe when such linkages can actually be implemented.
  In the last step, the legislative and policy processes in the selected countries will be analyzed in order to draw conclusions in which time horizon the linkage can actually be implemented.

• Two Case studies for linking sample ETSs with the EU-ETS (Milestone 2).
• Organization of a Workshop on linking the EU-ETS and emerging ETSs.

In this Work Package linking scenarios will be assessed quantitatively using a partial equilibrium economic model of permit markets. The model will show the resulting prices and trade flows in the emissions permit market.

• Building a partial equilibrium economic model for emissions markets in several countries, the CDM, and their interactions. The model will represent abatement options and costs by country and sector, and alternative scenarios for economic growth and autonomous changes in emissions intensity. Basic features will be drawn from the models used in Jotzo and Michaelowa (2002) and Jotzo and Pezzey (2007).
• Quantitative Assessment of different linking scenarios using the partial equilibrium economic model of permit markets. The analysis will include quantifying the possible effect of direct and indirect linking on permit prices and abatement in the EU ETS and other countries’ schemes; quantifying scenarios of restricted linking; and quantifying the impacts of price caps and intensity targets in ‘linked’ schemes. Analysis will be scenario-based, to illustrate the effect of different policy choices.

• Report on quantitative effects of direct and indirect linking on permit prices and abatement cost in the EU-ETS and other schemes.

This work package will include an assessment of the role of linking schemes for the future development of international climate policy.

• Assessment of the role of linking schemes for the future development of international climate policy. Different options of linking will be analyzed from a political point of view addressing also the question of how emerging cap-and-trade systems in countries who have not ratified Kyoto can be (re-)integrated into the global context.
• Analysis on which options for indirect linking are economically and politically viable in the post-2012 context.
• Exploration of possible links to new emerging market mechanisms, such as in the area of deforestation.

• Organization of a Workshop on the role of linking for a post-Kyoto agreement.
• Report on potential impacts of the linking of emissions trading mechanisms on a post-2012 climate regime (Milestone 3).
• Report on linking to new emerging market mechanisms.