harmonisation makes sense, analysts at the Green Finance & Development Center say this is difficult
to achieve in the short term, as the development of individual carbon markets in Vietnam, Indonesia,
Thailand and the Philippines is still at an early stage. For now, the analysts suggest, ‘the main focus
should be to assist Southeast Asian countries in completing the infrastructure construction of the
[regional] carbon market, improving the legislation of carbon market construction, building an
effective MRV (measure, report, verify) system, and exploring the development of the pilot carbon
market.’
Jessica Green, associate professor at Toronto University, writing in Nature magazine, says ‘linking
markets together should promote trading, smooth financial flows and lower the overall cost of
reducing emissions. A global price on carbon emissions would emerge without the need for long and
fractious diplomatic negotiations.’ However, she points out the reality is more complex: ‘Linked
carbon markets are difficult to manage when many regulatory authorities compete. Interactions with
other climate policies trigger unintended outcomes. Policymakers find it hard to keep prices at the
‘right’ level – neither so high that a carbon market becomes politically unacceptable, nor so low that
it fails to change behaviour.’
If a regional carbon market is challenging, a global one is even more so. Pongratz says: ‘The
introduction of a global carbon market is an ideal scenario that, however, seems unrealistic at present.
Several hurdles must first be overcome, as the different ETSs, especially those of China and the EU,
are at different stages of development and use different approaches and mechanisms that are
currently difficult to align.’
Alternatives to harmonising carbon markets
It will be some time before China can match the coverage and maturity of the EU ETS, Pongratz
says. The EU, as the ambitious climate policy leader, is keen to accelerate the process and has
exerted political pressure by proposing the Carbon Border Adjustment Mechanism (CBAM). This is
essentially a carbon tax on imports of certain products to protect climate action in Europe and to
prevent the ‘carbon leakage’ of European companies outsourcing their production to countries with
weaker emissions targets. She adds: ‘Using CBAM as a last resort, it wants other major emitters and
trading partners to step up their carbon pricing efforts. The more developed carbon pricing systems in
a specific country are, the less they will be affected by CBAM. CBAM should also serve as an
incentive to push forward global debates on carbon pricing, one type of which is emissions trading.’
Green believes that, within a global system, national carbon markets should limit their links to other
markets. She says China ‘made the wise decision to remain independent, providing leeway to fix the
problems that will inevitably arise. It should postpone any other linkages being considered. Similarly,
policymakers should reject offsets from other jurisdictions.’
Governments tend to avoid difficult political decisions. As a solution, Green favours the creation of a
central carbon bank to manage allowances and prices. She points to the EU’s Market Stability
Reserve for the EU ETS, which performs similar functions: ‘governed by detailed rules, it leaves
little opportunity for member-state influence’. In theory, a central carbon bank could perform a
similarly useful, independent intermediary role. In practice, she says, the likelihood of this happening
on a global basis is slim.
Managing volatility in the EU ETS