Think Piece

Creating a Club of Carbon Markets: Implications of the Trade System

By Nathaniel Keohane, Annie Petsonk, 
August 2015
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In the wake of the Copenhagen Accord in 2009 and amid frustration with the slow pace of the United Nations Framework Convention on Climate Change (UNFCCC) talks, a number of bilateral and plurilateral efforts and technology initiatives has been launched to deal with international climate policy. Bilateral efforts such as the November 2014 joint announcement between the United States (US) and China have provided welcome momentum. These minilateral efforts, together with the broader multilateral ones, constitute the emerging “regime complex” for climate change. In such a world, ambition in climate action must come from national governments as well as from international agreements. For promoting such ambition, key tools include market-based mechanisms that cap emissions of carbon dioxide and other global warming pollutants, and allow nations and firms that reduce emissions below capped levels to save, sell, and trade surplus units of allowable emissions. Such systems are in effect today in more than 50 countries, states, cities, and provinces where almost a billion people live.

To promote the spread of such policies, ensure their integrity, and drive the deep reductions needed to limit the worst impacts of climate change, this paper proposes the formation of a club of carbon markets (CCM)—a group of jurisdictions that develop harmonised standards for carbon market operations and mutually recognise each other’s emission units. A likely feature of such a club would be that members would grant each other exclusive access to their own carbon markets. Excluding emission units from non-members would be crucial to ensuring the environmental integrity of the club’s efforts. It would also serve as a powerful incentive for even non-member jurisdictions that only wish to sell offset credits to satisfy the club’s requirements for integrity to become members, since satisfying those requirements would be necessary to gain access to members’ carbon markets. And such a club could encourage greater breadth and ambition of climate mitigation actions, thereby alleviating real or perceived competitiveness pressures, and consequently damping calls for trade protective measures such as border carbon adjustments. But, in other contexts, the concept of exclusive trading privileges has raised concern about potential conflict with rules of the world trade system. This paper addresses the potential for that conflict to arise in a CCM, arguing that emission units are not “goods” or “services” and World Trade Organization (WTO) disciplines do not necessarily apply in this case.

The interplay of trade rules and the concept of a CCM are crucial because high-integrity carbon markets will be central to the success of emission reduction efforts over the coming decades. If the multilateral climate negotiations are unable to reach an agreement on robust rules for these markets, and if the rule-based framework of the multilateral trade system presents fundamental obstacles to these clubs, the legitimacy of those trade tenets may be questioned. On the other hand, if trade rules and carbon market clubs can coexist, and if the core multilateral rules of trade could provide helpful principles to make carbon market clubs more effective in reducing emissions, then a CCM should consider drawing on those rules by analogy when assembling itself. Finally, the paper compares the potential CCM-UNFCCC relationship with the evolving relationships between regional/plurilateral trade arrangements and the broader WTO. The discussion is meant to initiate an inquiry rather than present an exhaustive analysis, and areas for further research are suggested.

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