| It has become evident in recent years that anthropogenic greenhouse gas emissions significantly contribute to the atmospheric temperature rise. Climate change has become a serious issue for the world to confront. Natural disasters such as sea level rises, hurricanes, storms, and glacier melting are affecting the safety and well-being of human beings and other species on Earth. Different from other pollutants, greenhouse gases, especially carbon dioxide, are very stable and cause the same global warming effect regardless of where they are emitted. So combating climate change requires cooperation at the global level.In 1992,197 States ratified the United Nations Framework Convention on Climate Change (UNFCCC), the very first international convention specifically focusing on climate change. Five years later, the Kyoto Protocol to the UNFCCC was adopted, setting binding obligations for industrial countries to reduce greenhouse gas emissions. In 2015, the Paris Agreement was reached, which, for the first time, set legally binding obligations for every party to the Agreement. These milestones show an increasing attention on cooperating with each other on climate change by the world.In order to control greenhouse gas emissions, most countries adopt three methods: command and control, carbon tax, and carbon emissions trading. Carbon emissions trading provides economic efficiency, which gives comparable levels of environmental quality for lower costs, so more and more countries have started using or plan to use this method as a way to control greenhouse gas emissions. Within each emissions trading scheme (ETS), a "cap" (a total emissions limit) is set, and "allowances" are allocated to businesses that are covered by the ETS, representing the total emissions they are allowed to emit. Businesses purchase or sell allowances with each other to comply with their obligations at the end of each compliance period. Businesses with higher carbon abatement cost or higher needs to emit can buy allowances from those with lower cost or needs, and vice versa.Better cost-efficiency comes with larger market scale and better market liquidity. So for countries that operate their own carbon markets, in order to further reduce the aggregate cost of controlling emissions, linking different carbon markets together is a good option. The EU Emissions Trading Scheme (EU ETS), which began in 2005, is currently the largest ETS in the world. China is currently the largest greenhouse gas emitter worldwide, but is running seven pilot carbon markets and is preparing to implement a national ETS in 2017. Both the EU and China have expressed intentions to cooperate with other jurisdictions on climate change, with the EU specifically stating in its ETS policies that it supports carbon market linkages and an international carbon market. The importance and effects could be extremely significant if the current largest ETS links with the future largest ETS. For this reason, this thesis addresses the feasibility of such a linkage between the EU ETS and the Chinese national ETS.There are plenty of advantages for such a linkage, but at the same time, numerous challenges. These advantages and challenges are analyzed in detail in this thesis. Two completely different jurisdictions in virtually every respect, the compatibility of the EU and China ETSs is in doubt in terms of economic characteristics, ETS policies, market design features, and potential economic/financial conflicts between the EU and China. Despite the fact that the EU and China have maintained close interactions through international cooperation on climate change since the EU ETS began in 2005, a direct linkage between their two ETSs will likely be very difficult to accomplish. The only successful example of direct ETS linkage until now-the California-Quebec linkage-is compared with the EU-China linkage in question, so that lessons learned from this experience can be considered.Near the end of this thesis, an alternative approach for cooperation between different jurisdictions or ETSs is provided. According to the Networked Carbon Market (NCM) initiative proposed by the World Bank Group, the efforts of each jurisdiction will be assessed and given a "mitigation value" (MV). MV represents the effectiveness of the efforts made by jurisdictions to mitigate greenhouse gas emissions. In this NCM, MV is set by an overarching supervisory body (e.g. the UN) or by other stakeholders (e.g., rating agencies). The carbon units of different jurisdictions can be exchanged or traded based upon the MV of the jurisdictions. Commonly, the MV of the more effective jurisdiction will be set at 1, then the carbon units will be traded based on the ratio of the MVs (e.g. MV for Jurisdiction A is 1, MV for Jurisdiction B is 0.8, then the exchange rate is A/B=1/0.8, which means five B units are equivalent to four A units).The World Bank Group has not provided any algorithm or quantitative method to evaluate MV, since it is a complicated process, and many factors need to be considered. The last chapter of this thesis addresses factors likely to play a role in setting the MV for both the EU and China, with a purpose of illustrating how such exchanges would work under the NCM initiative. It analyzes the effectiveness of efforts made by the EU and China in their respective carbon market activities over four phases of the EU ETS (i.e., covering a time period from 2005 to the post-2020Based upon this analysis, a direct linkage between the EU ETS and the Chinese national ETS would appear to be very difficult to negotiate, and is highly unlikely to occur in the near future. Alternatives such as cooperation of bottom-up approaches by jurisdictions (e.g. NCM) appear to be considerably more effective and feasible as initial steps, and should lay the foundation for ultimately integrating the ETSs at the global level-and achieving the advantages sought from a global carbon price. |
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