Harnessing the Market: Trading in Carbon Allowances

In Andrew Jordan, Dave Huitema, Harro van Asselt and Johanna Forster (eds), Governing Climate Chsnge - Polycentricity in Action? Cambridge (UK), Cambridge University Press, 2018, pp. 231-248.

Over the past 20 years, the field of international carbon trading has grown, from a system initially dominated by the Kyoto Protocol’s country-to-country flexibility mechanisms, to something far more diffuse. As of 2017, there were 21 individual emissions trading systems were in existence, at global, regional, national and subnational levels. International and local factors have jointly influenced the diffusion of various ETSs across highly diverse jurisdictions. These ETSs interact in a range of ways – in particular, mutual learning, capacity building and formal market linking. They thereby form a system of polycentric governance, which faces some challenges while also creating some opportunities. Because a harmonised global carbon market linking all existing systems is highly unlikely to develop, today’s flexibly developing system seems a workable alternative for contributing to global climate mitigation efforts. However, the polycentric nature of this system may lead to overlaps and conflicts, as well as synergistic interactions among the actors involved. Moreover, interaction with other policies may undermine the functioning of carbon markets by inducing drops in the price of allowances – but such policies can also be a necessary complement to ETS by more directly supporting low-carbon investments.



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