Joining up regional emissions markets – hand wavy thoughts about the distant future

I am of the fairly conventional view that the ultimate goal of climate policy should be a global carbon price that is discovered through cap and trade. Obviously we can’t get there in one go, so the question is do we approach it region by region or sector by sector?

Take the current argument between the EU and the US over charging airlines for their emissions. The EU wants American carriers to purchase emissions allowances, either from the EU ETS or an equivalent American scheme, to cover their transatlantic flights. If they do not, the EU has insinuated that it may suspend their flying rights.

The primary objective of this threat is to protect European airlines, which would be at a disadvantage if they have to pay for their emissions while foreign competitors do not. The EU is also protecting the environmental integrity of the EU ETS. If the effect of pricing emissions for European carriers is that customers chose unregulated American ones instead, the emissions would ‘leak’ out of the scheme.

Let’s assume that the EU gets its way. If the American carriers buy credits in the EU ETS, the competing European and American carriers will be on the same competitive footing. All passengers crossing the Atlantic pay the European price for their emissions. If the American carriers join a US pricing scheme, the European carriers would probably be at a competitive disadvantage, because they would bear European carbon price, which is likely to be higher – at least initially. Transatlantic passengers in this scenario end up paying the US carbon price at the expense of the European carriers.

The most politically feasible solution would be to group sectors into those that are subject to international competition to the extent that carbon prices could cause customers to choose suppliers in the cheapest regime (such as aviation and steel), and those that are mainly subject to national or regional competition (such as power generation). The former group would ideally develop global pricing schemes that cover single sectors, while regional schemes would be set up to cover all remaining sectors. This model is shown as ‘intermediate solution c)’, below.

While this solution reduces the scope for trading between industries, it allows globally competitive sectors to participate in trading schemes without direct competitive concerns. When the regional schemes are ready to be linked up, the global single-sector schemes can be linked in too.

intermediate-trading-solutions.png

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