Using Linked Emissions Trading Systems to Transform Difficult‐to‐Abate Industries

Emissions trading systems (ETSs) have expanded over the past 20 years to cover over 23% of global GHG emissions. This growth reflects their demonstrated ability to reduce emissions by diverse sources at low cost with no adverse economic impacts. Their approach to allocating free allowances and to managing the supply of allowances has become more effective. Linking multiple ETSs has worked well. An ETS encourages sources to implement mitigation measures whose marginal cost is lower than the allowance price. This means that existing ETSs have achieved only limited reductions by sources in difficult‐to‐abate industries with high abatement costs. To stabilize the climate, all of these industries must be transformed to net zero emitters. This paper proposes a design for linked ETSs to achieve the needed transformation. Each ETSs should cover a substantial share of the global production and consumption of a single industry. The design promotes low emitting new entrants and retirement of high‐emitting facilities. It includes provisions to ensure a competitive allowance market and to assist developing countries. A trade agreement for the industry's products would complement the system. This article is categorized under: Climate and Environment > Net Zero Planning and Decarbonization Policy and Economics > Regional and International Strategies Policy and Economics > Governance and Regulation