The international dimension of the EU emissions trading system : bringing the pieces together

We analyse the international dimension of the EU Emissions Trading System (EU ETS) over the past two decades and in the foreseeable future by reviewing facts and economic theory. The facts mainly concern the international climate change regime and the EU’s relevant experience in international cooperation. Club theory shows how incentives can be created for cooperation on climate mitigation. The linkage of the EU ETS to the Kyoto flexible mechanisms had mixed results: it promoted emissions trading abroad, but the inflow of credits into the EU ETS added to a large market surplus and the environmental integrity of certain credits was problematic. Looking ahead, the ability of the EU ETS to reduce foreign emissions may grow. Key will be whether competitiveness and distributional effects are successfully addressed. The Carbon Border Adjustment Mechanism might help the EU reduce the risk of carbon leakage while incentivising emission reductions in countries exporting to the EU. The EU’s focus on reducing domestic emissions only, suggests we will probably not see new international linkages this decade. However, it cannot be excluded that the EU will revisit its decision and relax the domestic constraint.