Barriers to linking carbon markets in Northeast Asia

Chapter in the Carbon Market Cooperation in Northeast Asia: Assessing Challenges and Overcoming Barriers compendium report. Published by the Asia Society Policy Institute.

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Linking carbon markets can generate sizeable economic, environmental, and strategic gains, yet linking is not without its costs. These costs may frustrate carbon market integration in Northeast Asia even when integration is beneficial. This chapter reviews the economic and political barriers to linking that are behind these costs, first from a general theoretical perspective and then in the specific context of the carbon markets in China, Japan, and the Republic of Korea (hereafter Korea). It highlights three key barriers that policy makers must anticipate and prepare for well in advance. First, the magnitude of the existing permit price differences would imply substantial reallocation of abatement efforts and sizable financial transfers, which will be difficult to sustain from a political economy perspective. Second, linkages between systems featuring absolute and intensity targets on the one hand and operating at subnational and national levels on the other hand will be more challenging to negotiate and implement. Third, any given market’s core features must be shielded from political interference to establish a track record as a credible partner posing minimal regulatory risk in a potential linkage. To facilitate mutually beneficial linkages in the future, this chapter recommends that policy makers in the region start the dialogue with one another early but also actively participate in the ongoing United Nations Framework Convention on Climate Change (UNFCCC) efforts to flesh out the mechanisms supporting the implementation of Article 6 of the Paris Agreement. Finally, it is essential that all stakeholders in the region draw on the lessons learned from the successful linkages emerging around the globe.