Carbon Market Stabilisation Measures: Implications for Linking

Fitsum G. Tiche, Stefan E. Weishaar, and Oscar Couwenberg,

August 2016

The persistently low allowance prices in the EU emissions trading scheme (EU ETS)—oscillating between €5/tCO2 and €17/tCO2 since 2008/9—has reignited debates about the dynamic efficiency of cap-and-trade schemes. Within the context of the EU ETS, the debate has largely focused on the causes of the price slump, policy options to address the problem in the short- and long-run, and the efficiency, environmental effectiveness, and political feasibility of the various options. Despite the potentially significant risk that linking of emissions trading systems poses to market stability by facilitating contagion of localised price shocks and consequently eroding political support for domestic ETSs, studies analysing the linking implications of the proposed market stabilisation measures are largely absent. This paper fills that gap.