Volume 32: A Sustainable, Clean and Carbon-free Energy Future

Efficiency evaluation of international carbon market link limit mechanism in the context of carbon neutrality Hanying Jiang, Jiachen Wang, Sha Yu, Xinzhu Zheng, Can Wang

Abstract

Article 6 of the Paris Agreement enables Parties to achieve their Nationally Determined Contributions (NDCs) through direct cooperation or Internationally Transferred Mitigation Outcomes (ITMOs). Current researches on Article 6 are mostly based on the assumption of unlimited global carbon market link, which may lead to large price volatility and cause concern of policy makers. Here, we designed carbon market link scenarios with different degrees of trading volume limits, and simulated the global and regional carbon markets under different scenarios from 2025 to 2060 using the Global Change Assessment Model (GCAM). The findings suggest that as the link limit tightens, both the price volatility of global carbon market and the cumulative mitigation costs saved by carbon market links decrease. The price volatility under the unlimited global carbon market scenario is about 30% higher than that with link limits implemented. At the national level, a total of 15 regions are constrained in different link limit scenarios, among which China, the United States, EU and India are the most sensitive regions to link limits. Based on the scenario results, we discuss the design and impact of different international carbon market link limit mechanisms, such as absolute link limits and relative link limits.

Keywords Paris agreement, article 6, emissions trading system, limited link, cost-effectiveness, carbon price volatility