There are many incentives for the development of an international carbon market, as it would allow for increased economic efficiency of emissions reductions, more stability in prices, consistency between emissions markets, greater flexibility and liquidity in meeting reduction targets, less market power for large participants, lower transaction costs and less risk of carbon leakage (Johannsdottir et al. 2016; Kossoy et al. 2015b; Ranson & Stavins 2016; Carbone et al. 2009; Haites 2016; Kill et al. 2010; Hawkins & Jegou 2014). As a result, many argue that existing trading systems should become compatible and linkable, with similar methodology, tools, standards and indicators (Johannsdottir et al. 2016; Ranson & Stavins 2016; Carbone et al. 2009; Haites 2016; Kill et al. 2010). Current attempts at international carbon market development are results of the KP, including the Clean Development Mechanism (CDM) and Joint Implementation (JI) (UNFCCC 2013). These mechanisms work by coordinating offset projects the supply offset credits to already established carbon markets around the world, thereby linking those markets indirectly. Although these mechanisms provide flexibility for countries to meet their targets, and in the case of CDM, can act to stimulate sustainable development (Rahman & Kirkman 2015; UNFCCC 2016), the regulation of these systems has faced much criticism as research has shown that they may lead to an increase in GHG emissions above KP targets (Kollmuss et al. 2015). This is a threat to the environmental integrity of ETSs in countries that plan to link internationally, as the incorporation of these credits into the EU ETS, for example, is estimated to be undermining the EU’s reduction target by about 400 million tonnes of CO2e (Kollmuss et al. 2015). While a new market mechanism has been proposed by the Paris Agreement as a more holistic approach to an international carbon market (Garvard et al. 2013), development of this mechanism should consider the many lessons that have been learned from these previous attempts to develop a global market under KP: it is essential for crediting mechanisms to adopt fully transparent procedures with publicly available documentation, only internationally accepted methodologies should be eligible for use, auditors should be fully accountable for their actions and report to the authority regulating the mechanism, retroactive crediting should not be allowed, and investors must have reasonable certainty from the beginning that their projects will or will not be approved in order to avoid non-additional projects to be favoured (Kollmuss et al. 2015).
CDM and JI represent one strategy for constructing a global carbon market using indirect linkage of national and regional ETSs through the common use of credits. There are three other possible scenarios for global carbon market development, including a top-down global trading system based on an international treaty, formal linking of domestic ETSs to construct an international market bottom-up, or a mixture between these approaches, containing elements from each (Flachsland et al. 2008; Rudolph & Kawakatsu 2012). Three important elements that need to be considered when developing an international carbon market framework are: ability to link carbon market systems together between countries and regions; transparent and consistent rules that account for the transfer of international emissions reductions; and tools and regulations that allow for links between different carbon-pricing systems (Johannsdottir et al. 2016). The current state of carbon markets and recently proposed INDCs suggest emergence of a decentralized bottom-up market design, as opposed to the global top-down market previously attempted by the KP. As top-down global climate negotiations have progressed slowly, the emerging bottom-up mitigation efforts may be a more practical option to coordinate climate action (Liu & Wei 2014). Under this structure, carbon markets could be a promising way to facilitate cooperation and achieve the 2oC goal set by the Paris Agreement as long as it is regulated transparently, stringently, and with positive environmental intentions and integrity (Kossoy et al. 2015b).
