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Demand in a Fragmented Global Carbon Market: Outlook and Policy Options

image of Demand in a Fragmented Global Carbon Market: Outlook and Policy Options

The global carbon market currently faces a deep demand crisis. The consequent price fall reduces the incentive to make low-carbon investments and thus increases the risk of locking in carbon-intensive infrastructure. The global carbon market relies on ambitious climate policy and consists of a mosaic of different schemes. Despite the current lack of ambitious global climate policy, various market-based approaches are emerging around the world, indicating increasing scope and fragmentation of the carbon markets. This report, conducted by GreenStream together with Climate Focus, analyses the status and outlook of global carbon markets and identifies measures and circumstances how new demand for carbon credits could be created to strengthen global efforts to limit the global average temperature rise to 2°C, taking into account the trend towards fragmentation of carbon markets.

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Linking and fungibility of credits

With so many countries developing or considering developing a domestic cap and trade scheme, linking these schemes to each other to create a global carbon market is starting to become a relevant topic of discussion. The EU and Switzerland have been in negotiations to link their schemes since 2010 and the EU and Australia have recently agreed to a pathway to link their schemes. Linking is not only happening with the EU ETS, with California and Quebec as well as Australia and New Zealand having already begun negotiations to link their respective schemes. Other linking arrangements mooted for the future include Australia–California and New Zealand–South Korea, though no formal discussions have yet begun on these. Latin American and Caribbean (LAC) countries currently exploring the setting up of national ETS are also interested in understanding the conditions for linking.

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