Lessons Learned in Mandatory Carbon Market Development

The Kyoto Protocol introduced the notion of a global emissions trading scheme (ETS) to aid in meeting global emissions reduction targets. Since then, the share of emissions covered by carbon pricing has tripled and now encompasses approximately 12% of global emissions. This paper discusses the challenges in design and implementation of past and current ETSs to provide recommendations for ETS development and linkage. It summarizes seven major factors that should be considered for successful ETS implementation: cap setting, permit allocation, trading guidelines that avoid carbon leakage, regulation of offsets, high compliance, transparent and continuous monitoring, and careful collaboration between systems. Successes and failures in practical implementation of each factor are explored through various ETS case studies. If applied carefully, these factors could ensure high and consistent carbon prices, and coupled with strict regulations, could achieve an ETS that meets intended environmental benefits, while offering potential for bottom-up international linkage.