Emission Trading Systems with Different Offsets Provisions: implications for linking

The first experience of Emission Trading Systems (ETSs) with offsetting occurred under the Kyoto Protocol via its Clean Development Mechanism (CDM) and Joint Implementation (JI). The use of offsets generated by the CDM and the JI, while meant to foster sustainable development and facilitate national mitigation efforts, severely undermined the functioning of ETSs and climate action in general. The main threats posed by these offsets were represented by a huge oversupply in ETS carbon markets, persistently low allowance prices, additionality and integrity issues, human rights violation in jurisdictions where the offsets programs were implemented. As a response, most ETSs implemented qualitative and quantitative restrictions to the use of offsets. Nowadays, offsets can typically represent only a small share of compliance for firms covered by an ETS, and the European Union and New Zealand have completely excluded offsets use since 2021. Carbon offsets did not quit the scene, though. Two current major international climate policy cooperation frameworks mainly rely on transferable mitigation outcomes, i.e. the Paris Agreement and the Carbon Offsetting and Reduction Scheme for Aviation (CORSIA). How will these systems interact with ETSs and their carbon markets? What will different provisions for offsets use imply in terms of ETS linking prospects? This report investigates these issues, providing a comparative analysis of the six ETSs involved in the Carbon Market Policy Dialogue and is written as part of the project Life DICET (Deepening International Cooperation on Emissions Trading), co-funded by the European Commission. Co-authors: Simone Borghesi (simone.borghesi@eui.eu ), Stefano Verde (stefano.verde@eui.eu)