Effective and flexible emissions trading markets: international emission trading by networking carbon markets on distributed ledger technology architecture – regulatory and institutional frameworks

Abstract

Notwithstanding the apparent lack of success of international emission trading under the Kyoto Protocol, numerous jurisdictions are implementing mitigation mechanisms that put a price on carbon, whether by taxing activities that cause release of carbon to the atmosphere, or by creating markets through which the cost of atmospheric release of carbon is internalised to the relevant activities by way of emission trading schemes. Carbon pricing is integral as a tool of global climate policy for achieving greenhouse gas emission mitigation. The Paris Agreement and related decisions recognise and embrace the diversity of approaches taken by jurisdictions, moving away from the previous approach under the Kyoto Protocol. All the same, these diverse and heterogeneous mechanisms – in particular emission trading schemes – might achieve greater efficiency, larger scale and stimulate essential private sector engagement and other benefits, were they to be connected. There is a body of academic literature on the subject of linking emissions trading schemes, but surprisingly few examples. Linking entails jurisdictions achieving a certain level of convergence and homogeneity, which means parties negotiating out their differences. An alternative model is networking of emission trading schemes, which recognises and places a value on those differences, while maintaining the autonomy of the individual schemes. This thesis proposes a conceptual model of networking built on a distributed ledger technology (DLT) platform. DLT is one of a suite of new, so-called disruptive technologies impacting how services, especially financial services, will be provided into the future. As the carbon market network model is essentially a supra-jurisdictional financial market, the impact of these disruptive technologies must be taken into account. Even more so, DLT introduces features potentially making networking more feasible and effective within the policy framework of the Paris Agreement. New technologies come with their own issues, not least the fact that existing regulatory regimes may not be able to account for the changes they bring. Implementation of applications should be managed so that, on the one hand, they do not simply become means for circumventing current laws, but on the other, are not regulated in such a manner as to stifle innovation. In proposing an institutional and regulatory framework to enable the operation of the conceptual model proposed, this thesis analyses the literature and existing regulation of DLT applications in the financial markets. In so doing, the analysis draws together the applicable elements of climate change law, financial regulation and developing regulation of the technology. It aims to arrive at a position on the extent to which the proposal can overcome delays, inefficiencies and other problems that currently beset the carbon market, so as to maximise the opportunities for emissions trading to make a difference in achieving the objectives of climate policy. The thesis contributes to the extant academic literature in a number of respects, for instance, arguing that it is applications of new distributed ledger technology that should be the focus of regulation, not the technology itself; and by a novel application of theory concerning fragmentation of international environmental law and climate law to illustrate why it is postulated international emissions trading under the Kyoto Protocol was less effective than hoped. Equally importantly, the thesis contributes by examining networking as a means for connecting carbon markets, in contrast to the current linking approach; and by proposing a model for such networking, then analysing a governance structure for such connected markets, both areas that have received little previous academic attention. Key implications for policymakers arising from the thesis include issues such as the need for an assessment methodology to value diverse mitigation outcomes; and how to connect heterogeneous carbon pricing mechanisms to enhance mitigation policy.