While California's landmark greenhouse gas system is still a month away from launching its first auction of carbon credits, a new study finds that linking markets is feasible for California and the European Union.

The report by the Swedish Environmental Research Institute and the liberal think tank Forum for Reforms, Entrepreneurship and Sustainability explores the potential of the two systems. The E.U. system is the world's largest and California's will be its second-largest, once it begins next year, and the report finds that political will should be enough to bridge the technical differences between them.

Report author Lars Zetterberg concedes linking is probably some time away but says that "with political will, the current barriers to linking ... could probably be solved."

California's stated plans to link with Quebec and Europe's plans to link with Australia "could either be viewed as evidence that there is a political appetite for linking and that Europe and California could link at a later stage, or that both parties have found other partners considered to be more suitable for linking," the report says.

Even if the two systems have different allowance prices, both would benefit from linking, the report finds. The market with higher prices would benefit because some buyers would be able to purchase lower-cost allowances instead of taking more expensive action to reduce their emissions. The cheaper system would see increased revenues from higher demand for allowances.

"Linking can facilitate the acceptance of climate policy among business actors and the general public," the report says.

Beginnings of a global system?

But if the systems' prices are too different, participants might resist the idea of spending money for emissions reductions in another jurisdiction. California's credit price is estimated to be anywhere from $15 to $75 per ton in 2020, while futures for E.U. allowances in 2020 have fetched between $17 and $37 per ton. That makes it hard to determine who, if anyone, would be the net buyer of allowances, the report notes.

"Paradoxically, the difference in abatement costs, reflected in allowance price, is an important economic motive for linking two emission trading systems, but may also constitute a significant political barrier."

Another political obstacle could be the systems' varying approaches to offsets. California allows offsets from forest projects, while the European Union does not, but allows offsets from developing countries. Linking would effectively force each government to accept the other's offset standards, the report points out, since the use of an offset credit in one market would free up an allowance to be sold to participants in the other.

"This way the political decision in the second system to restrict the use of certain offsets has been bypassed," it says.

The report also includes commentary from two outside experts. Andrew Light, director of the Center for American Progress' international climate policy program, praised the study.

"If the EU ETS and the California ETS could be linked, this could speed up the creation of a global carbon market by decades by lowering the cost of reducing greenhouse gas emissions and reducing price volatility in these markets," he wrote. "Zetterberg has provided just the kind of clear and concise analysis we need to move this effort along."

But Andrei Marcu, senior adviser at the Center for European Policy Studies, raised a philosophical difference between the two systems.

"The U.S. seems to see the ETS as a way to decrease costs to its industry, and minimize the price of carbon," he writes. "The E.U. sees the ETS as an instrument for driving change, and has been going through difficult internal discussions to find ways to insure that the price in the ETS provides incentives for transformation. Are systems with different views of the world and objectives linkable until these differences are addressed?"