As the nations of the world consider alternative international climate policy architectures for the post-2012 period, tradable permit systems are emerging as a preferred domestic instrument for reducing greenhouse gas (GHG) emissions. The two most significant institutions for reducing GHG emissions implemented to date—the European Union Emission Trading Scheme (EU ETS) and the Clean Development Mechanism (CDM)—are tradable permit systems. Furthermore, tradable permit systems are being considered as the primary policy instrument for reducing GHG emissions in Australia, Canada, Japan, and the United States, among other countries.

Due to the increasingly likely prospect of a world with multiple tradable permit systems, attention has focused on how and whether to link these systems. Linking occurs when regulated entities in one tradable permit system are allowed to use emission allowances or emission reduction credits from another system to meet their domestic compliance obligations. These entities can then take advantage of cost savings from international trade: just as allowance trading within a tradable permit system allows higher-cost emission reductions to be replaced by lower-cost reductions within that system, trading across systems allows higher-cost reductions to be replaced by lower-cost reductions from a different system. These cost savings create significant incentives for regulatory authorities to link tradable permit systems.

Despite the benefits of linkage, there are also legitimate concerns about the implications of some linkages. These concerns depend, in part, on the type of linkage involved. One concern is that directly linking two cap-and-trade systems will result in the complete and automatic propagation of cost-containment measures from one system to the other.