1. Introduction

Global carbon market linkage governance refers to the legal, institutional, regulatory and technical arrangements through which two or more independent carbon markets are connected so that allowances or other recognized mitigation units can be transferred and, subject to agreed conditions, used for compliance across jurisdictions.

The concept is important because carbon markets are usually created under separate domestic laws. A European, Swiss, Chinese, Californian, Korean or other emissions-trading system may have different rules concerning emissions caps, allowance allocation, monitoring, verification, registries and enforcement. Linkage governance provides the legal architecture necessary to make these different systems interoperable without sacrificing environmental integrity.

The EU's legislation expressly provides for linking the EU ETS with compatible mandatory emissions-trading systems having absolute emissions caps. (EUR-Lex)

The most developed operational example is the EU–Switzerland ETS linkage, which has operated since 2020. The two systems remain legally separate, but allowances can be mutually recognized under the Linking Agreement. (EUR-Lex)

2. Meaning of Carbon Market Linkage

A conventional emissions trading system operates approximately as follows:

Government establishes cap → allowances issued → regulated entities trade allowances → emissions measured → allowances surrendered.

When two systems are linked:

ETS A ↔ Linking Agreement ↔ ETS B

An allowance issued under ETS A may, subject to the applicable rules, be used for compliance in ETS B, and vice versa.

Linkage therefore differs from simply allowing international trading in voluntary carbon credits. It generally involves mutual legal recognition of compliance units between mandatory regulatory systems.

The central legal question is:

When can two jurisdictions legally regard each other's carbon-market units as sufficiently equivalent for compliance purposes?

That question leads directly to the concept of compatibility.

3. Objectives of Global Carbon-Market Linkage

3.1 Cost-effectiveness

Different jurisdictions may face different marginal costs of reducing emissions.

Suppose:

Country A can reduce one tonne for $100.

Country B can reduce one tonne for $40.

A sufficiently integrated market may allow mitigation to occur at lower overall cost.

This is one of the economic rationales for linking emissions markets.

3.2 Increased liquidity

A larger linked market can provide:

more buyers;

more sellers;

greater trading volume;

improved price discovery;

additional compliance options.

The EU has reported that the EU–Swiss link has allowed participants to operate more like participants in a single market, while retaining separate regulatory systems. (EUR-Lex)

3.3 Price convergence

If an allowance has essentially equivalent compliance value in two linked systems, substantial price differences can create opportunities for arbitrage.

Consequently, linkage can place downward pressure on large differences between carbon prices.

However, price convergence is not necessarily complete, because differences in regulatory rules, transaction costs and market conditions may remain.

3.4 Carbon-leakage management

Carbon leakage may occur when carbon-intensive activity moves from a jurisdiction with stringent carbon regulation to a jurisdiction with less stringent regulation.

Linkage can reduce some regulatory differences between participating systems.

However, linkage is not itself a complete solution to carbon leakage.

3.5 International climate cooperation

Linkage can transform isolated national or regional markets into a broader international carbon-pricing architecture.

This creates an important distinction:

Global carbon-market governance does not necessarily require one global carbon market.

A network of legally coordinated national and regional markets may be more realistic.

4. Legal Foundations of Linkage Governance

A carbon-market linkage normally requires several layers of law.

Layer 1: Domestic ETS legislation

Each jurisdiction needs legislation governing:

emissions caps;

covered sectors;

allowance issuance;

auctioning;

free allocation;

monitoring;

reporting;

verification;

surrender;

penalties.

For the EU, the principal framework is Directive 2003/87/EC. Article 25 specifically addresses links with other greenhouse-gas emissions trading systems. (EUR-Lex)

Layer 2: International agreement

The participating jurisdictions may conclude a bilateral or multilateral agreement establishing:

mutual recognition;

compatibility requirements;

registry arrangements;

institutional cooperation;

information exchange;

dispute settlement;

amendment procedures.

Layer 3: Administrative rules

Regulators must establish detailed rules for:

account management;

verification;

reporting;

transactions;

compliance;

market supervision.

Layer 4: Technical infrastructure

Finally, the systems need interoperable registries and secure communications.

The EU–Swiss arrangement, for example, established a direct registry link enabling transfers between the EU and Swiss systems. (EUR-Lex)

5. Compatibility: The Core Principle

The most important principle in linkage governance is regulatory compatibility.

The EU–Swiss Agreement contains essential criteria designed to ensure compatibility, while permitting either system to adopt stricter requirements. (EUR-Lex)

Compatibility generally concerns:

A. Comparable emissions caps

The participating systems should establish credible limits on emissions.

B. Mandatory participation

The relevant system should impose legally enforceable obligations.

C. Comparable MRV

Monitoring, reporting and verification must be reliable.

D. Environmental integrity

An allowance should not acquire international compliance value merely because another jurisdiction has weaker standards.

E. Enforcement

Non-compliance must produce meaningful legal consequences.

F. Registry security

Transfers must be accurately recorded and protected against unauthorized transactions.

G. Market integrity

Rules must address:

manipulation;

fraud;

insider dealing;

abusive trading.

Thus, linkage is not simply technological interoperability; it is regulatory interoperability.

6. EU–Switzerland: The Leading Example

The EU–Switzerland ETS linkage is one of the most important examples of operational carbon-market linkage.

The agreement was signed in 2017 and entered into force on 1 January 2020. It allows allowances issued under one system to be used for compliance under the other, subject to the agreement's requirements. (EUR-Lex)

The systems nevertheless remain legally separate.

This demonstrates a crucial governance principle:

Integration of markets does not require integration of sovereign legal systems.

The agreement establishes:

mutual recognition;

compatibility criteria;

information sharing;

institutional coordination;

registry arrangements;

technical rules;

dispute settlement.

The Joint Committee established by the Agreement plays an important continuing governance role. (EUR-Lex)

7. Case Law: Commission v Council, C-425/13

Facts

In European Commission v Council of the European Union, Case C-425/13, the dispute concerned a Council decision authorizing negotiations concerning the linking of the EU ETS with an Australian emissions-trading system. (EUR-Lex)

The Commission challenged aspects of the Council's decision concerning the negotiating process.

Judgment

The Court of Justice examined the institutional balance between the EU institutions in the negotiation of international agreements.

The Court emphasized that Article 218 TFEU provides a general constitutional framework for negotiating and concluding international agreements and that the institutions must respect their respective powers and the principle of sincere cooperation. (EUR-Lex)

Importance for carbon-market governance

The case establishes an important governance principle:

International carbon-market linkage is also a question of constitutional and institutional authority.

A government or regulator cannot simply create an international carbon-market linkage without determining:

who has authority to negotiate;

who authorizes negotiations;

who concludes the agreement;

which legislature must approve it;

how regulatory amendments are handled.

Therefore, linkage governance has both environmental and constitutional dimensions.

8. Article 25 of the EU ETS Directive

Article 25 provides a specific legal basis for linking the EU ETS with other emissions-trading systems.

It contemplates recognition of allowances between the EU system and compatible mandatory greenhouse-gas emissions-trading systems with absolute emissions caps established in other countries or sub-federal/regional entities. (EUR-Lex)

This provision is important because it shows that linkage is legally conditional.

The EU does not simply say:

"Any carbon unit from any foreign market is automatically valid."

Instead, the foreign system must satisfy compatibility requirements.

9. Case Law: Swiss International Air Lines, C-272/15

Another relevant case is Swiss International Air Lines AG v Secretary of State for Energy and Climate Change and Environment Agency, Case C-272/15.

The case concerned the application of EU ETS aviation rules and the treatment of Switzerland in the context of the EU's temporary aviation derogation.

The Court considered whether the different treatment of Switzerland violated the principle of equal treatment and concluded that the relevant distinction was legally permissible.

Relevance

Aviation demonstrates why carbon-market linkage can become complicated.

International flights involve:

territorial jurisdiction;

overlapping regulatory authority;

different national ETSs;

international aviation rules;

questions concerning geographical coverage.

The EU–Swiss linkage therefore specifically addresses aviation coverage and seeks to maintain comparable rules. (EUR-Lex)

10. Registry Governance

A linked carbon market requires a reliable system for recording ownership and transfers.

The registry performs functions similar to a financial securities registry.

It must establish:

account ownership;

allowance issuance;

transfers;

surrender;

cancellation;

transaction history.

The EU–Swiss linkage required the creation of a direct connection between the EU Transaction Log and the Swiss registry infrastructure. (EUR-Lex)

This produces an important legal principle:

A carbon allowance has little practical international value without legally reliable ownership and transfer records.

11. Market Integrity

Carbon allowances increasingly interact with financial markets.

Consequently, global linkage governance must address:

Market manipulation

Artificially influencing allowance prices.

Insider dealing

Using confidential regulatory or market information for trading advantage.

Fraud

Creating or transferring invalid units.

Cybersecurity

Unauthorized access to carbon registries.

Money laundering

Carbon-market transactions may require financial-crime controls.

A linked market increases the importance of these problems because misconduct in one jurisdiction can potentially affect participants elsewhere.

12. Environmental Integrity

Environmental integrity is arguably the fundamental condition for legitimate carbon-market linkage.

Consider two systems:

System A

strict MRV;

independent verification;

declining cap;

strong enforcement.

System B

weak verification;

unreliable emissions data;

excessive allowance issuance.

If B's units are freely accepted in A, the environmental effectiveness of A can potentially be weakened.

Therefore, linkage agreements normally require minimum standards.

The EU–Swiss model expressly establishes essential compatibility criteria and provides for continuing information exchange concerning legislative developments. (EUR-Lex)

13. Double Counting

At the global level, carbon-market linkage creates a major accounting issue:

double counting.

Suppose Country A generates a mitigation outcome of:

1 million tonnes CO₂e

It transfers the outcome to Country B.

If both countries count the same mitigation toward their respective climate commitments, the same environmental outcome has effectively been claimed twice.

The Paris Agreement's Article 6.2 framework therefore requires corresponding adjustments for relevant ITMO transfers.

The UNFCCC explains that corresponding adjustments are intended to ensure transparency, accuracy, completeness, comparability and consistency and to reflect transfers in accounting toward NDCs. (UNFCCC)

14. ETS Linkage vs Article 6.2

These concepts must be carefully distinguished.

The distinction is essential because not every international carbon transfer constitutes an ETS linkage.

15. Corresponding Adjustments

Under Article 6.2, when an ITMO is transferred, the transferring and acquiring countries must account appropriately for that transfer.

The UNFCCC describes the basic principle as adjusting the relevant emissions balance to reflect the export or acquisition of mitigation outcomes. (UNFCCC)

This can be represented simply as:

Country A reduces emissions → transfers mitigation outcome → Country B acquires it

Accounting must ensure:

A cannot continue claiming the transferred mitigation + B cannot claim the same mitigation independently.

Thus:

Corresponding adjustment = legal/accounting safeguard against double claiming.

16. Governance of Carbon-Market Linkage

A mature linkage framework generally requires at least seven governance components.

1. Legislative compatibility

Domestic laws must remain sufficiently compatible.

2. Joint institutional governance

A joint committee or equivalent body should oversee implementation.

3. Regulatory coordination

Participants must exchange information concerning important legislative changes.

4. Technical interoperability

Registries must communicate securely.

5. Market surveillance

Trading must be monitored.

6. Dispute settlement

Disputes require a predictable process.

7. Suspension mechanisms

The parties need safeguards where compatibility or environmental integrity deteriorates.

The EU–Swiss Agreement incorporates these kinds of mechanisms, including Joint Committee coordination and dispute settlement. (EUR-Lex)

17. Dispute Settlement

A linkage agreement should determine what happens if the parties disagree.

The EU–Swiss Agreement provides for disputes concerning interpretation or application to be referred to the Joint Committee; if the dispute remains unresolved for six months, it may be referred to the Permanent Court of Arbitration at the request of either party. (EUR-Lex)

This is important because carbon-market rules are highly technical.

Disputes may concern:

allowance eligibility;

registry transactions;

aviation coverage;

regulatory amendments;

compliance;

environmental standards.

18. Dynamic Governance

Carbon markets are not static.

Governments continuously modify:

emissions caps;

allocation rules;

covered sectors;

auctioning;

aviation rules;

monitoring standards;

financial-market regulation.

Therefore, a linkage agreement must accommodate regulatory evolution.

The EU–Swiss Agreement permits future legislative developments while maintaining compatibility requirements. (EUR-Lex)

The EU–Swiss Joint Committee continues to amend the agreement's technical and regulatory framework; for example, a Joint Committee decision dated 9 June 2026 amended Annex I. (EUR-Lex)

This demonstrates that linkage governance is a continuous regulatory process, rather than a one-time treaty.

19. Suspension and Termination

A well-designed linkage agreement should permit suspension where serious problems arise.

Possible grounds include:

material regulatory divergence;

failure of MRV;

registry compromise;

serious market manipulation;

environmental-integrity concerns;

persistent non-compliance.

This creates a balance:

Integration ↔ regulatory autonomy

A jurisdiction should be able to protect its environmental system without unnecessarily destroying the stability of the linked market.

20. India and Future Carbon-Market Linkage

India's development of its domestic carbon-market framework makes international linkage legally significant.

Future Indian linkage arrangements could potentially involve:

Model 1 — Bilateral ETS linkage

Indian carbon market ↔ foreign ETS

Model 2 — Article 6.2 cooperation

India ↔ foreign country → ITMO transfer

Model 3 — Regional linkage

Several Asian carbon markets could eventually develop mutually recognized units.

Important Indian legal questions would include:

Who may authorize international transfers?

Which carbon units are eligible?

How will corresponding adjustments operate?

How will double counting be prevented?

Which authority maintains the registry?

How will exporters and industries be regulated?

How will domestic climate accounting interact with international transfers?

What happens if a foreign linked system changes its rules?

These questions demonstrate that carbon-market linkage is simultaneously an energy-law, environmental-law, international-law and financial-regulation issue.

21. Major Legal Challenges

A. Regulatory divergence

Two linked systems may gradually develop different rules.

B. Carbon-price shocks

A major policy change in one jurisdiction can influence the linked market.

C. Environmental integrity

Weak units may undermine confidence in the entire system.

D. Sovereignty

Countries may be reluctant to allow foreign regulatory changes to influence domestic carbon prices.

E. Double counting

Different accounting methodologies can produce conflicting claims.

F. Registry cybersecurity

Digital market infrastructure becomes critical.

G. Distributional impacts

Carbon prices can affect industries, electricity prices, consumers and employment.

H. Enforcement

Cross-border violations create jurisdictional problems.

22. Principles for Effective Global Carbon-Market Governance

A sound legal framework should incorporate:

Environmental integrity

Transparency

Comparable MRV

Secure registries

Accurate accounting

Anti-double-counting mechanisms

Market surveillance

Clear institutional competence

Effective dispute settlement

Regulatory flexibility

Suspension safeguards

Respect for national sovereignty

Equitable participation

Public accountability

These principles help ensure that economic integration does not undermine the environmental purpose of carbon pricing.

23. Important Case Laws and Their Principles

The first two are judicial decisions; the EU–Swiss instrument and Article 6 framework are legal/regulatory instruments rather than case law. This distinction is important in legal research.

24. Conclusion

Global carbon-market linkage governance is the legal architecture through which separate carbon markets become interoperable while retaining their independent regulatory institutions.

The central lesson from the EU experience is that successful linkage requires considerably more than permission to trade carbon units. It requires:

compatible legislation + environmental integrity + MRV + registry interoperability + market surveillance + institutional cooperation + accounting safeguards + dispute settlement.

The C-425/13 Commission v Council judgment demonstrates that international ETS linkage raises questions of institutional competence and treaty-making authority. (EUR-Lex)

The EU–Switzerland linkage demonstrates how two separate ETSs can function as a linked market while retaining separate legal systems, with compatibility requirements, technical registry connections, Joint Committee governance and dispute-settlement mechanisms. (EUR-Lex)

At the broader international level, Paris Agreement Article 6.2 introduces corresponding adjustments and enhanced accounting requirements to prevent transferred mitigation outcomes from being counted inconsistently toward national climate targets. (UNFCCC)

Accordingly, the emerging model of global carbon-market governance is best understood not as a single worldwide carbon exchange, but as a network of legally coordinated national and regional carbon markets governed by common principles of compatibility, environmental integrity, transparency, accounting accuracy and institutional accountability.