1. Introduction

Global carbon market linkage governance refers to the legal and institutional arrangements through which separate carbon-pricing or emissions-trading systems are connected so that emission allowances or mitigation outcomes generated under one system can be recognised, transferred, or used for compliance in another.

Carbon markets have developed through different national and regional approaches. The European Union operates the EU Emissions Trading System (EU ETS), while Switzerland, China, South Korea, New Zealand, Canada, Japan and several subnational jurisdictions have developed their own emissions-trading systems. The EU expressly recognises the possibility of linking its ETS with compatible systems in other jurisdictions. (Climate Action)

The central legal problem is that one tonne of carbon reduction must have sufficiently comparable environmental and accounting value across jurisdictions. Linkage therefore requires more than permission to trade. It requires common rules concerning monitoring, reporting and verification (MRV), allowance validity, registry systems, compliance, accounting, enforcement and protection against double counting.

At the international level, Article 6 of the Paris Agreement provides an important framework. Article 6.2 governs internationally transferred mitigation outcomes (ITMOs), Article 6.4 establishes a UNFCCC crediting mechanism, and Article 6.8 addresses non-market cooperation. (UNFCCC)

2. Meaning of Carbon Market Linkage

Carbon-market linkage can take several forms:

A. Direct ETS linkage

Two emissions-trading systems mutually recognise each other's allowances.

For example, the EU ETS and Swiss ETS are formally linked. Their linking agreement entered into force on 1 January 2020, and allowances from each system can be used for compliance in the other system. Physical transfers between the two registries became possible from September 2020. (Climate Action)

B. Unilateral recognition

One jurisdiction may recognise allowances or credits from another system without receiving reciprocal recognition.

C. Bilateral Article 6 cooperation

Two states may cooperate under Article 6.2 of the Paris Agreement and authorise transfers of mitigation outcomes, subject to the applicable accounting and reporting requirements.

D. Multilateral linkage

Several carbon markets can potentially be integrated through common rules or a shared institutional framework.

Thus, linkage exists on a spectrum ranging from simple recognition of foreign units to deep institutional integration.

3. Legal Foundations of Global Carbon-Market Linkage

3.1 Paris Agreement

The Paris Agreement is increasingly important to global carbon-market governance.

Article 6 creates three principal forms of cooperation:

Article 6.2 — cooperative approaches involving internationally transferred mitigation outcomes;

Article 6.4 — a UNFCCC mechanism for generating and transferring mitigation units;

Article 6.8 — non-market approaches. (UNFCCC)

At COP26 in Glasgow, the CMA adopted Decision 2/CMA.3, providing guidance on Article 6.2 cooperative approaches. (UNFCCC)

The importance of this framework is that international carbon trading cannot simply operate as an ordinary commodity market. Transfers can affect the accounting of national climate targets.

4. Corresponding Adjustments

One of the most important governance mechanisms is the corresponding adjustment.

Suppose:

Country A reduces emissions by 1 million tonnes;

it transfers 100,000 tonnes of mitigation outcomes to Country B;

Country B uses those units toward its climate target.

If Country A continues counting the same 100,000 tonnes toward its own target, the same reduction could effectively be counted twice.

Corresponding adjustment is designed to address this problem.

Conceptually:

Transfer of a mitigation outcome → adjustment of the transferring Party's accounting → prevention of double counting.

This makes accounting integrity fundamental to international carbon-market linkage.

The Article 6.2 guidance specifically addresses accounting, reporting and transparency for internationally transferred mitigation outcomes. (UNFCCC)

5. Environmental Integrity

Linkage requires confidence that an allowance or mitigation unit represents a comparable environmental value.

Important governance questions include:

Is the emissions cap sufficiently stringent?

Are reductions actually additional?

Are emissions accurately measured?

Are baselines credible?

Are credits over-issued?

Are removals permanent?

Is double counting prevented?

Are compliance penalties effective?

The EU has therefore identified compatibility and environmental integrity as important conditions for linking the EU ETS with another ETS. The EU framework refers, among other things, to comparable environmental integrity, mandatory participation and an absolute emissions cap. (Climate Action)

6. MRV Governance

Monitoring, Reporting and Verification (MRV) is the technical foundation of carbon-market linkage.

A linked system needs reliable rules for:

Monitoring

Operators measure emissions according to prescribed methodologies.

Reporting

Operators submit emissions reports to regulatory authorities.

Verification

Independent verification ensures that reported data meet regulatory requirements.

Without compatible MRV standards, one jurisdiction could effectively recognise emission reductions that another jurisdiction would not accept as reliable.

Therefore, linkage agreements commonly require:

common technical standards;

compatible monitoring methodologies;

verification requirements;

registry interoperability;

information exchange;

audit procedures.

7. Registry Governance

Carbon-market linkage also requires interoperable electronic registries.

A registry records:

ownership of allowances;

transfers;

cancellations;

surrender;

retirement;

compliance status.

The EU-Swiss arrangement demonstrates the importance of registry governance. Following the linking agreement, transfers between the two systems became operational through their registries. (Climate Action)

Registry linkage raises legal questions involving:

cybersecurity;

fraud;

unauthorised transfers;

data integrity;

identity verification;

reversal of erroneous transactions;

jurisdiction over disputes.

Consequently, technical interoperability becomes a question of administrative and international law.

8. Institutional Governance

A linked carbon market requires an institution capable of maintaining the relationship.

The EU-Swiss system provides a useful example. Its Joint Committee plays an important role in administering the linkage.

The Committee has adopted decisions concerning:

compatibility of the two systems;

common operational procedures;

amendments to annexes;

linking technical standards;

continuing operation of the linkage. (Climate Action)

This illustrates an important principle:

Carbon-market linkage is not a one-time treaty event; it requires continuing institutional governance.

Markets evolve. New sectors may be added, allocation rules may change, registries may be upgraded and climate targets may become more stringent.

9. Market-Price Convergence

One potential consequence of linkage is greater convergence in carbon prices.

If two markets are fully linked:

Low-price market → allowances may flow outward

High-price market → allowances may flow inward

Arbitrage can therefore reduce price differences.

However, this creates governance challenges.

A weaker carbon market may effectively import a lower level of climate ambition into a stronger market.

Therefore, regulators must consider:

cap stringency;

allowance supply;

price-control mechanisms;

market-stability reserves;

banking and borrowing;

free allocation;

sectoral coverage.

10. Carbon Leakage

Linkage is also connected with carbon leakage.

Carbon leakage occurs where climate regulation in one jurisdiction causes emissions-intensive production to move to another jurisdiction with weaker carbon constraints.

Linked carbon markets may reduce some competitive distortions by creating more comparable carbon prices.

However, linkage does not automatically eliminate leakage. Differences in:

electricity prices;

industrial regulation;

free allocation;

energy taxes;

labour costs;

technological capacity

can remain.

11. Legal Compatibility

A particularly important principle is legal compatibility.

Before two systems can be linked, regulators must determine whether their legal frameworks are sufficiently compatible.

This includes:

Substantive compatibility

Do both systems regulate comparable emissions?

Institutional compatibility

Do regulatory authorities have comparable powers?

Enforcement compatibility

Are violations subject to meaningful sanctions?

Procedural compatibility

Are monitoring and verification processes sufficiently similar?

Market compatibility

Can allowances be transferred without undermining either system?

International-law compatibility

Can the linkage agreement operate consistently with international climate obligations?

The EU's own framework expressly identifies system compatibility as a condition for linkage. (Climate Action)

12. Important Case Laws

Because global carbon-market linkage is relatively new, there are few judicial decisions directly deciding an international ETS-linkage dispute. However, European emissions-trading jurisprudence has developed important principles that are relevant to linkage governance.

Case 1: Arcelor Atlantique et Lorraine v Premier Ministre, C-127/07 (2008)

The Court of Justice considered the EU emissions-trading system and the principle of equal treatment.

The dispute concerned why certain industrial sectors were included in the EU ETS while other sectors were initially excluded.

The Court examined whether the different treatment was objectively justified. (InfoCuria)

Significance

The case demonstrates that carbon-market design must respect fundamental principles of EU law, particularly:

equality;

proportionality;

objective justification;

legislative discretion.

For international linkage, this suggests that differences between participating systems must have a rational environmental and regulatory justification.

Case 2: Arcelor SA v European Parliament and Council, T-16/04 (2010)

Arcelor challenged the EU emissions-trading framework on several grounds, including:

property rights;

freedom to pursue a trade or profession;

proportionality;

equal treatment;

legal certainty.

The General Court dismissed the action for annulment as inadmissible and rejected the damages claim as unfounded. (InfoCuria)

Significance for carbon-market governance

The case illustrates the legal importance of:

proportionality;

legal certainty;

market regulation;

protection of economic rights;

legislative discretion in environmental regulation.

These principles become especially important when linking markets because cross-border carbon pricing can materially affect businesses.

Case 3: ArcelorMittal Rodange and Schifflange v Luxembourg, C-321/15 (2017)

This case concerned the consequences of the cessation of activities at an installation and the treatment of unused emission allowances.

The Court examined Articles 3(a), 11 and 12 of the EU ETS Directive and the overall logic of the emissions-trading scheme. (InfoCuria)

Significance

The decision demonstrates that emission allowances are legal instruments governed by the architecture and objectives of the emissions-trading regime.

This is important for linked markets because the legal consequences of:

holding;

transferring;

surrendering;

cancelling

allowances must be clearly determined.

Case 4: ArcelorMittal Atlantique et Lorraine, C-80/16 (2017)

The Court considered the validity of EU rules governing free allocation of emission allowances and industrial benchmarks.

The dispute concerned methodology for determining benchmarks in the steel sector. (InfoCuria)

Significance

This case illustrates the importance of consistent methodologies.

For linked carbon markets, comparable methodologies are essential because different allocation or benchmarking methods can materially affect:

allowance supply;

competitiveness;

carbon prices;

market behaviour.

Case 5: Nitrogénművek, C-519/24 (2026)

A more recent Court of Justice judgment concerns a Hungarian tax imposed on CO₂ emission allowances.

The Court stated that a national law neutralising the compensatory effect of free allocation appears contrary to EU law, subject to verification by the national court. The Court emphasised the EU ETS objectives of substantially reducing greenhouse-gas emissions while preserving internal-market integrity and competitive conditions. (curia)

Significance

The case is relevant to carbon-market governance because it illustrates the interaction between:

carbon allowances;

national fiscal measures;

free allocation;

market integrity;

EU-wide emissions-trading objectives.

It shows that national measures affecting allowances cannot necessarily be treated as independent from the legal architecture of the ETS.

13. EU–Swiss Linkage as a Governance Model

The EU-Swiss ETS linkage is the clearest practical example of formal international ETS linkage.

The agreement was signed in 2017 and entered into force on 1 January 2020. Switzerland retained its separate ETS while establishing mutual recognition of allowances. (Climate Action)

The arrangement includes:

Separate national/regional systems

↓

International linking agreement

↓

Joint Committee

↓

Common operational procedures

↓

Technical linking standards

↓

Interoperable registries

↓

Mutual recognition of allowances

↓

Cross-border compliance

This model demonstrates that market linkage does not necessarily require creating one global carbon market. Separate jurisdictions can retain regulatory autonomy while establishing controlled interoperability.

14. Major Governance Challenges

14.1 Double counting

This is one of the most important challenges under Article 6.

The same mitigation result must not be claimed simultaneously by:

the host country;

the acquiring country;

another carbon-market participant.

Article 6 accounting rules are therefore central to global linkage. (UNFCCC)

14.2 Different levels of ambition

If one market has a stringent cap and another has a weak cap, unrestricted linkage could undermine environmental integrity.

14.3 Carbon-price shocks

Linkage can transmit price changes between jurisdictions.

14.4 Regulatory sovereignty

States may hesitate to allow foreign regulatory decisions to affect domestic compliance obligations.

14.5 Enforcement

A linked market requires confidence that violations will be detected and sanctioned.

14.6 Data integrity and cybersecurity

Cross-border registries create additional technical and legal vulnerabilities.

14.7 Human rights and social safeguards

International carbon-market governance increasingly intersects with rights of:

Indigenous peoples;

local communities;

workers;

vulnerable populations.

The Article 6.2 framework itself recalls the importance of human rights, Indigenous peoples, local communities, development and other social considerations in climate action. (UNFCCC)

15. Governance Architecture for a Global Carbon Market

A mature global carbon-market framework could contain six interconnected layers:

Layer 1 — International rules

Paris Agreement Article 6 and CMA decisions.

Layer 2 — National legislation

Domestic ETS and carbon-pricing statutes.

Layer 3 — Bilateral/multilateral agreements

Linking agreements between participating jurisdictions.

Layer 4 — Independent regulators

Authorities responsible for compliance and enforcement.

Layer 5 — Market infrastructure

Registries, exchanges, clearing systems and verification institutions.

Layer 6 — Judicial review

Domestic and international legal mechanisms for challenging regulatory decisions.

This produces a polycentric governance model rather than a single global carbon regulator.

16. Role of India

For India, global carbon-market linkage has increasing relevance because India is developing its own Carbon Credit Trading Scheme (CCTS).

Future international interaction raises questions concerning:

recognition of Indian carbon credits;

Article 6 authorisation;

corresponding adjustments;

MRV;

domestic carbon-market integrity;

export of mitigation outcomes;

interaction with India's NDC;

protection against double counting.

The legal challenge will be to balance international market participation with India's domestic climate-accounting requirements and development priorities.

17. Principles of Global Carbon-Market Linkage Governance

A sound governance framework should therefore incorporate:

Environmental integrity

Additionality

No double counting

Transparent MRV

Registry interoperability

Comparable compliance rules

Legal certainty

Proportionality

Equal treatment

Effective enforcement

Transparency

Stakeholder participation

Human-rights safeguards

Protection against market manipulation

Consistency with national climate targets

18. Conclusion

Global carbon-market linkage is fundamentally a legal-governance problem as much as an economic one. Linking markets requires more than allowing carbon units to cross borders. It requires agreement on what constitutes a valid emission reduction, how that reduction is measured, who owns it, how it is recorded, how it is transferred and how it is counted against national climate commitments.

The EU-Swiss ETS linkage provides an important practical model of how separate jurisdictions can preserve their own regulatory systems while establishing mutual recognition, common technical procedures and registry connectivity. (Climate Action)

At the international level, Paris Agreement Article 6 provides the broader framework for cooperative carbon-market activity, with Article 6.2 particularly important for internationally transferred mitigation outcomes and corresponding accounting. (UNFCCC)

The jurisprudence of the CJEU and General Court—particularly Arcelor Atlantique, Arcelor, ArcelorMittal Rodange and Schifflange, and ArcelorMittal Atlantique—shows that emissions trading is subject to principles of equality, proportionality, legal certainty, sound administration and market integrity. (InfoCuria)

Accordingly, the future of global carbon-market linkage will depend on whether jurisdictions can achieve interoperability without sacrificing environmental integrity, regulatory accountability and national legal autonomy.