What if global emission trading became mandatory? [36]

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Summary of the Article:

Mandating a global emissions trading system (ETS) would synchronize carbon prices, accelerate least‑cost abatement, and unlock capital flows from high‑emitting to low‑cost mitigation regions. Yet success would hinge on credible caps, robust MRV (monitoring, reporting, verification), market integrity, and equity mechanisms for developing economies. Existing blueprints—EU ETS, China’s expanding ETS, Article 6 under the Paris Agreement, and sectoral mechanisms like CORSIA—show feasibility and pitfalls. For India, compulsion would intersect with the Carbon Credit Trading Scheme (CCTS) and EU CBAM exposure, demanding rapid alignment of baselines, registry, and verification, plus targeted industrial decarbonization (steel, aluminum, cement). Immediate priorities: harden data and governance, ring‑fence revenues for transition, and negotiate Article 6 rules that recognize domestic intensity‑based pathways. [climate.ec.europa.eu], [icapcarbonaction.com], [unfccc.int], [icapcarbonaction.com], [worldbank.org]

Market Context

Carbon pricing is scaling but fragmented. As of 2024–25, carbon pricing revenues topped US$104 billion, with 75 instruments (ETS and taxes) covering ~24% of global emissions; however, fewer than 1% of emissions are priced in the range consistent with Paris goals. A mandatory global ETS could close this coverage and price gap. [worldbank.org]

ETS momentum is clear. The ICAP Status Report 2025 records 38 ETSs in force and ~20 in development, with growing participation from emerging economies; design reforms aim at net‑zero alignment and leakage mitigation (e.g., CBAMs). [icapcarbonaction.com]

Demonstrated performance exists. The EU ETS, operating since 2005 and now in Phase IV, has driven material reductions in power and industrial emissions; reforms such as the Market Stability Reserve and cap “rebasing” strengthened price signals and curtailed surplus. [climate.ec.europa.eu], [link.springer.com]

China’s market is scaling up. Launched nationally in 2021, China’s ETS—already the world’s largest by coverage—is expanding beyond power to steel, cement, and aluminum, with strengthened legal underpinnings and heightened penalties; an absolute cap is under consideration. [icapcarbonaction.com], [ieta.org], [ieefa.org]

International frameworks are readying. Article 6 governs international carbon cooperation (bilateral ITMOs via 6.2; centralized crediting via 6.4), with rulebook maturation accelerating post‑COP26 and into 2025–26. [unfccc.int], [energypoli...lumbia.edu]

Technology / Regulatory Landscape

Regulatory pillars for a mandatory global ETS would rest on:

  1. Cap setting and allocation. Transitioning from intensity‑based limits (common in emerging markets) to absolute declining caps is crucial for environmental certainty. The EU reform experience and China’s path toward absolute caps offer templates. [link.springer.com], [ieefa.org]

  2. MRV infrastructure. Uniform accounting aligned with IPCC methods and UNFCCC Article 6 guidance would be vital to prevent double counting and ensure fungibility. Current MRV under EU ETS and CORSIA shows scalable practice. [unfccc.int], [eur-lex.europa.eu]

  3. Market integrity & supervision. Preventing overallocation, fraud, and volatility requires features such as market stability reserves, transparent registries, and strong enforcement—areas in which the EU has iterated reforms; China has tightened penalties and registry rules. [climate.ec.europa.eu], [icapcarbonaction.com]

  4. International linkages and Article 6 operationalization. A mandatory regime would need clear corresponding adjustment rules and ITMO transfer protocols. Recent analyses recommend closing governance and capacity gaps for scale. [energypoli...lumbia.edu], [fsr.eui.eu]

  5. Sectoral coverage. Power and heavy industry must be covered early; aviation (via CORSIA) and maritime can be integrated, with harmonized crediting methodologies. [icao.int], [philiplee.ie]

Economics

Cost‑effectiveness. A global ETS equalizes marginal abatement costs, shifting reductions to where they are cheapest while maintaining environmental certainty through the cap. Evidence from the EU ETS attributes substantial power‑sector fuel switching and emissions declines to the carbon price signal, augmented by renewables policies. [carbon-pulse.com]

Revenue and recycling. Carbon pricing generated US$104 billion in 2023, with over half recycled to climate and nature programs. Under a global mandate, auction revenues could scale dramatically; recycling to households, SMEs, and strategic industries is central to public acceptability. [worldbank.org]

Trade and CBAMs. In the absence of harmonized pricing, border adjustments (EU CBAM) will proliferate to address leakage. A global ETS could reduce the need for CBAMs by aligning effective carbon costs, but transitional arrangements and sector benchmarks would still matter. [taxation-c....europa.eu], [mayerbrown.com]

Price sufficiency. The IPCC AR6 underscores that prices remain below Paris‑consistent levels; a mandatory regime would need price floors or cap trajectories aligned with 1.5–2 °C pathways, complemented by standards and investments. [ncalf.org]

Aviation illustration. CORSIA indicates how sectoral MBMs create offset demand; as CORSIA tightens and shifts toward mandatory coverage post‑2027, a global ETS could consolidate aviation pricing under a uniform cap‑and‑trade umbrella, improving efficiency and integrity. [icao.int], [resources....rbon.earth]

Risks

  1. Environmental integrity. Weak baselines, double counting, and low‑quality credits could undermine impact—historic critiques of offset markets inform Article 6 guardrails; robust supervisory bodies are essential. [energypoli...lumbia.edu]
  2. Equity and distribution. Uniform pricing can be regressive across countries and households. Without revenue‑sharing and transition finance, mandatory participation might face political pushback in developing economies. ICAP notes reinvesting auction proceeds is key to legitimacy. [icapcarbonaction.com]
  3. Competitiveness & leakage. Until global coverage is comprehensive, exposed sectors may lobby for free allocation or rebates; poorly designed protections can dilute incentives. CBAM interplay needs careful calibration. [taxation-c....europa.eu], [mayerbrown.com]
  4. Market volatility & governance. Oversupply (as seen in early EU phases) or data issues (a risk in rapidly scaling systems) can depress prices; stability mechanisms and strong MRV reduce these risks. [climate.ec.europa.eu]
  5. Implementation capacity. Uniform MRV, registries, and verification in scores of jurisdictions require significant technical assistance—especially to align with Article 6 accounting. [unfccc.int]

India‑Specific Implications

Regulatory alignment is already underway. India’s Carbon Credit Trading Scheme (CCTS) establishes a national framework with compliance and offset mechanisms, administered by BEE with CERC overseeing power‑exchange trading of Carbon Credit Certificates. Initial cycles set GHG intensity targets for obligated entities, with sectoral rollout. A mandatory global ETS would pressure India to: (i) shift from intensity to absolute caps for selected sectors; (ii) ensure corresponding adjustments for any export of credits under Article 6; and (iii) align MRV with international protocols. [pwc.in], [beeindia.gov.in], [beeindia.gov.in]

PAT to CCTS transition. India’s long‑running Perform‑Achieve‑Trade (PAT) scheme delivered measurable energy‑efficiency savings but faced issues (oversupply, delays). Lessons can inform CCTS rule‑setting (tighter baselines, timely issuance, and compliance penalties), which will be critical if credits are fungible globally. [beeindia.gov.in], [pib.gov.in], [energy.pra...aspune.org]

Trade exposure via CBAM. From 2026, EU CBAM imposes costs on steel, aluminum, cement, fertilizers, hydrogen, electricity, and is poised to expand to downstream metal‑intensive goods. Unless India’s domestic carbon costs are recognized (and effectively priced/verified), exporters will face EU ETS‑indexed levies, eroding margins; a global ETS could reduce this wedge if mutual recognition and price convergence occur. [taxation-c....europa.eu], [mayerbrown.com], [esgtimes.in]

Industrial decarbonization priorities.

  • Steel: Blast‑furnace routes at ~2–2.6 tCO₂/t steel face steep CBAM liabilities; accelerated shift to DRI‑EAF with green H₂, scrap utilization, and waste‑heat recovery will be essential under any mandatory trading. [policycircle.org]
  • Aluminum: Coal‑based power in smelters is CBAM‑sensitive; renewable PPAs, inert anodes, and process electrification can mitigate exposure. [insights.c...decode.com]
  • Cement: Clinker substitution, CCUS pilots, and alternative fuels will help meet tighter benchmarks and reduce compliance costs. [policycircle.org]

Macro‑fiscal design. Revenue from allowance auctions (if adopted) could finance industrial transition funds, DISCOM‑integrated renewable corridors, and social protection for workers in coal regions—aligning with India’s just transition priorities. [worldbank.org]

International positioning. India should leverage Article 6 to sell high‑integrity mitigation outcomes (renewables integration, methane abatement, nature‑based solutions with safeguards) while insisting on development‑compatible accounting (e.g., preserving NDC headroom, avoiding punitive adjustments). [unfccc.int], [energypoli...lumbia.edu]

Strategic Recommendations

For global policymakers (UNFCCC Parties):

  1. Anchor a global cap pathway: Negotiate an aggregate declining cap consistent with AR6 pathways, then allocate jurisdictional budgets with convergence over time; adopt price‑floor cooperation to reduce volatility and ensure ambition. [ncalf.org]
  2. Operationalize Article 6 at scale: Finalize ITMO registries, default corresponding adjustment rules, and standardized baselines/methodologies supervised by the Article 6.4 Supervisory Body. [unfccc.int]
  3. Integrity and equity package: Mandate MRV standards, independent verification, and grievance redress; earmark a share of auction revenues for Loss & Damage / adaptation and capacity building in low‑income countries. [icapcarbonaction.com]
  4. Rationalize CBAMs: Establish transition arrangements whereby CBAMs are phased down as jurisdictions join the global ETS and meet equivalence criteria; prevent double charging. [taxation-c....europa.eu]

For India (Union Government, BEE, MoP, MoEFCC):

  1. Harden CCTS architecture (12–18 months). Publish sector‑wise absolute cap pilots (steel, cement, refineries) while retaining intensity targets in other sectors; finalize MRV rulebook aligned to IPCC and Article 6; enable monthly trading, limited banking, and graduated penalties. [pwc.in], [beeindia.gov.in]
  2. De‑risk industrial decarbonization. Launch a Carbon Contracts for Difference (CCfD) window for green steel (DRI‑EAF + H₂), low‑carbon aluminum (renewable PPAs), and low‑clinker cement; stack with PLI‑like incentives and concessional finance. Tie CCfDs to verified emissions reductions recognized under Article 6. [unfccc.int]
  3. CBAM playbook for exporters (2026 readiness). Mandate installation‑level emissions accounting to EU‑comparable standards; set up a CBAM helpdesk and a verification pool to lower compliance costs; pursue equivalence dialogues to recognize CCTS payments where feasible. [taxation-c....europa.eu], [mayerbrown.com]
  4. Revenue recycling & social protection. Commit (ex‑ante) to recycle ≥50% of auction proceeds to (i) household rebates for vulnerable groups, (ii) coal‑region transition funds, and (iii) grid investments that enable RE integration and firming (BESS/DSM). Evidence shows earmarking boosts public acceptability. [worldbank.org], [icapcarbonaction.com]
  5. Position under Article 6. Prioritize high‑integrity ITMO supply (renewables firming, industrial gases, methane), with robust benefit‑sharing and safeguards for communities. Ensure corresponding adjustments protect India’s NDC headroom. [unfccc.int]

For Indian industry (steel, aluminum, cement, refineries):

  • Abatement curves now: Map marginal abatement cost portfolios (energy efficiency, electrification, fuel switch, CCS pilots), sequencing quick‑win retrofits before capital‑intensive shifts. Use CCTS/CfDs to bridge viability gaps. [pwc.in]
  • Data discipline: Build site‑level MRV (ISO‑aligned), assurance, and product‑carbon‑footprint disclosures to meet both CCTS and CBAM/CORSIA buyers’ expectations. [taxation-c....europa.eu], [eur-lex.europa.eu]
  • Hedging & procurement: Develop carbon risk management—forward purchases of allowances/credits where permitted; lock in renewable PPAs and green H₂ offtake MOUs tied to future compliance trajectories. [taxation-c....europa.eu]

Conclusion

A mandatory global ETS is not a silver bullet but remains the most scalable economic instrument to drive least‑cost, verifiable emissions cuts while mobilizing private capital. The building blocks exist—EU ETS and China’s ETS demonstrate operational feasibility; Article 6 provides the legal and accounting spine; and sectoral MBMs like CORSIA can be folded in. For India, the imperative is to professionalize CCTS, de‑risk industrial transitions, and protect trade competitiveness amid CBAMs—turning compulsion into strategic advantage. [climate.ec.europa.eu], [icapcarbonaction.com], [unfccc.int], [taxation-c....europa.eu]

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