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Rationale for ETS &Overview of state of ETS worldwideOverview of state of ETS worldwide
Camille Serre, ICAP Secretariat26 January 2015
Rationale for carbon pricing
• More cost-efficient than command-and-control (e.g.: China)
• Need to internalize cost for pollution that is otherwise not taken into account
• Polluter pays principle
• Create revenues for climate action (RGGI, IKI in Germany), redistribution to low-income households, support of other policies…
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to low-income households, support of other policies…
But also…
• Global momentum for putting a price on GHG emissions:
NY Climate Summit in September 2014, World Bank Statement followed by Carbon Pricing Leadership Coalition, issue addressed at the World Economic Forum…
• Why introducing an ETS?
• Environmental considerations
• Economical considerations
• Political considerations
• Look at the “global picture”: growth and diversification of carbon markets
• ETS - a flexible instrument
Overview
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ETS - a flexible instrument
• Overview of ETS worldwide
• Asia Pacific
• Latin America
• North America
• EU and neighbors
Environmental rationale
• „Cap“: Maximum amount of emissions ensures that reductions are achieved with a high degree of certainty
⇒ Emissions targets often are formulated in absolute manner, e.g. California AB32: reduce GHG to 1990 levels by 2020
• Long-term: Possibility of sharpening of cap (vs. raising tax rates)
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• Long-term: Possibility of sharpening of cap (vs. raising tax rates)
⇒ The ETS can adjust to new climate ambitions and to changing international and domestic circumstances
(session on Tuesday about “cap setting” and on Thursday about “ex-post
program changes”)
Economical rationale
• Reductions happen where they are the most cost-efficient:• Within entities covered by ETS (session on Tuesday)• Outside the scope of ETS via (domestic or international) offsets (session on Wednesday)
• Reductions happen when they are the most cost-efficient: companies can adjust their compliance strategy to their needs, within a compliance period and in many operating ETSs across compliance periods (so-
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period and in many operating ETSs across compliance periods (so-called “banking”) (session on Wednesday)
⇒ Environmental target is achieved at the lowest cost to the economy as a whole⇒ Equitable access to least-cost abatement options
Economical rationale (2)
• Instrument automatically adjusts to economic conditions
Carbon price is established by the market:
• In times of economic downturn, emissions are reduced and hence the price falls. >> ETS lowers costs when the economy is at its weakest.
• In turn, when the economy booms, GHG emissions increase and the carbon price rises. >> When there are more capacities, the carbon price ‘bites’ most.
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‘bites’ most.
⇒ Counter-cyclical effect can help achieve macroeconomic stability
Political considerations• Public acceptability:
• Flexibility in the compliance strategy leads to greater political acceptability
• Possibility to take into account distributional issues, various mitigation potentials and competitiveness concerns via allocation method => broader sector coverage possible, rather than exclusion from policy (sessions on Tuesday and Wednesday)
• May allow to gain consensus on higher emissions reduction goals
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• What can better fit international mechanisms?• Alignment with international commitment (e.g. NZL)• Adjustment to the international carbon price(s) via use of
international credits (session on Wednesday)• Possibility of linking: a larger market improves cost effectiveness (session on Thursday)
NB: In practice, choice of instrument often depends on which Ministry/ public authority is in charge and what its competencies are.
Look at the “global picture” - QUIZ
1. How many ETS are in force as at January 2015?a) 10 b) 17 c) 20
2. Jurisdictions with an ETS in force make up: a) 25%, b) 40% or c) 50% of global GDP?
3. ETS can be implemented only on national level: a) True or b) False?
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4. This year, the EU ETS (world’s largest and first international system) turns a) 5 b) 8 or c) 10?
5. Which among these systems are the first three largest carbon markets?a) Shanghai b) EU c) RGGI d) California-Québece) New-Zealand f) Rep. of Korea
Source: Upcoming ICAP Status Report 2015 on Emissions Trading Worldwide
Look at the “global picture”
ETS over the world as at January 2015:
17 systems in operation, 1 scheduled, 14 under consideration
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Source: Upcoming ICAP Status Report 2015 on Emissions Trading Worldwide. See also the ICAP Interactive ETS Map at: https://icapcarbonaction.com/ets-map
Look at the “global picture”
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Source: Upcoming ICAP Status Report 2015 on Emissions Trading WorldwideSource: Upcoming ICAP Status Report 2015 on Emissions Trading Worldwide.
ETS – a flexible instrument
Great diversity in terms of design: No one-size fits all.
• Not only Annex 1 countries, but growingly non-Annex 1 countries introduce (or consider introducing) an ETS to reduce their GHG emissions. Programs can be adapted to suit rapidly developing economies.
• In smaller jurisdictions (Québec, Delaware), megacities and provinces that are economically the size of countries (Tokyo, California) and large, diverse regions (EU)
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diverse regions (EU)
• Adapted for economies that rely on heavy industry, advanced service sectors, or large agriculture and forestry sectors.
• In countries with a high level of renewable energy, as well as those which predominantly rely on coal.
ETS – a flexible instrument
• Considerable flexibility in terms of system size, gas and sector coverage
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Overview of ETS worldwide:Dynamism in Asia
• 9 new systems over the past three years, incl.:
• Republic of Korea
• 7 Chinese Pilot programs
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⇒Most dynamic region
China
• 12th Five Year Plan (2011-2015): gradually build a national market
• Seven pilots selected (city/provincial levels) which started in 2013-14
• Beijing, Shanghai, Tianjin, Chongqing, Shenzhen
• Guangdong, Hubei
• Price ranges from ~20 to 51 RMB/CNY (3.25 to 8.29 USD)
• Uniformity: Direct and Indirect Emissions of CO2, Chinese CERs (with various add. provisions)
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various add. provisions)
• Devolved: Sectoral coverage decisions, Allocation methods, Price stabilization
• National system expected as early as 2016
• Started in January 2015• Legislation passed in May 2012 with bipartisan support
• Building on experience with Target Management System
• Overall GHG reduction goal -30% from BAU (revision of BAU)
• 2nd largest system worldwide: three-year cap of 1.687 billion tons, cap in 2015: 573 MtCO2e
Republic of Korea
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billion tons, cap in 2015: 573 MtCO2e
• 525 business entities from 23 sectors covered
• No international offsets until at least 2020
• Korean CERs
Tokyo
• First ETS on city level and in Asia
• Participants: Industry, large commercial buildings
New Zealand
• Start in 2008, sectors phase-in over time
Further ETS in the Asia Pacific region
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• Transition period with reduced obligation through 2015
• Current prices around 3.80 NZD (3.19 USD)
Australia
• Repeal of CPM/ ETS
• Planned alternative: Emissions Reduction Fund - Financing of reduction projects
Vietnam
• ETS for steel sector in 2020?
Thailand
• Various instruments under development, which may transition into an ETS in the long-term
Further ETS in the Asia Pacific region
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into an ETS in the long-term
Latin America
• Mexico: from carbon tax on fossil fuels to an economy-wide ETS?
• Chile: Carbon tax adopted in 2014 and to enter in force in 2017: USD 5 per ton of CO2 and on particulate matter. 2013: roadmap for ETS introduction with PMR support.
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introduction with PMR support. TBD now with carbon tax.
• Brazil: ETS one of the options under assessment. Current in a holding pattern on local levels (Rio de Janeiro und Sao Paulo)
Regional Greenhouse Gas Initiative (RGGI)
• Started in 2009
• Electricity sector, almost all allowances auctioned
• Positive effect despite low prices
• Reform completed in 2012. Changes include increased cap reduction
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include increased cap reduction
• Prices now USD ~$5.20
California and Québec (WCI)
• Compliance started in 2013
• Members of the Western Climate Initiative (WCI)
• Link effective from 1 January 2014
• First international link (no binding legal contract)
• Mutual recognition of allowances and offsets
• Joint Auctions since late 2014
Current prices around ~$11-12 USD
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• Current prices around ~$11-12 USD
• Linked markets form the 3rd carbon market worldwide
• 2015: Expansion of coverage (fuel distribution)
• ~85% coverage of domestic emissions
National EPA-Clean Power Plan
• Carbon targets set per state based on reasonable ability to implement measures
• „Building blocks“ : Power plant efficiency, low emission generation, renewable energy,
US National Level
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generation, renewable energy, energy efficiency
• States can use collective approach to comply
• Potential to push other states to action
Europe and its periphery (1)
European Union ETS• 28 Member States plus Norway,
Liechtenstein, Iceland• Reform: EU Commission proposal for
2030• 40% reduction (own effort)• Linear reduction path increases from
1.74% to 2.2%• Market stability reserve
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• Market stability reserve
• Prices ~7 EUR• Linking negotiations with Switzerland
Switzerland• Transition from carbon tax with
voluntary ETS (2008) to mandatory ETS in 2013
• Similar design as EU ETS
Europe and its periphery (2)
Kazakhstan• Pilot phase 2013, start 2014• Delay in allocation processes,
regulatory reform• Prices ~$2 – 2.50 USD
Russia
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Russia • ETS under discussion
Ukraine• Development of domestic ETS
stipulated in EU association agreement
• Internationally: expect more clarity on post-2020 international framework
• First and second generation ETS have matured:
• Caps will have started to ‚bite‘, with implications for prices
• CA/QC, Korea, others: offset mechanisms (fully) developed
ETS post-2020 – some possible trends
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• CA/QC, Korea, others: offset mechanisms (fully) developed
• Rising share of auctioned allowances
• Inclusion of additional sectors/gases?
• „Third generation ETS“ on stream? China, Ukraine, Mexico, Chile, Turkey, Thailand, Vietnam, Russia, others?
ICAP - ETS Information Platform
ICAP Interactive ETS Map
• Comprehensive, up to date information about existing and planned ETS
• Ability to compare and download detailed profiles
ICAP Status Report 2015 „Emissions Trading Worldwide“ to be released early February
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• New report on existing and planned ETS, market trends, detailed factsheets, infographics, and articles
Quarterly Newsletter “Global Trends in Emissions Trading”
www.icapcarbonaction.com
Thank you for your attention!
www.icapcarbonaction.comwww.icapcarbonaction.comcamille.serre@icapcarbonaction.com
@ICAPSecretariat