Building a global carbon market

The European Union’s vision

Artur Runge-MetzgerHead of International Climate Negotiations,

European Commission

In-session workshop on means to reach emission reduction targets,

AWG 5.1, Bangkok, 1-3 April 2008

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The EU’s global vision – 2 degrees objective

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Mitigation by industrialised countries

Common but differentiated responsibility: take the lead and make most of the effort

EU commitments: 20% unilaterally by 2020 30% in context global deal 60-80% by 2050

Carbon market as a key tool

Binding and effective rules for monitoring and enforcing commitments

Developed countries GHG emissions

0%

20%

40%

60%

80%

100%

120%

140%

1990 2005 2020 2030 2040 2050

Baseline Reduction Scenario

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Mitigation in developing countries

Toolbox:o No commitments for least

developed countrieso Sustainable development

policieso Enhanced CDMo Performance-based

fundingo Sectoral approacheso Quantified emission limits

Developing countries GHG emissions

0%

40%

80%

120%

160%

200%

240%

280%

320%

1990 2005 2020 2030 2040 2050

Baseline Reduction Scenario

• Reaching development objectives will be imperative; mitigation and adaptation

• Reduce growth of emissions asap, and absolute reductions after 2020

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Building a global carbon market

The carbon market: cost-effective and flexible mitigation tool and source of finance for low-GHG technology development

EU’s aim: progressive development towards global carbon market

Countries take part according to different responsibilities and capabilities

Backed by ambitious mitigation commitments in line with 2 degree objective

Build on existing mechanisms, link schemes and develop new mechanisms

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The role of the carbon market (I): 27 Gt CO2e emission reduction potential below € 40/ton CO2

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Each Parties’ opportunity + responsibility mainly in household, buildings, transport

Exchange good practice in policy design: e.g.– Abandon energy subsidies

(fossil fuels: ~ € 130 billion p.a.)

– Domestic company-based emissions trading

– Set energy efficiency standards, building codes, labelling schemes, 1-Watt-Initiative

– ‘Ban the bulb’: CFL, LED– Progressive taxation– Address potential cash flow

issues, e.g. targeted loan schemes (e.g. refurbishment of existing power plants)

The role of the carbon market (II): No. 1 = 6-7 Gt CO2e: Harvest all low hanging fruits by 2020

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Domestic emissions trading schemes to set carbon price for private sector.

Less developed countries: strengthened CDM to drive technology transfer and economic transformation

Complementary approaches needed to address sectors not covered by the carbon market, other barriers and possibly to scale up finance

Advanced developing countries: move beyond offsetting, new mechanisms to incentivise increased mitigation contributions

Carefully watch demand and supply!

The role of the carbon market (III): No. 2 = 10 – 12 Gt CO2e: carbon market will be the main driver

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Promote co-operation for research and technology development (e.g. joint ventures, PPP)

Subsidies for demonstration, e.g. NZEC

Direct subsidies for deployment of clean technologies, e.g. GEEREF, export credits, PPP, concessional IFI loans

Reduce tariffs for advanced ‘GHG-efficient’ products and services

Promote regulatory approaches gaining energy security/clean air benefits: e.g. mandatory standards (cars, appliances), fuel taxes, portfolio standards (e.g. renewable energy, CCS)

The role of the carbon market (IV):

No. 3 = 10 – 12 Gt CO2e: promote high-end options

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Clean Development Mechanism (I) CDM has delivered real and measurable benefits and

generated a multi-billion dollar market (€28 billion in 2007)

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Continuity for the CDM post-2012 EU Commission proposal would allow 2.63 Gt (1.4 Gt in the

EU ETS, 1.23 Gt MS use) of CERs to be used until 2020 independent of an international agreement

Includes ongoing projects registered before 2012 and projects established post-2012 in LDCs

EU first to provide certainty for CER use post-2012 – no one else does so far!

About one third of the necessary reduction effort towards 20% target from CDM/JI - other two thirds ensure real emission reductions in Europe

Unlimited access to CDM/JI under the 20% target would lead to drop in CER price to €4 and increase of EU domestic emissions to about 4% above 1990 = contradicts EU objectives of climate policy leadership and energy security.

Substantial increase as part of Copenhagen agreement: EU Commission proposal would allow half of the additional effort (~1.2 Gt extra: totalling ~70bn€ of transfers, i.e. ~6bn€ annually) to be met by CDM/JI or new mechanisms.

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Clean Development Mechanism (II)

Reform of CDM for post-2012 needs to address the following concerns:– strengthen environmental integrity: ensure real and

additional emission reductions (key to offsetting mechanism)– address possible perverse incentives resulting from (low-

cost) CDM– review current institutional set-up and procedures (Article 9)

Strengthen CDM’s contribution to technology transfer and economic transformation in less developed regions

Need to move beyond offsetting for advanced developing countries will be key for post-2012 – explore new approaches, e.g. baseline/credit, sectoral approaches

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CDM – some proposals

More executive and supervisory role of EB, including delegation of decision-making and strengthened professional support staff

Revision of CDM decision-making procedures, including strengthening the basis and transparency of decision-making

Assessment of roles and responsibilities of DOEs Increased use of technology benchmarks for

baseline setting and additionality testing Dialogue with host countries on how to strengthen

contribution to SD and tech transfer More differentiated approach to CDM will help

improve regional distribution

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Joint Implementation JI has delivered benefits, but not yet realised its full potential Role for JI post-2012: stimulating international collaboration and

channeling investment and technology towards certain mitigation opportunities and sectors, which otherwise lack access to the global carbon market

JI allows for institutional learning about market-based approaches and a transitional step before wider application of cap-and-trade

Need to discuss JI post-2012 and explore new concepts:

– May need to continue with a two-track approach with internationally supervised procedure (track 2) for countries that still lack institutional and legislative framework for JI track 1

– Explore synergies and parallels with revision of CDM for track 2 procedure, e.g. on simplifying and streamlining institutional set-up and procedures and strengthening environmental integrity

– Explore new concepts such as programmatic JI

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Shared vision of a low-carbon future: Annex I “Offsetting” is not enough

How can the carbon market build on “measurable, reportable and verifiable mitigation action” by developing countries?

What means of support are needed in addition to the carbon market?

In which way can the carbon market most effectively contribute to sustainable development and technology transfer? What is needed in which countries and which sectors?

IPCC 2007, WGIII, ch. 13

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Need to explore new mechanisms to incentivise enhanced mitigation: e.g. no-lose sectoral crediting mechanism

Source: Ecofys

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Conclusions

Significant role of the carbon market already today – should be strenghtened post-2012. An environmentally more effective CDM should continue to play a role

Offsetting is not enough – carbon market offers promising potential if we succeed in developing new tools that build on differentiated contributions by developing countries

Carbon market is part of the solution but not a panacea – needs to be combined with other tools to further technology cooperation, financial flows and investment

Thank you!