Archive for the ‘Emissions Trading’ Category

Some post-Paris diplomacy

President Obama and Canadian Prime Minister Justin Trudeau met last week for their first formal bilateral meeting since the latter was elected. With the success of the Paris Agreement behind them, the two leaders made their first steps together towards implementation with the announcement of a number of actions. A greater focus on methane emissions figured high on the list of things to do, but perhaps even more important than this was the recognition that co-opoerative action is required to implement the provisions within the Paris Agreement that are aimed at carbon market development. The joint statement released during the meeting made a very specific reference to this work;

Recognizing the role that carbon markets can play in helping countries achieve their climate targets while also driving low-carbon innovation, both countries commit to work together to support robust implementation of the carbon markets-related provisions of the Paris Agreement. The federal governments, together and in close communication with states, provinces and territories, will explore options for ensuring the environmental integrity of transferred units, in particular to inform strong INDC accounting and efforts to avoid “double-counting” of emission reductions.

The reference here is to Article 6 of the Paris Agreement, which allows for “internationally transferable mitigation outcomes” (ITMO) between Nationally Determined Contributions. Article 6 also establishes an emissions mitigation mechanism (EMM) which could well support the ITMO by becoming, amongst other things, a standardised carbon unit for transfer purposes. These are the sorts of areas where considerable thought will be required over the coming months.

The statement represents a big step forward for the United States and for the further development of carbon markets. The USA was amongst the very first countries to release its INDC, within which can be found the statement;

Use of markets:
At this time, the United States does not intend to utilize international market mechanisms to implement its 2025 target.

This was not a big surprise at the time. It was still early days for the resurgent political interest in the importance of government implementation of carbon pricing and therefore the supporting role that international carbon markets can play in helping optimise its use. But a great deal has happened in a year (the USA released its INDC on March 25th 2015), topped off with Article 6 in the Paris Agreement. This time last year that looked like an almost impossible dream, although several of us in the carbon pricing community dared to talk about it.

But perhaps it is the developments in North America itself that have raised the profile of cross-border carbon unit trade with the respective national governments. Although the California-Québec linked cap-and-trade system got going in 2014, it wasn’t until 2015 that Ontario showed a sudden interest in joining the system. At the April 2015 Québec Summit on Climate Change, Ontario announced its intention to set up a cap-and-trade system and join the Québec-California carbon market. The following September, Quebec and Ontario signed a cooperation agreement aimed at facilitating Ontario’s upcoming membership in the Québec- California carbon market. To add to this, during COP21 Manitoba announced that it would implement, for its large emitters, a cap-and-trade system compatible with the Quebec-California carbon market. Québec and Ontario then committed in Paris to collaborate with Manitoba in the development of its system bysigning a memorandum of understanding tothat effect.

Others US states and Canadian provinces may join, with Mexico also looking on in interest. This could in turn lead to a significant North American club of carbon markets; perhaps one even starting to match the scale and breadth of the 30 member EU ETS. Clubs of carbon markets are seen by many observers as the quickest and most effective route to widespread adoption of carbon pricing. The Environmental Defence Fund based out of New York has written extensively on the subject with their most recent paper being released in August last year.

With parts of the USA members of a multi-national club of carbon markets, the Federeal government is then effectively bound to build their use into their NDC thinking. There may be a significant flow of units across national borders, which will make it necessary to account for them through Article 6 and the various transparency provisions of the Paris Agreement.

But most importantly there is the economic benefit of doing this; a larger more diverse market will almost certainly see a lower cost of carbon across the participating jurisdictions than would otherwise have been the case. This could translate into a lower societal cost for reaching a given decarbonization goal or open up the possibility of greater mitigation ambition.

A focus on the Philippines

Last week I was in Manila participating in the opening panel session of the Shell sponsored energy event, Powering Progress Together. The panel included IPCC WG1 Co-chair, Dr. Edvin Aldrian from Indonesia; Philippine Department of Energy Secretary, Hon. Zenaida Y. Monsada; and Tony La Vina, a former Undersecretary of the Department of Environment and Natural Resources, but currently Dean of the Ateneo School of Government. With the focus of our panel being the energy transition and climate challenge it didn’t take long to get to the situation faced by the Philippines and the Intended Nationally Determined Contribution (INDC) it submitted to the UNFCCC in the run-up to COP21.

The Philippines has seen energy sector emissions rise sharply in recent years (see chart) with coal use doubling between 2007 and 2014, while natural gas and oil demand remained almost static. Although oil use for transport increased, this was offset by a drop in oil based power generation.

Philippines Energy Emissions

Against this backdrop the Philippines submitted an INDC which calls for a 70% reduction in emissions for 2030 against a business as usual projection which sees increasing coal use in the power sector. The charts below were prepared by the Department of Energy. By 2030, full INDC implementation would see only a modest change in coal capacity from current levels, but a significant increase in natural gas and growth in wind and solar such that they become material in the overall power generation mix.

Philippines Electrcity Capacity

The government also has big plans for the transport sector, with major electrification of the popular Jeepney (small buses) and tricycle (motorcycle based carriers) fleet. These are everywhere in Manila.

But as the Secretary pointed out in the panel discussion, this shift is dependent on outside financial help. The reduction goal represents at least 1 billion tonnes of cumulative carbon dioxide over the period 2015 to 2030 and although an anticipated cost of implementation isn’t given, it may well run into tens of billions of dollars. However, the immediate benefits should be considerable, particularly for health and welfare in cities such as Manila itself as roadside air quality improves with an alternative bus fleet. The INDC specifically notes (one of several mentions);

The mitigation contribution is conditioned on the extent of financial resources, including technology development & transfer, and capacity building, that will be made available to the Philippines.

The Philippines have certainly felt the sharp end of the global climate in recent years, but particularly with Typhoon Haiyan, a Category 5 Super Typhoon, in November 2013. That event led to a member of the Philippine delegation pledging to fast for the duration of COP 19 in Warsaw. The INDC is an ambitious start on their mitigation journey, but also highlights the challenges faced by many countries at a similar stage in their development. As the Philippine economy develops it will need much more energy than currently supplied; the surge in coal use as a response is also seen in many other national energy plans. Limiting the early growth of coal in emerging economies is one of the big global issues that the Paris Agreement and related INDCs must address as they are implemented. The provisions within Article 6 of the Agreement can help; ideally by channelling a carbon price into those economies with the necessary climate finance to change the energy outlook.

Developing Article 6

  • Comments Off on Developing Article 6

Article 6 of the Paris Agreement contains a number of bolt holes for the development of market and non-market mechanisms to drive future mitigation.

Within these, paragraph 6.2 pertains to any linkage that might exist between Nationally Determined Contributions (NDCs), such as could occur between cap and trade systems residing in different countries. For example, Canada and the United States have such a linkage between the California and Quebec systems, with other states and provinces likely to join. Presumably when Canada presents the result of its NDC efforts to the UNFCCC at various stock takes, the transfer that has occurred between these two systems will need to be accounted for, with this paragraph leading to a clear set of modalities for the necessary accounting of the transfer. The longer term hope is that this paragraph provides additional impetus to such activities, catalysing both the use of such trading systems and the creation of links between them. This is an important step towards the formation of a globally traded carbon market.

Paragraph 6.4 is also a formative proposition, potentially containing within it the means to drive new investment and markets. It states;

A mechanism to contribute to the mitigation of greenhouse gas emissions and support sustainable development is hereby established under the authority and guidance of the Conference of the Parties serving as the meeting of the Parties to the Paris Agreement for use by Parties on a voluntary basis. It shall be supervised by a body designated by the Conference of the Parties serving as the meeting of the Parties to the Paris Agreement, and shall aim:

  1. To promote the mitigation of greenhouse gas emissions while fostering sustainable development;
  2. To incentivize and facilitate participation in the mitigation of greenhouse gas emissions by public and private entities authorized by a Party;
  3. To contribute to the reduction of emission levels in the host Party, which will benefit from mitigation activities resulting in emission reductions that can also be used by another Party to fulfil its nationally determined contribution; and
  4. To deliver an overall mitigation in global emissions.

Almost from the moment the gavel came down in Paris, commentators have been referring to this as the Sustainable Development Mechanism. This has become so embedded that when I returned to this part of the Agreement to write this post I was surprised that it isn’t actually called that. Rather, the mechanism is an EMM (Emissions Mitigation Mechanism) which supports sustainable development, not a sustainable development mechanism that happens to result in emissions reduction.

It is very early days, although Paragraph 6.7 gives the negotiators just this year to sort out the modalities and procedures of the mechanism. At a conference in London this month, a first discussion around Article 6 and particularly the mechanism within it took place. Although the meeting was more of a post-Paris stocktake, it offered an opportunity to get some thoughts and ideas onto the table.

One of the first of these was a presumption that the mechanism is simply the Clean Development Mechanism of the Paris Agreement, i.e. CDM 2.0. While it may eventually offer such a service, to limit it to this and no more may turn out to be very short sighted. In the first instance, the text above does not mention project activity or identify developing countries as the beneficiaries of the activities undertaken. This is in contrast to Article 12 of the Kyoto Protocol which clearly identified such a role for the CDM.

Rather, paragraph 6.4 is defined more broadly as a mechanism to contribute to the mitigation of greenhouse gases while fostering sustainable development. This means that it could have very wide scope and operate on many fronts or alternatively be specified quite narrowly but operate universally as a carbon trading unit. Other definitions or uses may also be considered.

Within a broad scope the mechanism could operate down to a single project, as was the case under the CDM, or become a crediting unit within a baseline system that operates across an entire NDC or within a sector covered by an NDC. Such a unit might be traded between systems, acting as the agent to link baseline-and-credit designs or even cap-and-trade designs. It could become a carbon reduction bought through a financing mechanism such as the Green Climate Fund, establishing that fund as a buyer of reductions as a means of driving mitigation activity. Other possibilities include linking it to technology demonstration or climate finance requirements.

The ambition embedded within the Paris Agreement is going to require change on a very large scale and at a very rapid pace; certainly much faster than could be envisaged through a project by project approach, as was the case with the CDM. While the CDM was very successful in what it did, the scale was hardly measurable against the size of the global energy system. This also argues against an early narrow use of Paragraph 6.4.

At this stage the possibilities are wide open and we need to keep them that way. In the months leading up to the Bonn intercessional meeting in late May, the opportunity exists to explore these options and think through the possible applications of a broadly defined mitigation mechanism. A rush to create CDM 2.0 would be a mistake, even if there is early recognition that the mechanism will need to fulfil this task as part of its overall definition.

Carbon pricing in 2015

  • Comments Off on Carbon pricing in 2015

Perhaps more than any other aspect of the climate agenda, carbon pricing took a major step forward in 2015. This was supported by many initiatives, but most notably by the creation of the Carbon Pricing Leadership Coalition under the auspices of the World Bank. This in turn encouraged a variety of private sector interventions, such as the mid-year letter on carbon pricing from six oil and gas industry CEOs to the UNFCCC. All these actions urged governments to implement carbon pricing policies within their economies as the principle mechanism for advancing climate change action.

In terms of real policy developments, the January 2016 map (below) doesn’t look radically different to the January 2015 map, but a number of important changes took place;

  1. China confirmed the implementation of a nationwide ETS, with a proposal that would see such a system up and running over the coming 2-3 years.
  2. The fledging California-Quebec linked market is likely to see both Ontario and Manitoba join on the Canadian side.
  3. Alberta announced its intention to implement a comprehensive carbon tax from 2017.
  4. The US Clean Power Plan has elements within it that could (but not a given) lead to widespread adoption of a trading model, which in turn implies a carbon price developing in the US power sector.
  5. India again doubled its coal tax in the middle of the year, now at 200 Rupees per tonne of coal. While not a strict carbon price, it will have a similar impact. However, the level is very modest (<$2 per tonne CO2), even compared to the current low price of coal (~$40 per tonne).
  6. The aviation industry is moving closer to a voluntary carbon pricing system.
  7. South Africa moved forward with its carbon pricing legislation.
  8. The EU introduced the Market Stability Reserve as a mechanism to begin to manage the allowance surplus in the EU ETS.

The year ended with what may become the most important element of all, Article 6 of the Paris Agreement. While this doesn’t mention carbon pricing at all, it nevertheless provides fertile ground for its development through international trade of allowances and various other carbon related instruments. It also seeks to create a new global mechanism to underpin emissions reductions and promote sustainable development.

2016 will need to build rapidly on these developments if a government implemented carbon price based approach is to become the global model for reducing emissions. The ambitious goal of the Paris Agreement will need much wider and faster uptake of carbon pricing policy than is apparent from the charts below.

Carbon pricing 2016

Carbon pricing 2015Carbon pricing 2014

Carbon pricing 2013

COP21: A success within the success

From the moment Laurent Fabius nervously banged his gavel on Saturday 12th December, the newswires, bloggers and analysts have been writing about the success of COP21 and the ambitious nature of the Paris Agreement. Without doubt, more will be written in the weeks and months ahead. But the deal was done and many parts made it possible.

Deal done

In the end it is the detail and implementation that will count. One critical aspect of implementation received a major boost from a short but very specific piece of text within the Paris Agreement; Article 6 might just be the additional catalyst that is needed for the eventual emergence of a global carbon emissions market and therefore the all-important price on carbon.

The Paris Agreement was never going to be the policy instrument that would directly usher in a global price on carbon; carbon pricing is a national or regional policy concern. But the Agreement could offer the platform on which various national carbon pricing policies could interact through linkage, bringing some homogeneity and price alignment between otherwise disparate and independently designed systems. The case for this was initially put forward through collaboration between the International Emissions Trading Association (IETA) and the Harvard Kennedy School in Massachusetts. A number of papers coming from the school underpinned a Straw-Man Proposal for the Paris Agreement, authored by IETA in mid-2014 and eventually published at the end of that year. The straw-man didn’t mention carbon pricing or emissions trading, it simply proposed a provision for transfer of obligation between respective INDCs, in combination with rigorous accounting to support said transfer.

. . . . . may transfer portions of its defined national contribution to one or more other Parties . . . . .

In addition, the straw-man proposed a broader mechanism for project activity and REDD+. The IETA team worked hard during 2015 building the case for such inclusions in the Paris Agreement. A number of governments, business groups and environmental NGOs came to similar conclusions; Paris needed to underpin carbon market development. After all, fossil fuel use and carbon emissions are so integrated into the global economy that only the power of the global market could possibly address the problem that has been created.

Roll on twelve months and the Paris Agreement now includes Article 6, which provides the opportunity for INDC transfer between Parties and a sustainable development mechanism to operate more widely and hopefully at greater scale than the Clean Development Mechanism (CDM) of the Kyoto Protocol. In the case of the transfer, Article 6 says;

. . . . . approaches that involve the use of internationally transferred mitigation outcomes towards nationally determined contributions . . . . .

While not exactly the same as the original IETA idea, it does the same job. Of course, like every other part of the Paris Agreement, this is just the beginning of the task ahead. The CDM within the Kyoto Protocol was similarly defined back in 1997, but it was not until COP7 in Marrakech in 2001 that a fully operational system came into being. Even then, the CDM still required further revisions over the ensuing years.

Exactly how the transfer between INDCs materializes in a UNFCCC context is not clear today, although such a transfer is a prerequisite for cross border linking, such as between California and Quebec or what might eventually become multiple US States and multiple Canadian Provinces. The good news for now is that the provision is there and its use can be explored and developed over the coming year before the COP convenes again in Marrakech in 2016. The eventual goal remains the globally linked market.

Global market

COP21: How are carbon markets doing?

  • Comments Off on COP21: How are carbon markets doing?

The opening of COP21 has come and gone with some 150 statements from the pulpit by the largest collection of global leaders ever to assemble in one place. It wasn’t possible to listen to all of them as the group was split and parallel programmes ran in separate rooms. But with the benefit of the excellent webcast facilities provided by the UNFCCC it was possible to jump back and forth between the two groups and listen to a few key addresses. I was hoping for some solid mention of carbon pricing, but references were few and far between, despite the push by the World Bank to raise the profile and importance of government policy measures to introduce a price on carbon. However, the French Preident did make a particular reference.

Two other references that I heard are particularly important;

  1. The President of China, Xi Jinping, reiterated the plan to introduce an economy wide cap-and-trade system in that country.
  2. The new Australian Prime Minister, Malcolm Turnbull, announced that Australia would ratify the 2nd Phase of the Kyoto Protocol, covering the period from 2013-2020.

In one sense the Australian announcement might be seen as a symbolic gesture, in that the Kyoto Protocol is clearly winding down with the expected arrival of the Paris Agreement. However, the move could also  represent an important stake in the ground for the future. Australia has a growing resource sector, even during the current period of lower commodity prices. As such, reducing emissions almost certainly means attaching the economy to an international carbon market, such that even if domestic emissions do not immediately fall, the country can nevertheless pay its way in terms of reductions elsewhere. Australia will need a market architecture to do this and at least for the period up to 2020, the Kyoto Protocol is the only game in town. It will also allow Australia to hold on to offshore reductions made in the pre-2020 timeframe and carry them forward into the Paris Agreement period; assuming that period sees the development of some sort of carbon market framework and accounting.

Therein lays a problem. At least early on in the Paris deliberations, negotiators were already stuck, trying to find agreement between very basic accounting provisions and a more overarching carbon market framework for the Paris Agreement. Simple accounting is perhaps closer to the entirely bottom up nature of the Paris process, but a real market needs some form of framework to build on, particularly when the traded commodity within that market requires precise definition from government.

This is not to say that nobody is talking about carbon pricing in Paris. It was gratifying to see the new Prime Minister of Canada appear on the podium at the launch of the World Bank Carbon Pricing Leadership Coalition, which Shell has joined. Mr Trudeau had come from his leadership statement in the Plenary where he proudly announced, “Canada is back”. At the CPLC launch he spoke of the efforts of the Canadian Provinces in developing carbon taxes and cap-and-trade systems.

But my early take is that the governments now represented in Paris have a way to go before fully recognising one important truth about climate policy. Implementing public policy to deliver a cost for emitting carbon dioxide as part of the energy economy is arguably the single most important step that can be taken to achieve the global goal of limiting warming of the climate system to as close to 2°C as possible.

On Wednesday evening (December 2nd) the business community made it very clear what they think on this issue. At an event in the IETA/WBCSD pavilion, a dozen or more major business association read out their statements on the importance of a carbon price and the inclusion of carbon market provisions within the expected Paris Agreement.

Global market

Why carbon pricing matters – the video

  • Comments Off on Why carbon pricing matters – the video

David+2

Carbon pricing and COP21

As we get closer to COP21 there will be plenty of articles and opinion pieces put forward describing the process, speculating on the outcome and generally trying to help readers understand what exactly is going on. One such piece appeared in the Financial Times recently, written by Pilita Clark. It’s a good summary and has some thoughtful insights but requires some clarification around what the six oil and gas industry CEOs actually argued for in their letter to the UNFCCC.

Pilita Clark rightly points out that a Paris accord, if reached, will be based on many widely differing national contributions, rather than a single agreed policy such as a global carbon price. But the article further qualifies this conclusion with reference back to the letter that the CEOs of Shell, BP, ENI, BG, Statoil and Total wrote to the Executive Secretary of the UNFCCC and the French Presidency, with the following remark;

“. . . the European oil and gas companies that have called for a global carbon pricing framework ahead of the Paris meeting have done so safe in the knowledge this would never emerge from the talks.”

In fact the letter didn’t call for a global carbon price or pricing framework for the very same reason that Pilita Clark gave; this isn’t on the agenda and would never be agreed by the negotiators assembled in Paris.

Rather, the main agenda item for Paris is the negotiation of a framework within which the Intended Nationally Determined Contributions (INDC) will sit. This will probably include provisions for measurement, reporting, verification, peer review and financial assistance for implementation.   An important tool for nations to meet their mitigation goals will be through  carbon pricing mechanisms, which are referenced in a few Parties’ INDCs but not often enough.   The framework agreed in Paris could also include another important provision; the notion of cooperative implementation through the transfer of the obligation under the INDC to another party. This would allow emission reductions to be made at lowest cost globally, which in turn could assist the process of review and agreement on greater ambition.

The International Emissions Trading Association (IETA) have been advocating for such a provision for over a year, with a proposal that would require such transfers to be reconciled in terms of carbon units of some description. The transfer of units would lead to price discovery and therefore the emergence of a carbon market at international level. IETA proposed the following short text insertion within the expected Paris agreement:

Cooperation between Parties in realizing their Contributions

Parties may voluntarily cooperate in achieving their mitigation contributions.

  • A unified international transfer system is hereby established.
  • A Party though private and/or public entities may transfer portions of its nationally determined contribution to one or more other Parties through carbon units of its choice.
  • Transfers and receipts of units shall be recorded in equivalent carbon reduction terms.

IETA have also proposed alternative formulations of the same idea as various Parties (national governments) have put forward their own versions of the concept. Like almost every piece of language proposed so far, this has been incorporated to some extent in the 55 pages of text about to be negotiated, along with its multitude of bracketed options and alternative language possibilities. What survives remains to be seen?

In their letter, the CEOs alluded to this idea, when they called for the following;

Therefore, we call on governments, including at the UNFCCC negotiations in Paris and beyond – to: 

  • introduce carbon pricing systems where they do not yet exist at the national or regional levels
  • create an international framework that could eventually connect national systems. 

National carbon pricing systems make complete sense, such as the ETS in Europe and the proposed carbon tax in South Africa. The framework that could connect them would allow for the speedy and transparent transfer of a national obligation across a border through emissions trading, which is exactly what happens today between Norway and the EU, between countries within the EU and arguably even between the USA and Canada through the California – Quebec ETS linkage. But this needs to be a much more widespread activity in order to quickly leverage the full potential for emission reduction that exists at any point in time.

This isn’t an empty call for a global carbon price, but a reinforcement of the call that IETA has been making for some time and a plea to the UNFCCC, the French Presidency of the COP and the respective Parties to see such a measure included in the Paris agreement. It’s a simple practical step that is needed to catalyse the development of a global carbon market.

Final steps towards Paris?

The last ten days have seen a rush by nations to publish their Intended Nationally Determined Contributions (INDCs), with the much anticipated INDC from India amongst those submitted. On Monday October 5th, the Co-Chairs of the ADP also released a proposal for a first draft of a new climate change agreement for Paris. So it has been a very busy few days, but are we any closer to a deal and could that deal have sufficient ambition to bend the emissions curve?

The India INDC is telling as an indicator of where the developing world really is, versus where the rapidly emerging economies such as China now find themselves. In the case of the latter group, there is thinking towards an emissions peak with China indicating that this will be around 2030 and continuing signals from the academic and research community in that country indicating that it may well be earlier. One such article appeared recently in the Guardian. But for the much poorer developing countries the story remains very different.

The submissions from India is 38 pages long, but of this some 28 pages is supporting evidence and context, explaining the reality of Indian emissions, the need to grow the economy to take hundreds of millions out of poverty and the expected use of fossil fuels to power industry, including areas such as metal smelting, petrochemicals and refining. With a focus on efficiency in particular, India expects to achieve a 33 to 35 percent reduction in CO2 intensity of the economy, but in reality that means a rise in energy related emissions to around 4 billion tonnes or more by 2030, up from some 2+ billion tonnes per annum at present (1.954 Gt in 2012, IEA). This could be tempered by a further element of their contribution which aims to increase forest sinks by some 3 billion tonnes of CO2 in total through to 2030.

There has been considerable speculation as to the renewable energy component of India’s INDC, with a hope that this would show enormous progress in solar deployment in particular. The INDC took the somewhat unusual route of talking in capacity additions, rather than generation (and therefore emissions). India aims to achieve 40% cumulative electric power capacity from non-fossil fuel based resources by 2030. This is significant, but less than it might appear. In a very simple example where 100 GW of generating capacity is comprised of 40 GW solar PV and 60 GW coal, the generation mix might be around 14% renewables and 86% coal. This is assuming a 20% capacity factor for the solar PV (maximum is 50% with day-night) and 80% capacity factor for the coal.

India has also put a considerable price tag on their INDC, with a mitigation effort of some US$ 834 billion through to 2030. In a previous post I looked at the costs assumed in the Kenyan INDC, which came to some $25 billion, but for a population of ~60 million (average through to 2030). With a projected population of some 1.5 billion by 2030, the finance side is in the same ballpark as the Kenyan INDC, albeit on the higher side.

Finally, the last few days have seen new draft text appear – shortened dramatically from some 80 pages to a manageable 20. But references to government led carbon markets, carbon pricing systems or even the use of transfer mechanisms between parties are largely missing. Article 34 of the Draft Decision does hint at the need to rescue the CDM from the Kyoto Protocol by referring to the need to build on Article 12 of the Protocol, but it will be of little use if there isn’t substantial demand for credits in developing and rapidly emerging economies. Simply creating a new crediting mechanism or even bringing the CDM into the Paris agreement won’t on its own direct the finance to the likes of Kenya and India. That demand and related finance flow will only come if the developed and emerging economies are building emissions trading systems (such as in China) and have the ability and confidence to transfer units related to it across their borders. So a great deal of work remains to be done.

 

 

FASTER carbon pricing mechanisms

  • Comments Off on FASTER carbon pricing mechanisms

Last week New York hosted amongst other events, the Papal visit, the UN General Assembly where some 150 world leaders gathered and Climate Week. Arguably this had the makings of a bigger coming together than COP21 itself, although many other issues were also on the agenda, such as the UN Sustainable Development Goals. Nevertheless, the climate issue progressed and the subject of carbon pricing was widely discussed, both how it might be implemented by governments and how companies could use carbon valuation internally in relation to project implementation and risk management.

A highpoint of the Climate Week events was the release by the World Bank of its FASTER principles on implementation of carbon pricing mechanisms . This is work to support the overall push by that organisation for greater uptake of explicit carbon pricing mechanisms at national level as governments consider how they might implement their INDCs.

FASTER is an acronym, with each of the terms further elaborated in a fairly readable 50 page accompanying document. The short version is as follows;

  • F – Fairness
  • A – Alignment of Policies
  • S – Stability and Predictability
  • T – Transparency
  • E – Efficiency and Cost-Effectiveness
  • R – Reliability and Environmental Integrity

I have a slight feeling that the acronym was thought up before the words, but each of the subject areas covered is relevant to the design of a carbon pricing mechanism by governments, such as a cap-and-trade system.

Importantly, the principles recognise many of the key issues that early cap-and-trade and taxation systems have confronted, such as dealing with competitiveness concerns, managing competing policies and complementing the mechanism with sufficient technology push in key areas such as carbon capture and storage and renewables. The latter requires something of a Goldilocks approach in that too little can result in wasted resource allocation, but too much while also being wasteful can end up becoming a competing deployment policy.

In the various workshops held during Climate Week, one aspect of the FASTER principles that did draw comment was the call for a “predictable and rising carbon price”. Predictability should be more about the willingness of government to maintain the mechanism over the long term, rather than a clear sign as to what exactly that price might be. For the most part, commodity markets exist, trade and attract investment on the basis that they are there and that the commodity itself will continue to attract demand for decades to come. We are still some way from a reasonable level of certainty that carbon pricing policies will be in place over many decades, given that they do not enjoy cross-party support in all jurisdictions.

Particularly for the case of a cap-and-trade system, a rising carbon price cannot be guaranteed. Rather, the system requires long term certainty in the level of the cap, after which the market will determine the appropriate price at any given point in time. This might rise as the EU ETS saw in its early days, but equally the widespread deployment of alternative energy sources or carbon capture and storage could see such a system plateau at some price for a very long time. Even within this, capital cycles could lead to the same price volatility as is seen in most commodity markets.

The guarantee of a rising price may not be the case for a tax based system either. Should emissions fall faster than the government anticipates, there could be popular pressure for an easing of the tax. As carbon tax becomes mainstream, we shouldn’t imagine it would be treated any differently to regular income based or sales tax levels, both of which can fluctuate.

The release of the FASTER Principles coincides with my own book on carbon pricing mechanisms, which was launched just prior to Climate Week. I cover many of the same topics, but drawing more on the events that have transpired over the last decade. Both these publications will hopefully be of interest to individuals and businesses in China, the government of which formally announced the implementation of a cap-and-trade system from 2017. This will be an interesting implementation to watch, in that it may well be the first such system that operates on a rising cap, at least for the first few years. Irrespective, the announcement ensured that Climate Week ended on a high note.