Archive for the ‘Emissions Trading’ Category

The UK 5th Carbon Budget

In amongst the excitement created by the Brexit vote, on 30th June 2016 the UK Government met its statutory requirement and announced the details of the 5th Carbon Budget which covers the period 2028-2032. The Government followed the recommendation of the Climate Change Committee and advised that the carbon budget for the 2028–2032 budgetary period is 1,725,000,000 tonnes of carbon dioxide equivalent. This assumes 590 MtCO2e covered by the EU ETS and subject to its carbon price and a nontraded share of 1,135 MtCO2e (excluding international shipping emissions). The overall budget represents a reduction of 56.9% below the 1990 baseline.

The UK is unique in the world with its carbon budget approach. This is the result of far reaching legislation enacted back in 2008 in the form of the Climate Change Act which requires the UK Government to establish a specific carbon budget for successive future periods. To date the UK is on track towards meeting the 2nd Carbon budget, as described in a recently released summary of greenhouse gas emissions which covers the period up to the end of 2014. But the journey has been relatively easy so far. With the continued shift to natural gas and away from coal, the arrival of wind and to a lesser extent solar, the 2008-2009 recession and the higher cost of oil and gas in recent years driving real efficiency and demand reduction, UK emissions have fallen.

UK GHG Emissions to 2014

In 1990 UK CO2 emissions per kWhr of electricity generation were 672 grams, whereas today they are around 450 grams. As a result, emissions from power generation have fallen, even with current electricity demand higher than the 1990 level. By contrast, road transport emissions have remained about flat for 25 years although there has been a marked shift from gasoline to diesel. Another significant reduction has come from industry, but much of this is due to an overall reduction in heavy industry (steel making, refineries), in favour of services (media and finance) and high technology industry (e.g. aerospace).

With a large natural gas base and a diminished heavy industry sector, has the UK now reached an interim floor in terms of national greenhouse gas emissions? While there are still gains to be made in the electricity sector, future progress towards the goals of the 3rd, 4th and 5th Carbon Budgets will require additional action in other parts of the economy.

UK Emissions Progress

The 5th Carbon Budget requires nearly another 200 Mt per annum of reductions across the UK, compared to the 2nd Carbon Budget period that we are currently in. Even with Hinkley Point nuclear and an ambitious renewables programme (which is reported as being off track ), it is unlikely that power generation emissions would fall more than 100 MT per annum. A 200-250 gram per KWh goal by 2030, equivalent to about 50% natural gas and 50% nuclear/renewables would mean a fall of about 70 Mt. There may also be upward pressure on the sector as transport electrifies.

The above implies that the emission reduction focus will have to expand more rapidly into the transport and residential areas in particular. While the residential sector has been an area of action for some time with a focus on boiler efficiency and home insulation, the rate determining step here is turnover in housing stock or at least housing refurbishment, which can be very slow.

UK transport emissions have hardly budged over many years, although there has been some redistribution within the sector. A sharp single step reduction came during the 2008-2009 recession, but that fall has not been continued. Data since the late 2014 price fall in crude oil is not available yet, but that may put upward pressure on transport emissions. Between now and 2030 there is the opportunity for a single turnover of the vehicle fleet, but EV sales are still only very modest in the UK. In March 2016 there were some 67,000 registered plug-in cars in the UK, less than 0.2% of the fleet. During January to March 2016, some 11,750 new ultra low emission vehicles (ULEVs) were registered in the UK. Over the year to the end of March 2016, ULEVs represented 1.0% of all new registrations, compared with 0.8% over the previous year and 0.2% over the year before that.

The 5th Carbon Budget represents a further landmark step for the UK, but it also means a shift in policy emphasis is required in the near term.

A new reality to come to terms with

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The first UNFCCC talks since the adoption of the Paris Agreement are now underway and the various delegations are getting down to the tough task of implementation. I was in Bonn on the opening day of the two week meeting, representing the International Emissions Trading Association (IETA) in a side event hosted by the Clean Development Mechanism (CDM) Executive Board (EB). The aim of the event was to draw on the learning from a decade of CDM operation and apply this experience to Article 6 of the Paris Agreement. This is the Article that provides a potential new foundation for carbon market development. I was there to present the IETA Article 6 Vision paper which I posted a story on recently.

The side event was packed out and many were standing in the corridor leading to the room; there is clearly considerable interest in this topic. Over the years the CDM has been a successful mechanism, resulting in nearly 8000 projects and some 1.7 billion Certified Emission Reduction (CER) units issued. Even at a €5-10 per CER (as it was in the earlier days of the EU ETS), this still represents a carbon price based financial injection of up to €10 billion into developing economies. The CDM spawned a small industry of project developers, assessors, MRV professionals and climate finance experts and clearly demonstrated that even a gentle application of the market can have a significant impact. Little wonder that there is such interest in the mitigation mechanism embedded in Article 6 and its potential to drive change.

However, the CDM (or a version of it) is unlikely to be repeated or replicated under Article 6, at least not under the terms that existed within the Kyoto Protocol. It was clear from the discussion during the side event that this new reality is going to take a while to hit home and settle in. The CDM became an important source of climate finance for developing countries, where the only real obligation on the part of the host country for a given project was to provide the necessary governance structure to ensure eventual issuance of the CERs. But that is no longer the case given the provisions of the Paris Agreement and Article 6 are now effectively the same for all countries.

Over time, Nationally Determined Contributions (NDC) will expand to cover all greenhouse gas in all economies. Every NDC, either specifically or notionally (for assessment and stocktake purposes) is linked to a quantitative carbon budget and there is an expectation from the Paris Agreement that these budgets will be delivered. While the Paris Agreement doesn’t say this in such stark terms, it is nevertheless implied. The whole approach that the UNFCCC used to assess the NDCs in their latest synthesis report, released on May 2nd, underpins this. Their aggregate analysis is summarized in carbon budget terms as follows;

The implementation of the communicated INDCs is estimated to result in aggregate global emission levels of 55.0 (51.4 to 57.3) Gt CO2 eq in 2025 and 56.2 (52.0 to 59.3) Gt CO2 eq in 2030. The global levels of emissions in 2025 and 2030 were calculated by adding the estimated aggregate emission levels resulting from the implementation of the communicated INDCs, that is 46.5 (44.3 to 48.9) Gt CO2 eq in 2025 and 48.0 (45.1 to 51.4) Gt CO2 eq in 2030, to the levels of emissions not covered by the INDCs. Global cumulative CO2 emissions after 2011 are expected to reach 533.1 (509.6 to 557.2) Gt CO2 in 2025 and 738.8 (703.6 to 770.9) Gt CO2 in 2030.

As I noted in my last post and drawing on Article 6.5 in the Paris Agreement, this means that the transfer of credits from a project across a national border (in the style of the CDM) will impact the national inventory reports of both parties. These transfers will then have to be executed in the style of Joint Implementation (JI) of the Kyoto Protocol, which effectively required an adjustment to the project host country’s national goal if the crediting unit was to be used by another Party to meet their goal.

I raised this issue as part of my presentation and the message was then amplified by a couple of people in the audience during the Q&A. But the response from some in the room was close to one of denial of this new reality, even though the Paris Agreement makes the need for such adjustment clear. The discussion almost drifted back into the old reality of developing countries not having goals and targets, but fortunately we didn’t land there. We didn’t resolve the issue either, which means that there are probably some tough discussions ahead as the negotiators get down to business.

A week later in Bonn and after many hours of discussions on Article 6 by the Parties, there has been some progress. At a side event on the second Monday also on Article 6 and also standing room only, I heard one central African delegate note that we had certainly left the world of the CDM and that perhaps we were somewhere between the constructions offered by CDM and JI of the Kyoto Protocol, albeit this would have to be interpreted to match the new bottom up global architecture of the Paris Agreement. I also heard another national delegate argue strongly that the new mechanism was not a sustainable development mechanism and should not be referenced as such, even if sustainable development was an important outcome of the implementation of the mechanism. Several panellists talked about quantification of NDCs as an important precursor to the avoidance of double counting.

The various concerns and issues that have been raised in these early discussion are very valid and the answers aren’t immediately obvious. Many developing countries have placed the need for finance as a condition on at least some portion of their mitigation contribution and in the past the CDM offered such finance. But if the reality of a new mechanism is a tighter national goal as a consequence of using it, there may be some push back. In the IETA paper one possible solution to this was proposed, namely the direct purchase of project units from the host country of the mitigation activity by multi-lateral funds. But this is unlikely to reach the necessary scale of mitigation envisaged by the NDCs, so other approaches will have to be developed. Interesting times ahead!

Update: The co-chairs in the UNFCCC discussions on Article 6 have released informal notes on ITMOs (here) and the proposed mechanism (here). These are a summary of points made in the initial discussions in Bonn.

Within the Paris Agreement sits Article 6, a carefully crafted set of provisions to foster, in the parlance of the UNFCCC and the Parties to the Agreement, cooperative approaches. This includes a provision for cross border transfer of mitigation outcomes and a mechanism to contribute to the mitigation of greenhouse gas emissions and support sustainable development. But for those outside the negotiating process (and hopefully those inside as well), this Article is seen as the foundation for carbon market development. There was a great deal of advocacy effort behind the Article, particularly from the International Emissions Trading Association (IETA) who argued strongly that such a construction within the Paris Agreement was essential to see accelerated adoption of government implemented carbon pricing; widely recognised as a critical policy instrument for managing carbon dioxide emissions.

The wording of Article 6 needs some deciphering and for those now assembling in Bonn to begin the process of implementation of the Paris Agreement, some steer from the private sector will hopefully be helpful. After all, if the provisions do enable the development and expansion of carbon markets then it will almost certainly be the private sector that is most deeply involved. To that end, IETA have now published a first thought piece on Article 6, setting out a vision for its implementation.

IETA Article 6 Brochure

The IETA vision for Article 6 is built on the need for governments to implement carbon pricing, ideally through market based approaches such as cap-and-trade or baseline-and-credit. This starts with the internationally transferred mitigation outcomes (ITMO), described in 6.2 and 6.3. These transfers are effectively carbon market trades between governments or private entities operating through emission trading systems. One example is the link between California and Quebec, which effectively ties parts of the Nationally Determined Contributions (NDCs) of Canada and the United States together. Similarly the link between Norway and the EU ETS is doing the same for their respective NDCs. IETA argues that for clean and simple accounting and the avoidance of double counting, that the concept of exchange of carbon units, either notional or real, should be an underpinning feature of any ITMO. That means the basis for cooperative approaches is, for the most part, a market based one. For governments to access the economic benefits and cost effectiveness of a cooperative approach, they will need to implement carbon unit based emissions management systems within their economies.

IETA also recognises that not all governments may be ready or able to implement trading based systems, so its vision draws on another aspect of Article 6 to enable this. Paragraphs 6.4 (a) – (d) describe an emissions mitigation mechanism (which IETA have given the designation EMM). While some commentators are already arguing that this is a future version of the Clean Development Mechanism of the Kyoto Protocol (i.e. CDM 2.0), IETA makes the case for a much broader interpretation and use of this mechanism. Such implementation could see the EMM offering both universal carbon allowance and crediting units for those countries that choose to use them, facilitating trade between NDCs (i.e. ITMO), providing registry accounting and offering the prospect of carbon pricing in many economies.

The EMM could also be designed to establish sector baselines and issue sovereign credits for performance in excess of those baselines, which might then be purchased by external climate funds to channel investment. In this way it would function more like the CDM. But as IETA notes in its thought piece, the world in which crediting from one country acting as a direct offset in another is coming to an end. Under the CDM this was possible because the project host country had no quantified emissions management goal. As such, national accounting effectively took place on one side only, although the project itself had to have a credible baseline against which it operated. But as NDCs progressively expand to cover all national emissions (if they don’t then the Paris Agreement can’t claim to manage global emissions), paragraph 6.5 prevents such one sided accounting;

Emission reductions resulting from the mechanism referred to in paragraph 4 of this Article shall not be used to demonstrate achievement of the host Party’s nationally determined contribution if used by another Party to demonstrate achievement of its nationally determined contribution.

This means that the transfer of credits from a project across a national border (in the style of the CDM) will impact the national inventory reports of both parties. IETA argues that these transfers will then have to be executed in the style of Joint Implementation (JI) of the Kyoto Protocol, which effectively required an adjustment to the project host country’s national goal if the crediting unit was to be used by another Party to meet their goal.

The Paris Agreement introduces a very different world of international emissions trading to the one that exists today and has operated in recent years. The IETA paper concludes with a visualisation of how this might end up.

Article 6 Evolution

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

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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

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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?

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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

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