Pricing carbon: Is this the year?

At the close of COP21, French President Francois Hollande promised to build on the Paris Agreement by advocating for a global carbon tax.

ICAPPutting a price on carbon has been done at regional, national, and subnational levels thus far. Some jurisdictions have used the cap and trade approach while others have levied a carbon tax.

Today the International Carbon Action Partnership (ICAP) issued a report predicting that 16% of global GHGs will be covered by carbon markets by 2017, up from 9% in 2016. The report underscores that emissions trading schemes (ETS) are currently found on 4 continents, 35 countries, 13 provinces and states, and 7 cities.  Analyzing the coming growth, it points to pledges in the 185 INDCs filed pre-COP21 that indicated intent by almost half of these countries to use market mechanisms to mitigate GHG emissions.  ICAP specifically highlights China’s announcement in 2015 to expand its province-level pilot markets to a national market in 2017: once operational, the Chinese ETS will bypass the EU’s market as the largest in the world. The ICAP report also looks carefully at new efforts in North America, Latin America and the Caribbean, and greater Asia Pacific region.

On the carbon tax front, Canadian province British Columbia has applied a carbon tax to fossil fuel consumption in the province since 2008.  Currently, voters in Washington State are considering a ballot measure that would make it the first U.S. state to do the same. Over 350,000 Washington residents signed on to the initiative, which (similar to BC) would be a “revenue neutral” tax that would result in other state taxes being lowered.  South Africa is in the process of revising a carbon tax bill proposed last November, which is likely to be implemented in January 2017.

UPDATE:  On March 3, all ten Canadian province premiers will meet with Prime Minster Justin Trudeau to discuss a national carbon tax. Alberta Premier Rachel Notley supports a carbon tax while her peers from Manitoba and Saskatchewan oppose it.  Interestingly, the Ontario and Quebec premiers also oppose a national carbon tax, presumably due to their existing regional carbon pricing schemes.  A collection of energy sector business leaders, banks, unions, think tanks, and environmental groups have weighed in to support it.

 


The Inevitable Linkage Discussion

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Let’s face: it is almost the end of 2014 and we are still negotiating an international agreement to mitigate climate change for after 2020. The good news is that several countries have taken the initiative, and adopted climate change policies. These policies vary from emissions trading, carbon taxes, performance standards, among others. But what role will these regional, national, or sub-national policies play under the new international agreement? Yesterday, the International Emissions Trading Association (EITA) held a side event to address this question. The discussion, “Linkage Among Climate Policies in the 2015 Paris Agreement”, had as panelists leader researches on the topic: Robin Stavins, from Harvard University; Daniel Bodansky, from Arizona State University; and Dirk Forrister, from  EITA, among others. The discussion was based on the latest report from the Harvard Project on Climate Agreements, “Facilitating Linkage of Heterogeneous Regional, National, and Sub-National Climate Policies Through a Future International Agreement” (November, 2014).

The concept of linkage is fairly simple; it refers to the idea that distinct carbon pricing instruments can be linked together to meet the general goal of reducing greenhouse gas emissions. The linkage can occur is two ways: direct and indirect. The direct linkage occurs when two different schemes mutually accept the emission reduction units from one another to meet their goals. The indirect linkage occurs when two programs, for example cap-and-trade schemes, do not allow the trade of allowances between their programs, but both are direct linked to a third, common trading scheme.

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As wisely explained by Daniel Bodansky, to address this issue the new international agreement can follow three distinct approaches.  The first is to expressly forbid any linkage between different carbon pricing schemes. The second approach is to be silent about the issue, and the third, preferable approach is to allow linkage between different carbon pricing schemes. Allowing linkage would provide a number of benefits to participating countries, including: cost savings; improvement of individual market, through the decrease of market power and price volatility; and equity distribution. Another main interesting point is that, as Robert Stavins (left) pointed out, allowing the linkage between different schemes can potentially increase overall national emission reduction ambitions, as more market options are made available. 

To allow linkage between different climate policies, all panelist agreed that the new agreement shall include a paragraph as simple as possible. As proposed by the panelists, the paragraph shall be limited to expressly allow linkage, define key terms, and provide basic guidance regarding tracking emissions to ensure the environmental integrity. In their opinion, further detailed rules shall be decided by future meetings of the Conference of the Parties. 

While challenging, linkage is already happening in different levels. In fact, the issue is very similar to the decision, in 1997, to allow the co-existence of emissions trading, joint implementation, and clean development mechanisms under the Kyoto Protocol. Countries are also already dealing with this issue in the national, or sub-national level. California and Quebec Emission Trading Schemes, for instance, are linked since 2013. The same is true for the European Union and Norway Emission Trading Schemes, that signed their linkage agreement back in 2007. Other linkage agreements are expected to happen as the number of cap-and-trade programs increase; up to date there are 20 regional, national, or sub-national trading schemes in operation or scheduled to enter into operation. The linkage issue will not go away, and several examples and options have already been deeply discussed. The remaining question is if the Paris agreement will take the necessary step and deal with this issue, or if the new agreement will be silent. 


No Need to Re-Invent the Wheel

At today’s side event forum, hosted by the Executive Board of the Clean Development Mechanism (CDM), panel members called for governments to stand behind the CDM. Comprised of Executive Board members of the CDM, renowned representatives from the Parties and the private sector, World Bank and Green Climate Fund (GCF) the message was clear, there is no need to reinvent the wheel. “We need to work with what we have,” said Phillip Hauser of the GCF.

Despite current funding issues, panelists made the case that governments already have a powerful tool in the CDM that they can use now. Following the central message from the 81st meeting of the CDM Executive Board, panelists urged governments to release the full potential of CDM for strong climate action. “We urge countries in Lima [ ]and in Paris next year to renew their commitment to the CDM,” said CDM Executive Board Chair Hugh Sealy. “This is one of the most effective instruments governments have created under the United Nations Climate Change Convention. It drives and encourages emission reductions, climate finance, technology transfer, capacity building, sustainable development, and adaptation—everything that countries themselves are asking for from the new Paris agreement,” he said. Countries need to set a strong market signal to ensure the stability of the CDM. “They can do this by increasing their demand for Certified Emission Credits (CERs) before 2020, by recognizing the value that the CDM can add to emerging emission trading systems, and by recognizing the mechanism’s obvious value in the international response to climate change after the new agreement takes force in 2020,” he said.

Acknowledging that the CDM is far from perfect, Sealy said that the “learning by doing” mantra has provided valuable insight into building on the success of the market mechanism. As the largest, most widely recognized baseline and crediting mechanism in the world, the CDM has the potential to reduce 2.8 billion tonnes of carbon dioxide equivalent by the end of 2020. Over the past nine years, the CDM has reduced over 1.5 gigatonnes of emissions and saved $3.6 billion in Kyoto Protocol compliance costs. In addition, the CDM has encouraged $138 billion in climate finance, leveraging privately 10 times the amount of public investment. Compatibility---Wind-And-Agricultural-Farming450px copy

However, despite the success of the CDM, the demand for CDM is plummeting. This year saw a continuing decline in the size of the CDM program, which had about a tenth of the number of registered projects in the preceding reporting periods, said Dirk Forrister, President of International Trading Association.  As Sealy explained, the demand from traditional markets (especially the European Union Emission Trading System) has contracted severely, with the spot price of a secondary CDM CER crashing from over 30 USD in 2008 to around USD 0.30 in 2014. Investment in new CDM projects is almost non-existent and significant hemorrhaging in the private sector is occurring. The price drop in CERs has lead to a decreased incentive to continue projects and develop capacity. Ultimately, “all this jeopardized the long-term partnerships of the UNFCCC Parties and the private sector, in the midst of a growing need for global climate action.

Increased demand is the key to addressing the CDM’s current challenge, said Sealy. The CDM is too valuable to discard, especially now that we have figured out most of the kinks, said Forrister.


European Council Endorses Binding 40% GHG Emissions Reduction Target by 2030

On October 24, the European Council New_European_Council_-_Consilium_Logoreleased its Conclusions on 2030 Climate and Energy Policy Framework. This announcement asserted a 40% domestic GHG Emissions Reduction Target by 2030 compared to 1990 levels. Approximately 10% of all GHG emissions worldwide currently come from the EU.

Under this newly announced goal, the EU must also increase renewable energy by at least 27% and reduce energy demand by 27% by 2030. All EU member states, in “solidarity and while considering fairness“, will participate in these efforts. The 40% reduction target is EU-wide; legally binding member specific targets have not been extended beyond 2020. Member states are currently free to set their own targets post 2020.

The EU intends to achieve these goals by reforming the Emissions Trading System (ETS). The ETS will lower the cap on maximum emissions from 1.7% annual reduction to 2.2% starting in 2021.

Smoke billows from the chimneys of Belchatow Power StationDuring negotiations, Poland fought to preserve its coal industry while other members states argued for their various economic interests including methane producing livestock, nuclear facilities, and cross-border power lines in Spain and Portugal. Germany and the U.K. pushed for The 40% target was finally agreed upon after hours of negotiations.

The EC encourages all countries to develop ambitious emission reduction targets and policies in advance of COP 21.

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Christiana Figueres weighed in on the EC’s announcement stating that it provides momentum towards the Paris agreement and that the EU would be able to submit its INDC contribution by March 2015. Further, she noted that because 28 European countries were able to compromise on the 40% reduction target, all countries should be able to come to an effective agreement in Paris.

EU Climate Action Commissioner Connie Hedegaard noted that achieving 4th0% emissions reduction would be difficult. She stated that the EC’s ambitious proposal can only be achieved by major transformation across the EU. However, the new proposal is an important step forward for the entire world in terms of combating climate change.

 


Germany, Exhibit A of the EU Emissions Debate

Although Germany is popularly viewed as an international leader in the clean energy field, its 2013 performance in producing electricity german renewablestells a different story.   Electricity output from brown coal plants rose .8% in 2013, to 162 billion kilowatt hours, according to the German Institute for Economic Research.   This was the highest level since reunification, when Germany produced almost 171 billion kilowatt hours of power from coal, many in old eastern German plants.  Consequently, Germany’s CO2 emissions will have risen in 2013, even though electricity from renewables is now 25% of the energy portfolio.  (In 2014 alone, surcharges on electricity bills will generate €23.5 billion worth of subsidies for wind and solar power projects.)

This paradox is explained by two main reasons.  First, the low price of CO2 emissions permits in the EU trading scheme has not produced german coal firedsufficient incentives to switch sources.   Second (and related to the first), new brown coal plants came on line in 2012 with a generating capacity more than twice that of the plants being shut down that year.  Build it and they will use.   In addition, electricity production from gas-fired plants fell by almost 15% (due in part to them being more expensive to run), resulting in coal plants mostly replacing the capacity lost when Germany shut down eight nuclear plants in 2011.

This increase in coal-generated power, and the larger context of higher priced gas-generated power, has led to Germany exporting more electricity than it imports.  The Berlin-based think tank Agora Energiewende observed that German coal-fired plants “are crowding out gas plants not just in Germany but also abroad — especially in the Netherlands.”

Gerald Neubauer of Greenpeace declared that “the coal boom now endangers Germany’s credibility on climate protection and the energy revolution,” and requires the Social Democrats to adopt a more critical stance.  This internal political debate will likely be felt in the upcoming EU elections as well.  And in the EU’s position at future UNFCCC negotiations when offering nationally determined commitments.


EU Debating Internally Its Carbon Emission Pledges

This article in Bloomberg News explores the divide among EU member countries when setting the bloc’s overall commitments under the second commitment period of the Kyoto Protocol, as well as those it will agree to in the KP’s successor agreement due to be signed in Paris in 2015.  A draft plan due to be released tomorrow by the European Commission (EC) seeks to commit the EU’s 28 member countries to reducing carbon emissions by 35 – 40% by 2030.  (Currently the EU has pledged a 21% cut by 2020 over 2005 levels.)

Polish coal fired utilityThis plan’s ambitions pose internal political challenges.  Retail power prices have spiked 65% from 2004 to 2011,while natural gas prices have risen by 42%.  In comparison, inflation has been 18% during that same time period.  Some EU members, like Germany, France, Italy, and the U.K., support the 40% target while countries like Poland, which derives almost all of its electricity from coal, opposes it.  Likewise, there is disagreement on how to balance the policy goals of overall reduction targets with renewable energy targets.  Four years ago, when making the 2020 pledge, the EU also aimed to have 20% of energy consumption by 2020 come from renewables. Germany, France, Ireland, Denmark, and Belgium continue to support having a separate renewables target, while the U.K. opposes it.  Internal politics is key to the EU’s next climate policy steps:  the European Parliament is due for elections in May and the EC, in October.

In the larger picture also looms external political concerns.  “What we must do is to keep climate policy, but we have to put at the same level cost competitiveness for energy and security of supply,” said the president of BusinessEurope, a Brussels-based group that represents companies from 35 European countries. “If we go for 40 percent unilaterally this would be absolutely against industrial competitiveness of Europe. The goal has to be realistic.”danish wind turbine

Reconciling the internal and external political concerns is not only key to the EU setting its internal climate policy, but also critical for the UNFCCC negotiations: the EU has the biggest emissions trading system (covering some 12,000 utilities and manufacturers) and the most advanced limits on carbon emissions (covering industrial sectors outside the ETS).  Consequently it is a leader both in setting ambition and devising the mechanisms for achieving sustainable development for developed countries.