Carbon Emission Policies and Market Mechanisms
Takashi Hattori, Head of Climate Change Unit
MaryRose Cleere, Environment and Climate Change Unit
Christopher Guelff, Environment and Climate Change Unit
12/04/2013
© OECD/IEA 2010
Outline
1. Climate change overview: international
framework and process; climate change
scenarios
2. Climate policy choices in the energy sector:
interaction between policy areas and policy
packages
3. Carbon markets: overview, flexibility
mechanisms, market readiness
© OECD/IEA 2010
IEA climate change work
 UNFCCC process:
 Climate Change Expert Group
 Market mechanisms







Domestic climate change policy issues:
Design of emissions trading instruments
Energy security and climate change
Electricity in a Climate-constrained World
Energy efficiency
Combining policy instruments
Climate and energy efficiency policy databases
© OECD/IEA 2010
Outline
1. Climate change overview: international
framework and process; climate change
scenarios
2. Climate policy choices in the energy sector:
interaction between policy areas and policy
packages (case study)
3. Carbon markets: overview, flexibility
mechanisms, market readiness (case study)
© OECD/IEA 2010
International framework
 United Nations Framework Convention on
Climate Change (UNFCCC)
 sets an overall framework for intergovernmental efforts
 193 countries have ratified (in force 21 March 1994)
 Kyoto Protocol
 Linked to the UNFCCC: adopted in 1997; entered into
force February 2005
 Differentiated commitments; overall objective leads to a
5% reduction from 1990 levels by 2012
 Three “flexibility mechanisms”:
 Emissions trading (right to buy and sell quotas)
 Two project-based mechanisms: Clean Development Mechanism
(CDM) and Joint Implementation (JI)
© OECD/IEA 2010
International framework
 Since Bali 2007 two negotiating tracks for post-2012:
 Kyoto Protocol
 “LCA” – new commitments for developed countries and
“Nationally Appropriate Mitigation Actions” for developed
countries
 2009 Copenhagen:
 2C goal, $100B finance by 2020, mitigation from all countries
(but no centralised architecture for this).
 2011 COP17 Durban, agreement to:
 Extend Kyoto Protocol
 Negotiate a new climate treaty with legal commitments for all
countries, developed and developing
© OECD/IEA 2010
Status of negotiations
COP18 in Qatar:
 Close two previous negotiating tracks: LCA and
KP
 Agree details of Kyoto Protocol extension, and
pass amendment to Protocol enacting the
changes
 Map out more clearly the work programme to get
to the new 2015 agreement
© OECD/IEA 2010
Status of negotiations
Qatar outcomes - 1
 Keeps climate change on the international
agenda, and agreed to a second commitment
period of the Kyoto Protocol to 2020
 Targets are those volunteered by countries, but
process to strengthen these in 2014.
 SOME restrictions on access to CDM for countries
not taking on targets
© OECD/IEA 2010
Status of negotiations
Qatar Outcomes - 2
 ADP process:
 Two workstreams: the nature and form of the
new agreement, and raising ambition before
2020
 Elements of negotiating text will be considered by
COP20 in December 2014, with a view to making
negotiating text available before May 2015
 Ban Ki Moon to convene world leaders in 2014 to
create political momentum towards a 2015
agreement
© OECD/IEA 2010
Status of negotiations
Qatar Outcomes - 3
 LCA closed:
 Launched review of global goal (1.5C vs 2C) and
progress towards this for 2013 to 2015
 Acknowledged delivery of $30B fast-start finance
© OECD/IEA 2010
ETP 2012 – Choice of 3 Futures
2DS
a vision of a sustainable
energy system of reduced
Greenhouse Gas (GHG)
and CO2 emissions
The 2°C Scenario
4DS
reflecting pledges by
countries to cut
emissions and boost
energy efficiency
The 4°C Scenario
6DS
where the world is now
heading with potentially
devastating results
The 6°C Scenario
© OECD/IEA 2010
© OECD/IEA 2012
Choose the future energy system
To achieve the 2DS, energy-related C02 emissions
must be halved until 2050.
Significant mitigation efforts are needed, a large
part in non-OECD countries.
© OECD/IEA 2010
Annual additional investments
in 2DS
Additional investments in non-OECD countries exceed the pledged
climate finance, but the incremental cost is much less due to fuel savings
Source: ETP 2012
© OECD/IEA 2010
Outline
1. Climate change overview: international
framework and process; climate change
scenarios
2. Climate policy choices in the energy
sector: interaction between policy areas
and policy packages (case study)
3. Carbon markets: overview, flexibility
mechanisms, market readiness (case study)
© OECD/IEA 2010
Climate policy options in energy
 “Externality pricing”, “economic instruments”
 Tradeable GHG emission quotas
 Tax on GHG emissions
 Specific energy efficiency policies
 Fiscal measures (tax rebates)
 Minimum energy performance standards, building codes
 Information (labelling) / market transformation
 Market instruments (tradeable energy efficiency
certificates)
 Specific support to low-CO2 energy technologies
 Direct subsidies to deployment: feed-in-tariffs, tax
credits
 Market instruments: Renewable Energy Certificates
 Support to research and development
 Green procurements, etc.
© OECD/IEA 2010
Market mechanisms for GHG
mitigation
 Why market-based mechanisms?
 Impact of CO2 emissions reductions insensitive
to location
 Costs and opportunities to mitigate CO2 vary
between companies/ sectors/ countries
 Market-based instruments can be cost
effective
 Taking advantage of differences in marginal
abatement costs across different emission
sources
© OECD/IEA 2010
Current and Proposed Emissions
Trading Systems
Alberta
British
Columbia Ontario
California
Quebec
RGGI
EU
Ukraine
Switzerland
Turkey
Kazakhstan
Republic of Korea
China
Tokyo
Thailand
Brazil
Chile
Australia
NSW
New
Zealand
Operating/soon to launch
Developing/Considering
© OECD/IEA 2010
HOW DOES CAP AND TRADE WORK ?
Strategy 2:
Investment in own
reductions beyond
compliance need
Strategy 3:
Purchase of
allowances
Business as usual emissions
Actual
emissions
Allowances
Business as usual emissions
Actual emissions
Allowances
Business as usual emissions
Surplus
allowances
Actual emissions
Purchased
allowances
Allowances
Strategy 1:
Investment in own
reductions up to
compliance need
Investments in
reductions
Choice of compliance strategy depends on marginal cost of
reductions and price of allowances
CO2 emissions
CO2 allowances
© OECD/IEA 2010
Free allowances
Total cost =
investment
in reductions
Actual emissions
Business as usual emissions
Free allowances
 Free allowances in an
unregulated electricity
market (e.g. EU) can lead to
windfall profits for clean
sources, not the case in a
regulated market
 Allocation process
requires data on past
emissions
CO2 emissions
CO2 allowances
Investments in
reductions
 Can facilitate introduction
of the system
© OECD/IEA 2010
Auctioned allowances
Actual emissions
Business as usual emissions
Auctioned allowances
Total cost =
investment
in reductions
plus
purchase of
allowances
 Similar to a tax in regulated
markets where the cost cannot
be passed on through higher
electricity prices
 However, auction revenues
can be used to compensate
negative impacts of emission
constraint, finance other
mitigation measures or lower
other taxes
CO2 emissions
CO2 allowances
Investments in
reductions
 Past emission data
unnecessary: each entity
defines its own needs
© OECD/IEA 2010
ETS Design Features
 Sectoral coverage
 Setting the cap
 Overall costs
 Managing price uncertainty and
volatility
 Long-term investment signals
 Free allocation and auctioning
 Competitiveness effects
 Use of ETS revenues
 Market oversight
© OECD/IEA 2010
IEA work on policy combinations and policy interactions:
© OECD/IEA 2010
World energy-related CO2 emission savings by technology in
the WEO 450 Scenario relative to the New Policies Scenario
Energy efficiency measures are essential
Source: WEO 2011
© OECD/IEA 2010
Energy Efficiency lowers short-term
carbon prices
Price of CO2
€/tCO2e
P
P*
MtCO2
Q*
Q*
EmissionEmission
goal
reductionreduction
goal
© OECD/IEA 2010
Technology support lowers long-term
carbon prices
Price of CO2
€/tCO2e
(a)
Carbon price
ambitious target
Carbon price
modest target
Conventional Technologies
Price of CO2
€/tCO2e
Modest target
New
Technology
MtCO2
Ambitious target
(b)
Carbon price
ambitious target
Carbon price
modest target
MtCO2
Modest target
Ambitious target
© OECD/IEA 2010
TIME is also a constraint
Emission
Reductions
Emission
Reductions
(a)
(b)
New
Technology
New
Technology
Conventional
Technologies
Time
2050
Conventional
Technologies
Time
2050
© OECD/IEA 2010
Policy packages can lower costs
Price of CO2
€/tCO2e
Technology support policies
to reduce costs for long-term
decarbonisation
Reduced long-term
marginal abatement
cost
MtCO2
Carbon price mediates
action economy-wide
Policies to unlock costeffective energy efficiency
potential that is blocked by
non-economic barriers
© OECD/IEA 2010
Policies interact, so design as a
package
e.g. Carbon price level depends on supplementary
policy delivery
BAU EMISSIONS
(a)
SUPPLEMENTARY
POLICIES
UNDERACHIEVE
(b)
SUPPLEMENTARY
POLICIES
OVERACHIEVE
15 %
10 %
EMISSIONS
CAP 30%
BELOW BAU
5%
Reductions from:
energy efficiency polices
technology policies
price response in trading scheme
© OECD/IEA 2010
Need for Regular Reviews
-
Abatement potentials, costs
Macroeconomic impacts
Establish Policy Core:
Carbon price supplemented by
-Energy efficiency policies
-Technology policies
Consider case for further supplementary
policies
Assess
interactions,
adjust if
necessary
Assess wider economic effects
REVIEW TO MAINTAIN COHERENCE OVER TIME
Build Constituency for Climate Change Response
Understand fundamentals:
© OECD/IEA 2010
Group Exercise:
Domestic Climate Policy
options
© OECD/IEA 2010
Outline
1. Climate change overview: international
framework and process; climate change
scenarios
2. Climate policy choices in the energy sector:
interaction between policy areas and policy
packages (case study)
3. Carbon markets: overview, flexibility
mechanisms, market readiness (case
study)
© OECD/IEA 2010
Market size in 2010 (USD billion)
Project-Based
Transactions
CDM
1.5
Allowance Markets
Secondary
CDM
EU Emission
Trading Scheme
18
120
Other offsets
1.2
Other allowances
1.1
Source: World Bank, 2011
© OECD/IEA 2010
Evolution of carbon markets
Source: World Bank, 2011
© OECD/IEA 2010
Overview of emission reductions
achieved by CDM projects
 CDM pipeline
information: About 1.15
GtCO2 expected until
2012
 Electricity sector Likely
Energy
efficiency
(demand side,
transport,
energy
distribution)
1%
Other energy
(fossil fuel
switch, energy
efficiency
supply side)
13%
delivery of reductions:
400 Mt - 600 MtCO2
 Projected electricity
Industrial and
fugitive gases
36%
emissions over that
decade in non-Annex I:
60 GtCO2
Methane
reduction,
cement
16%
 CDM structurally
unlikely to deliver
needed mitigation
Source: UNEP Risø, CDM pipeline, consulted in March 2012
Renewables
33%
Projects that are registered or
requesting registration
Land use and
forestry
1%
© OECD/IEA 2010
New market mechanisms
CDM:
New scaled-up market
mechanisms:
 Project-based
 Beyond project scope
 Business-as-usual
 Ambitious baseline
 Ex-post crediting
 Ex-post crediting or
crediting line
(net global mitigation)
ex-ante trading
© OECD/IEA 2010
Incentives for host countries for
moving beyond CDM offsets
 Larger overall volume of credits and
potentially lower transaction costs
 Potentially increased and more
structured technology transfer
 Direct support for putting in place policy
frameworks
 Full choice of mitigation technologies
 Discounting and limitations on use of
CDM credits
© OECD/IEA 2010
Market readiness
The necessary technical, policy and
institutional frameworks that a country
needs to access and employ, through
market mechanisms, private and public
financing for low-carbon development
© OECD/IEA 2010
Two categories of new market
mechanisms
International carbon markets
Crediting mechanism linked to
international markets
Domestic market mechanisms
with link to international carbon
market
(e.g. emissions trading scheme;
sectoral trading)
Domestic emission reduction
policies
with possible crediting link to
international carbon markets
(e.g. NAMA or sectoral
crediting)
© OECD/IEA 2010
Categories of building blocks
Market Readiness
Technical:
The basic structure of a market mechanism (e.g.
coverage, MRV, registry, etc.)
Policy:
Ambition of the environmental goals and policy
measures to reach it (i.e. identifying mitigation
potential and costs and choice of policy instruments)
Legal/institutional:
Institutions needed to operate the market mechanism
(e.g. collection of inventory data, issuance of
allowances/credits, compliance, etc.)
© OECD/IEA 2010
Specific actions/activities in each phase
PHASES OF MARKET READINESS
Policy actions
(1) Assessing mitigation
potential and policy
instruments
- Setting environmental goals
(4) Aligning policy and
legal/institutional framework
(5) Piloting, testing and review
- Use national GHG inventory
etc. to estimate likely BAU path
- Cost estimation of goals
- Gather data on GHG trends by
relevant sector/ NAMA
- Identify and close data gaps
- Stakeholder consultations
(2) Feasibility assessment and
choice of market based
approaches
(3) Setting up the technical
framework
Implementation activities
- Determine coverage
- Setting environmental goal for
market mechanism
- Allocation of allowances / credits
- Responsibility for enforcement,
collecting GHG data and verification
- Interaction with accounting and
tax legislation
- Policy coherence with other policy
areas
Following piloting and testing a review process may
feed back into preceding steps resulting in a redesign
of some elements of the market mechanism
-Establish reference year
emissions (baseline or cap)
-Establish MRV system, registry
and transaction log
Q&A
© OECD/IEA 2010