Linking the EU emissions trading scheme: economic implications of allowance allocation and global carbon constraints

We investigate the role of domestic allowance allocation and global emissions constraints for the carbon-market impacts of linking the EU Emissions Trading Scheme (ETS) internationally. Employing a quantitative simulation model of the global carbon market, we find that the economic benefits from connecting the European ETS to emerging non-EU schemes strongly depend on the regional allowance allocation of the linking participants: In a world of moderate carbon constraints, an economically efficient regional allowance allocation induces a much stronger fall in total compliance costs than a sub-optimal (i.e. too high) domestic allocation of emissions permits. However, a more efficient (i.e. stricter) allocation shifts abatement efforts and compliance costs to energy-intensive industries which are covered by the domestic ETS. We further find that committing to ambitious global emissions reduction targets (compatible with stabilizing CO₂ concentrations at 450 ppm) induces much stronger regional abatement efforts and substantially higher compliance costs for the abating regions. In such an ambitious climate policy regime, an efficient domestic allocation of allowances is even more important from an economic perspective: Here, linking emissions trading schemes diminishes the associated compliance costs on the largest scale.

Advancing the climate regime through linking domestic emission trading systems?

More and more countries are incorporating the instrument of emissions trading into their national climate policies. This emerging mosaic of emissions trading schemes (ETS) raises the question of whether they should be linked with each other. From an economic point of view, linking of domestic schemes is supposed to increase the economic efficiency of carbon markets. In addition, linking is also expected by some to yield substantial political benefits in terms of the evolution of the UNFCCC/Kyoto regime. However, these optimistic prospects are based on a best-case scenario where all major countries establish environmentally effective emissions trading systems and then link them with each other. Real-life politics might develop rather differently. This paper therefore examines to what extent the current status of emissions trading in industrialised countries provides a basis for reinforcing and moving forward the international climate regime through linking domestic ETS. After comparing emerging emissions trading schemes from an institutional perspective, it emerges that not only emissions trading is at a very early stage in most countries, in addition the emerging systems are probably going to be designed very differently from the EU ETS. While for some design features such as the coverage design differences do not matter, there are some areas where the plans in many non-EU countries look crucially different from the EU system. The outlook for a linked international ETS is therefore currently still very uncertain. Given this state of affairs, the EU should pro-actively engage with the non-EU countries to try to harmonise their developing national emissions trading schemes with the EU ETS, widely disseminate the lessons it has learned from the EU ETS, strongly make the case for environmental integrity and at the same time make clear that systems that want to link to the EU ETS will need to meet certain quality criteria.

Foresty offsets in emissions trading systems: a link between systems?

An important aspect in the linking of different emissions trading schemes is the degree to which these systems allow (or ban) external offset project categories. The EU Emission Trading Scheme (EU ETS) currently allows the use of credits from energy and industry projects developed under the Kyoto Protocol’s Joint Implementation (JI) and Clean Development Mechanism (CDM) but excludes the use of carbon credits from forestry projects for compliance in the EU ETS. Forestry credits generated by the CDM have a limited lifetime and expire at the end of a project’s crediting period, or earlier if the carbon stock for which the credits have been issued ceases to exist. According to the recently adopted amendment of the EU ETS Directive forestry credits will remain to be excluded until 2020. The present article reviews how the New South Wales Greenhouse Gas Abatement Scheme (Australia), the Regional Greenhouse Gas Initiative (US) and the voluntary scheme of the Chicago Climate Exchange integrate forestry offsets into the respective system and how they deal with the risk of losing stored and credited biomass. By comparing the results of different scenarios this article shows how differences in the treatment of forestry offsets could impact the efforts to link various emission trading systems in future.

Linking Russia with the European and global greenhouse gas emissions trading markets: three paths for greening the Russian assigned amount under the Kyoto Protocol

This article examines possibilities for linkage between the European Union Emissions Trading System (EU ETS) and Russia, with a view to enhancing cooperation on a broader scale than the project-based approaches that have been tested thus far. Three paths for possible EU-Russia linkage are presented by which the Russian Assigned Amount under the Kyoto Protocol can be greened in order to stimulate emissions trading: 1. Joint implementation—reductions earned via individual projects in Russia; 2. Greened allowances or green investment schemes; and 3. Linked cap-and-trade systems, in which a Russian domestic emissions trading system would link with the European Union Emissions Trading System. The authors conclude that the third option, emissions trading through linked domestic emissions trading systems, offers the best opportunities at the lowest transaction costs. The authors discuss useful innovative instruments like call options and slip level arrangements on government-to-government and business-to-business levels.

Assessing the dynamic efficiency of internal mitigation projects. An evolutionary perspective

Internal mitigation projects have recently been proposed as an additional flexibility mechanism, particularly in the context of the European Union. Their main objective is to engage sectors not included in the European Union emissions trading scheme (EU ETS) in cost-effective emissions reductions. However, in this paper it is argued that, when assessed in terms of dynamic efficiency, the instrument is likely to be, at best, irrelevant to induce the scale of systemic technological changes which are required to tackle the climate change problem and, at worst, detrimental for this task. Insights from the Evolutionary Economics of technological change complemented with political economy considerations are used to support this claim.

Challenges and opportunities of a post-Kyoto mitigation regime: a survey of the European electricity sector

This paper empirically shows how the uncertainty associated to the absence of a mitigation regime which follows the United Nations Framework Convention on Climate Change Kyoto Protocol (UN FCCC Kyoto Protocol) is affecting investments in abatement activities in the EU electricity sector and, thus, future emissions levels. Based on a survey of EU electric utilities, it identifies the most likely post-Kyoto scenarios considered by them and how they are coping with such uncertainty in their investment decisions. It is found that firms react differently to such uncertainty and adopt different strategies to cope with it, diversifying their emissions control activities. Although most companies foresee post-Kyoto compliance regimes with emissions trading systems, they differ in their perceptions of the form that a post-Kyoto regime could take and are, thus, positioning differently to face such regime. The particular features of each company and the country where they operate affect their perception of the uncertainties, their position regarding a possible post-Kyoto regime and their inclination to carry out mitigation activities. Complying with Kyoto (and, eventually, post-Kyoto) targets significantly influences the investment decisions of European electricity companies. Uncertainty about a post-Kyoto regime may already be affecting investments in mitigation activities in the electricity sector. Therefore, significant progress has to be made in the definition of a post-Kyoto regime. It is urgent to define and agree internationally the emissions reduction objectives and the mitigation instruments that will be accepted for compliance, ensuring continuity of the international emissions trading system foreseen in the Kyoto Protocol.

Linking the Northeast states of the US mitigation program to the EU Emission Trading Scheme—Implications and costs

It is argued that there are at least five reasons for the Northeast states of the United States to implement a regional emission trading scheme for carbon dioxide despite the lack of federal policy regulations: goodwill, learning, political influence, risk management and competitiveness interests. Using an energy-economy model, the carbon price to bring the firms into compliance with a 10% reduction by 2020 is estimated to be 20-150 US$ per ton C. There have been discussions about linking the ongoing EU Emission Trading Schemes to the Northeast state initiative. The prime argument is that such a linkage would encourage a change of the federal US policy, which has traditionally followed action taken at the state level. Emissions trading with binding mitigation commitments could thus be demanded and accepted also on federal level. This paper demonstrates that the impact of linkage on permit prices depends on the reduction target in the European scheme: A low EU target results in a net flow of permits to the Northeast scheme, while a 40% EU reduction target results in a net flow of permits from the Northeast. Flow of permits from the Northeast state must be compensated for by the EU because the United States is not a party of the Kyoto Protocol. The EU must therefore buy permits in allowances recognized in the Kyoto regime in an amount equal to the net flow of permits from the Northeast states.

Ensuring the environmental effectiveness of linked emissions trading schemes over time

Linking emissions trading schemes allows the combined emissions cap to be achieved at lower cost. Linking is usually environmentally neutral, but some design features can lead to higher aggregate emissions if schemes are linked. Technical solutions to limit the potential emissions increases due to design differences implemented when schemes are linked are not sufficient to ensure the environmental effectiveness of the linked schemes over time. Technological, economic, administrative and other changes that can lead to higher aggregate emissions are inevitable. The administrators of the linked schemes must ensure the stringency of the emissions cap relative to the “business as usual” emissions of affected sources, the accuracy of the emissions reported by affected sources, the integrity of the allowance registry, effective compliance enforcement, and the environmental integrity of the credits issued for emission reduction projects over time. This will require a process for agreeing on revisions to the regulations of the linked schemes, a mechanism to provide assurance of the environmental effectiveness of each of the linked schemes, and a procedure for terminating the linking agreement.

CDM potential of SPV lighting systems in India

In view of the increasing interest in the development and dissemination of technologies for harnessing new and renewable sources of energy in India, there have also been some efforts towards their use in the domestic lighting sector. However, the cumulative number of Solar Photovoltaic (SPV) lighting systems such as SPV lanterns and solar home lighting systems in India is far below their theoretical potential despite government subsidy programmes. One of the major barriers is the high capital investment in these systems. The Clean Development Mechanism (CDM) provides industrialized countries with an incentive to invest in emission reduction projects in developing countries to achieve a reduction in CO₂ emissions at lowest cost that also promotes sustainable development in the host country. SPV lanterns and solar home lighting systems could be of interest under the CDM because they directly displace greenhouse gas emissions while contributing to sustainable rural development. However, only two SPV projects have been submitted under the CDM so far. This study assesses the maximum theoretical as well as the realistically achievable CDM potential of SPV lanterns and solar home lighting systems in India. The SPV lantern project is financially viable at a certified emissions reductions (CER) price of 34 € whereas the solar home lighting project is financially viable at a CER price of 46 €. While the maximum mitigation volume is about 35 million tonne CO₂ on an annual basis, an estimate of achievable CER levels is done using the past diffusion trends of SPV systems. We find that annual CER volumes could reach 0.8 to 2.4 million by 2012 and 5.6 to 13.6 million by 2020. This would require that the government sets the subsidy level for SPV lighting systems at a level that allows them to become viable with the CER revenue. From a macro-economic point of view this makes sense if the sustainability benefits are deemed sufficiently high to warrant promotion of this type of project.

The globalization of the carbon market: Welfare and competitiveness effects of linking emissions trading schemes

In the light of the prevailing goal to keep global temperature increase below 2° and recent challenges to reach a global climate agreement in the near term, linking emissions trading schemes has emerged as a prominent complementing policy option. To this end, we explicitly assess (1) the macroeconomic welfare impacts and (2) the trade-based competitiveness effects of linking the European Union (EU) Emissions Trading Scheme in the year 2020. A stylized partial market analysis suggests that, independently of regional cost characteristics, the integration of emissions trading schemes (ETS) yields economic welfare gains for all participating regions. A computable general equilibrium analysis confirms these findings at the macroeconomic level: The economic efficiency losses from emissions regulation are diminished for both EU Member States and non-EU regions by linking ETS. However, the quantitative analysis suggests opposite trade-based incentives for linking up: while EU Member States improve their terms of trade by integrating with emerging ETS, non-EU linking candidates face competitiveness losses by linking. We conclude that, for non-EU regions, the attractiveness of linking ETS is a matter of priorities for economic welfare or international competitiveness. If these priorities are hierarchized in favor of welfare, the globalization of the carbon market could become a promising policy option complementing the efforts to reach a global climate agreement in 2015.     

CO2 emission reduction costs for iron ore-based steelmaking in Sweden

Possibilities to reduce CO₂ emissions and related costs at Swedish iron-ore based steelmaking in Sweden have been estimated. An evaluation of the direct impact on costs for emission-reducing measures due to the inclusion in the EU ETS is also made.Two different abatement options, based on previously implemented measures at SSAB Oxelösund as well as some future measures that could be implemented at the company by 2010, have been investigated. The first option corresponds to a CO₂ emission reduction of 6.5% and the second to a 13% reduction. The abatement measure with the largest reduction potential is dependent on natural gas being available at SSAB Oxelösund by 2010, which is not certain.Several of the estimated abatement costs are negative, meaning cost savings for the company if implemented. The cost estimates are strongly linked to the fuel prices. The inclusion of industries in the EU ETS increases the incentives for companies to implement CO₂ abatement measures.     

CO2-emission reduction costs for petroleum refineries in Sweden

Possibilities to reduce CO₂ emissions and related costs at Swedish petroleum refineries have been estimated. An evaluation of the direct impact on costs for emission-reducing measures due to the inclusion in the EU ETS is also made. Abatement measures possible to implement within the next 5–6 years at Shell refinery Gothenburg corresponding to a 8% reduction, and at Preemraff Lysekil corresponding to 22% of the estimated fossil CO₂ emissions in 2010 have been included. Many of the estimated abatement costs are negative, meaning cost savings for the companies if implemented. The cost estimates are strongly linked to the fuel prices. The inclusion of industries in the EU ETS increases the incentives for companies to implement CO₂ abatement measures.     

欧盟温室气体排放交易实践对我国的借鉴

基于欧盟温室气体排放交易体系的建立与特点,概述了欧盟温室气体排放交易第一阶段的市场运行效果,分析了该阶段取得的经验与教训,主要包括管制范围、历史数据获取与分配方法等方面,在此基础上提出我国应加紧制定温室气体排放交易法律法规、建立国际化碳交易所,并以电力行业为试点探索建立我国碳排放贸易体系。     

欧盟航空碳税对中国的影响及应对建议

尽管始终备受争议的航空碳税计划终于在欧盟内外的双重压力之下面临流产,但是建立全球碳排放交易体系终究是大势所趋,中国在这一问题上应该有前瞻性.由于欧盟航空碳税同环保高度相关,本文通过资料调研及数据收集,对欧盟此举的主要原因和对中国的影响进行了分析,并从保护航空业竞争力、介入全球碳排放交易体系设计和我国环保工作实际出发提出了应对建议.     

Greenhouse gas mitigation in developing countries through technology transfer?: a survey of empirical evidence

While greenhouse gas (GHG) emissions are projected to rise primarily in the developing countries, the potential for developing new GHG mitigation technologies exists primarily in the industrialized countries. It is thus important, not only for predictions about future emission paths but also for climate change mitigation policies, to understand how the international diffusion of such technologies takes place and how it affects the energy infrastructure and GHG emissions in developing countries. This paper provides an overview of the channels through which these technologies diffuse and focuses on the empirical evidence pertaining to the effects these technologies have on GHG emissions in developing countries.

基于GD_CGE模型的广东省碳排放权交易政策评估

为了评估广东省碳排放权交易制度设计对控制二氧化碳排放及经济发展可能发挥的作用,本文建立GD_CGE模型研究了在碳强度约束目标下碳交易政策的实施效果.首先分析了无减排约束和有减排约束情景下广东宏观经济(GDP)、能源消费总量和碳排放总量的发展趋势;进一步扩展减排约束情景,考察了在全省碳强度减排目标约束下,把电力、水泥、石化、钢铁、造纸、纺织六大部门纳入碳交易体系,并分别按照历史法和潜力法确定行业碳排放约束上限时,实施碳交易政策对宏观经济和能源消费量的影响,模拟了碳市场的交易情况和碳价格.结果表明:在碳强度目标控制下,实施碳交易政策可显著降低部门的减排成本,减小控制碳排放可能对全省GDP的影响,起到了促进广东省低成本节能减排的作用.     

Carbon tax,emission trading,or the mixed policy: which is the most effective strategy for climate change mitigation in China?

China, as the world’s largest emitter, intends to achieve the peaking of carbon dioxide (CO₂) emissions around 2030 and to make best efforts to peak early to mitigate global change. Under this strategy, a dynamic, recursive computable general equilibrium (CGE) model is used to analyze the economy, energy, and environment impact of CO₂ emission reduction policy based on 17 scenarios in China: carbon tax, emission trading scheme (ETS), and the mixed policy in different price level, in order to find out which kind of emission reduction strategy is more feasible. The results show that CO₂ emission in 2030 will be reduced with the implementation of tax, ETS and mixed policy, by 10–13 %, 12–14 %, and 18–28 %, respectively. From 2016 to 2030, China can reduce 18,338–24,156 Mt CO₂ through the implementation of mixed policy. Furthermore, relative to single policy, mixed policy has stronger effects on primary energy consumption cut, by 738–1124 Mtoe or 18–28 %, which will make CO₂ emissions reach a peak before 2030 and the peak emission is not greater than 12 billion tons which is in line with the reduction demand in China. Thus, the mixed policy is the most effective strategy so that mixed policy is recommended to parties included in Annex I in United Nations Framework Convention on Climate Change Kyoto Protocol and other countries with large potential of emission reduction, while ETS is suggested to countries with low carbon emissions per capita which can balance economic development and CO₂ mitigation.     

Top-down approaches for sharing GHG emission reductions: uncertainties and sensitivities in the 27 European Union Member States

To reduce GHG emissions, the 27 European Union Member States committed themselves in 2007 to reduce emissions from 1990 levels by 20% by 2020. In January 2008, the EU Commission gave the first country-specific proposals to reduce emissions in sectors outside the EU emission trading system (non-ETS). In this study, we looked at several ways of sharing emission reductions in the non-ETS sector. We considered population and economic growth as significant drivers of the development of emissions. In particular, we analyzed development in GHG intensity of economies. Reduction requirements vary greatly among countries depending on the principle of effort sharing. The results of our calculations can be perceived as examples of how effort sharing between the EU Member States could look like when certain assumptions are made. Generally they illustrate the sensitivity of the results to data used, assumptions made, and method applied. The main strength of simple top-down approaches is transparency. A major weakness is a very limited ability to consider national circumstances. Political negotiations are ultimately crucial; an analysis like this provides material for negotiations and makes a contribution to solving the effort-sharing problem. As future development is partly unpredictable, implementation of some kind of subsequent adjustment could be considered during the process.     

Setting greenhouse gas emission targets under baseline uncertainty: the Bush Climate Change Initiative

There is substantial uncertainty regarding baseline greenhouse gas (GHG) emissions forecasts—i.e., how GHG emissions will grow over time in the absence of policy intervention. Thus baseline uncertainty should be a key consideration in setting GHG emissions targets as a mitigation strategy to respond to global climate change. At a minimum, the emissions target must be less than the baseline level to induce changing behavior and new investment. Despite this fundamental policy criterion, baseline considerations have played only a minor role in target setting under international climate policy. Baseline uncertainty applies to both absolute and intensity based emissions targets. It is demonstrated that one advantage of intensity targets is reduced uncertainty in the projected baseline, however there will always be some residual uncertainty in model projections. To illustrate the importance of considering baseline uncertainty in GHG target setting, the Bush Climate Change Initiative is analyzed against its projected baseline as a case study of a modest intensity target. Based on comparison with historical data, the range of projections by major energy-economic models, past discrepancies in the accuracy of model projections and the added complexity of sector-specific drivers for non-CO₂ GHGs, it is shown that the Bush Initiative cannot be guaranteed or even expected to deliver actual reductions against an uncertain baseline. This finding emphasizes the importance of setting a target that accounts for baseline uncertainty to achieve genuine mitigation of GHG emissions.

Tropical deforestation in a future international climate policy regime—lessons from the Brazilian Amazon

The possibility of adopting national targets for carbon dioxide (CO₂) emissions from tropical deforestation in a future international climate treaty has received increasing attention recently. This attention has been prompted by proposals to this end and more intensified talks on possible commitments for developing countries beyond the United Nations Framework Convention on Climate Change Kyoto Protocol. We analyze four main scientific and political challenges associated with national targets for emissions from tropical deforestation: (1) reducing the uncertainties in emission inventories, (2) preserving the environmental integrity of the treaty, (3) promoting political acceptance and participation in the regime, and (4) providing economic incentives for reduced deforestation. We draw the following conclusions. (1) Although there are large uncertainties in carbon flux from deforestation, these are in the same range as for other emissions included in the current Kyoto protocol (i.e., non-CO₂ GHGs), and they can be reduced. However, for forest degradation processes the uncertainties are larger. A large challenge lies in building competence and institutions for monitoring the full spectrum of land use changes in developing countries. (2 and 3) Setting targets for deforestation is difficult, and uncertainties in future emissions imply a risk of creating ‘tropical hot air’. However, there are proposals that may sufficiently deal with this, and these proposals may also have the advantage of making the targets more attractive, politically speaking. Moreover, we conclude that while a full carbon accounting system will likely be politically unacceptable for tropical countries, the current carbon accounting system should be broadened to include forest degradation in order to safeguard environmental integrity. (4) Doubts can be cast over the possible effect a climate regime alone will have on deforestation rates, though little thorough analysis of this issue has been made.