Building a global carbon market The European Unions vision Artur Runge-Metzger Head of International Climate Negotiations, European Commission In-session workshop on means to reach emission reduction targets, AWG 5.1, Bangkok, 1-3 April 2008

2 The EUs global vision – 2 degrees objective

3 Mitigation by industrialised countries Common but differentiated responsibility: take the lead and make most of the effort EU commitments: 20% unilaterally by % in context global deal 60-80% by 2050 Carbon market as a key tool Binding and effective rules for monitoring and enforcing commitments

4 Mitigation in developing countries Toolbox: oNo commitments for least developed countries oSustainable development policies oEnhanced CDM oPerformance-based funding oSectoral approaches oQuantified emission limits Reaching development objectives will be imperative; mitigation and adaptation Reduce growth of emissions asap, and absolute reductions after 2020

5 Building a global carbon market The carbon market: cost-effective and flexible mitigation tool and source of finance for low- GHG technology development EUs aim: progressive development towards global carbon market Countries take part according to different responsibilities and capabilities Backed by ambitious mitigation commitments in line with 2 degree objective Build on existing mechanisms, link schemes and develop new mechanisms

6 The role of the carbon market (I): 27 Gt CO 2 e emission reduction potential below 40/ton CO 2

7 Each Parties opportunity + responsibility mainly in household, buildings, transport Exchange good practice in policy design: e.g. –Abandon energy subsidies (fossil fuels: ~ 130 billion p.a.) –Domestic company-based emissions trading –Set energy efficiency standards, building codes, labelling schemes, 1-Watt-Initiative –Ban the bulb: CFL, LED –Progressive taxation –Address potential cash flow issues, e.g. targeted loan schemes (e.g. refurbishment of existing power plants) The role of the carbon market (II): No. 1 = 6-7 Gt CO 2 e: Harvest all low hanging fruits by 2020

8 Domestic emissions trading schemes to set carbon price for private sector. Less developed countries: strengthened CDM to drive technology transfer and economic transformation Complementary approaches needed to address sectors not covered by the carbon market, other barriers and possibly to scale up finance Advanced developing countries: move beyond offsetting, new mechanisms to incentivise increased mitigation contributions Carefully watch demand and supply! The role of the carbon market (III): No. 2 = 10 – 12 Gt CO 2 e: carbon market will be the main driver

9 Promote co-operation for research and technology development (e.g. joint ventures, PPP) Subsidies for demonstration, e.g. NZEC Direct subsidies for deployment of clean technologies, e.g. GEEREF, export credits, PPP, concessional IFI loans Reduce tariffs for advanced GHG-efficient products and services Promote regulatory approaches gaining energy security/clean air benefits: e.g. mandatory standards (cars, appliances), fuel taxes, portfolio standards (e.g. renewable energy, CCS) The role of the carbon market (IV): No. 3 = 10 – 12 Gt CO 2 e: promote high-end options

10 Clean Development Mechanism (I) CDM has delivered real and measurable benefits and generated a multi-billion dollar market (28 billion in 2007)

11 Continuity for the CDM post-2012 EU Commission proposal would allow 2.63 Gt (1.4 Gt in the EU ETS, 1.23 Gt MS use) of CERs to be used until 2020 independent of an international agreement Includes ongoing projects registered before 2012 and projects established post-2012 in LDCs EU first to provide certainty for CER use post-2012 – no one else does so far! About one third of the necessary reduction effort towards 20% target from CDM/JI - other two thirds ensure real emission reductions in Europe Unlimited access to CDM/JI under the 20% target would lead to drop in CER price to 4 and increase of EU domestic emissions to about 4% above 1990 = contradicts EU objectives of climate policy leadership and energy security. Substantial increase as part of Copenhagen agreement: EU Commission proposal would allow half of the additional effort (~1.2 Gt extra: totalling ~70bn of transfers, i.e. ~6bn annually) to be met by CDM/JI or new mechanisms.

12 Clean Development Mechanism (II) Reform of CDM for post-2012 needs to address the following concerns: –strengthen environmental integrity: ensure real and additional emission reductions (key to offsetting mechanism) –address possible perverse incentives resulting from (low-cost) CDM –review current institutional set-up and procedures (Article 9) Strengthen CDMs contribution to technology transfer and economic transformation in less developed regions Need to move beyond offsetting for advanced developing countries will be key for post-2012 – explore new approaches, e.g. baseline/credit, sectoral approaches

13 CDM – some proposals More executive and supervisory role of EB, including delegation of decision-making and strengthened professional support staff Revision of CDM decision-making procedures, including strengthening the basis and transparency of decision- making Assessment of roles and responsibilities of DOEs Increased use of technology benchmarks for baseline setting and additionality testing Dialogue with host countries on how to strengthen contribution to SD and tech transfer More differentiated approach to CDM will help improve regional distribution

14 Joint Implementation JI has delivered benefits, but not yet realised its full potential Role for JI post-2012: stimulating international collaboration and channeling investment and technology towards certain mitigation opportunities and sectors, which otherwise lack access to the global carbon market JI allows for institutional learning about market-based approaches and a transitional step before wider application of cap-and-trade Need to discuss JI post-2012 and explore new concepts: –May need to continue with a two-track approach with internationally supervised procedure (track 2) for countries that still lack institutional and legislative framework for JI track 1 –Explore synergies and parallels with revision of CDM for track 2 procedure, e.g. on simplifying and streamlining institutional set-up and procedures and strengthening environmental integrity –Explore new concepts such as programmatic JI

15 Shared vision of a low-carbon future: Annex I Offsetting is not enough How can the carbon market build on measurable, reportable and verifiable mitigation action by developing countries? What means of support are needed in addition to the carbon market? In which way can the carbon market most effectively contribute to sustainable development and technology transfer? What is needed in which countries and which sectors? IPCC 2007, WGIII, ch. 13

16 Need to explore new mechanisms to incentivise enhanced mitigation: e.g. no-lose sectoral crediting mechanism Source: Ecofys

17 Conclusions Significant role of the carbon market already today – should be strenghtened post An environmentally more effective CDM should continue to play a role Offsetting is not enough – carbon market offers promising potential if we succeed in developing new tools that build on differentiated contributions by developing countries Carbon market is part of the solution but not a panacea – needs to be combined with other tools to further technology cooperation, financial flows and investment

Thank you!