March 2009 Emissions Trading in South Africa National Climate Change Summit Emily Tyler

- Recap: What can we learn from theory and emerging international experience? - Some initial considerations for the design of a South African ETS - White Certificate Trading - Areas for further exploration…

Emerging Lessons from Theory and International Experience Developing an ETS: capacity (planning and management), certainty Markets and Politics: market structure (power concentration, experience with market mechanisms, existing distortions), info asymmetry Design Elements: distributional, revenue generation, point of regulation, liquidity, simplicity, data for baseline setting, allowance allocation, some sectors less suitable (transport)

South African ETS: Emerging Considerations 1. Importance of certainty - Significant uncertainty both domestically and internationally - Electricity market price uncertainty Design: Price certainty (floors, ceilings) to enable investment planning 2. Timing and importance of preparation and long lead times - Data, planning, consultation Design: 2020 turning the corner and cap, voluntary scheme prior to this?

South African ETS: Emerging Considerations 3. Capacity to implement and manage an ETS - does SA have this in government, energy sectors? - less certainty, data symmetry = more complex in design - lack of experience with market mechanisms, especially in energy sector - strong financial sector Design: simplicity! 4. Coverage - Issue of power concentration for regulation of downstream emissions - Substitution, who? - Distributional issues Design: Price mechanisms to avoid pass-through of costs, point of regulation as large electricity users and Scope 1 non-electricity emissions, initially only CO2

Short term significant opportunities in energy efficiency Substitution opportunities amongst large players perhaps best targeted by non-market mechanisms To gain liquidity and avoid market power concentration issues need to look towards consumer of electricity, coal, gas, liquid fuels Significant near-term, negative cost opportunities in energy efficiency White Certificate Trading Schemes

White Certificate Trading Indirect GHG mitigation policy mechanism White Certificates: a guarantee awarded to indicate that a certain amount of energy savings have been achieved, can be generated through a quota system Unique, traceable, establish a ‘property right’ over the savings Most White Certificate Trading Schemes are ‘baseline-and-credit’ Point of regulation is typically energy distributors: electricity, gas, oil Therefore most often there is a distinction between the point of regulation, and where the savings occur Energy Service Companies (EsCOs) fill the gap Internationally often used in the household sector

Emerging lessons from theory and international experience WCS develop measuring and monitoring capacity within the energy sector The development of an EsCO sector is stimulated Low cost to government Existing market structure has been found to be less of a concern BUT Interlinking of white certificate schemes with other energy sector policy mechanisms - additionality issues (baseline and additionality crucial to performance) Clear point of regulation and regulatory certainty are important Interlinking with other GHG policy mechanisms, complex

White Certificates and Emissions Trading in South Africa Proposed ECS and RTC schemes are WCS In pipeline, with sectoral buy-in advanced Captures ‘low hanging fruit’ of mitigation opportunities Will generate data Issue of temporary, intensity based nature of the ECS, complexity of linking with a GHG scheme in future A possibility for households and transport? Simplicity: one policy objective, one instrument.

Areas for further work We need to better understand: -The implications of the use of a white certificate trading scheme as a greenhouse gas mitigation policy instrument in South Africa (GGAS, UK) -How could an ETS work in conjunction with existing / proposed policy initiatives in the energy sector, particularly the ECS and RTC? -How can it be ensured that the energy efficiencies realised through the ECS are sustainable and long term in nature? -What policy mechanisms are required for the short term critical investment decisions? -Current global economic climate and implications for economic policy making, market vs regulation -What and how costly are the emission reduction opportunities outside the energy sector? -Undertake a direct comparison of a future tax vs trading scheme in the South African context