Carbon markets An international tool for cost-effective GHG mitigation

Governments develop “appropriate” plans to meet their GHG reduction goals Transportation? –Fuel efficiency standards –Electric vehicle purchase rebates –High-speed rail Energy generation? –Renewable energy portfolio standards –Technology incentives –Energy Efficiency programs Emissions trading schemes And more…

Market elements are adapted to local conditions –Coverage and Scope –Cap and allocations –Requirements and systems for monitoring, reporting, verification and compliance –Trading and stability –Institutional arrangements –Use of offsets and linking

GHG Market Design Companies can choose least-cost compliance method: –reduce emissions directly and/or –purchase compliance rights (allowances and/or offsets)  Cap-and-trade schemes are proven to be economically effective tools to reduce emissions ElementExample CoverageEnergy, cement, oil & gas, landfills, heavy industry across the country ScopeFacilities emitting 20,000 mt CO2 year Cap2% reduction each year AllocationsTo individual installations 95% of a benchmark OffsetsUp to 10% of total allocation

Existing and emerging emissions trading schemes Source: World Bank, 2013, Mapping Carbon Pricing Initiatives.

Capped vs. Uncapped Reductions Housing and utilities ETS Construction Steel/metallurgy industry Production of building materials Mining Pulp & paper Fuel extraction industry Production & distribution of electricity, water, gas Agriculture and forestry Waste management Transportation Uncapped

Two Pathways for GHG Reduction Projects Capped Sector Projects Example: renewable electricity and energy efficiency projects Can use streamlined standards and procedures Projects are given quota allocations based on GHG reductions achieved Uncapped Sector Projects Example: Coal mine methane reductions Quantified using carbon offset methodologies Projects are issued carbon offset credits based on GHG reductions achieved

ENVIRONMENTAL MARKETS IN OPERATION

Oldest emissions market: SO 2 (USA)(1995-present) Cost to date: $3 billion Benefit to date: $120 billion 2009 activity: 2,716 transactions transferring 26% of allowances between economically unrelated parties SO 2 Allowance Market in Brief (close of 2009) Total Value of the SO 2 Allowance Market $1.1 billion Year-End Price$61 per ton Total Allowance Volume (Allowable Emissions) 18,017,192 SO 2 Emissions from Acid Rain Program Sources, 1980–2009

GHG Market: Kyoto Protocol (1997) Countries committed to binding national reduction targets Allows use of “Flexibility Mechanisms” to meet reduction targets –Emissions trading –Clean Development Mechanism –Joint Implementation

European Union: Emissions Trading Scheme (ETS) First GHG ETS to launch (2005) Today 28 member countries participating + Iceland, Liechtenstein, Norway –Cap decreases annually 1.74% across EU –Has grown as the EU has grown during the same period –Covers 45% of total emissions –11,000 installations

EU ETS Phase 1: (pilot) Phase 2: –CO 2 emissions from fuel combustion + 5 industrial sectors –National caps –Mostly free allocation Phase 3: – aviation + other activities + N 2 O (some activities) + PFCs (aluminum) –Greater harmonization; one EU-wide cap –Increased auctioning of allowances (40% in 2013 with the % increasing each year –Benchmark-based allocations –300 million allowances reserved for renewable energy + CCS

EU ETS: Reductions/allocations –Allocations have tightened over time Backloading auction of some allowances –49% offsets possible across EU Each country sets own limits within national scheme CDM units can be converted to offsets, but now only from LDCs

CO2 EU ETS (2005) New Zealand (2008) Economy- wide + forestry Electric power RGGI (USA) (2009) California (Jan 2012) Economy- wide Standard- ized offsets CO2 from Industrial sources + buildings Tokyo (April 2012) Aus- tralia (July 2012) Carbon Pricing Mech- anism Link to EU ETS Economy- wide (First in Asia) Kazakhstan (2013) China Pilot ETS (2013) Voluntary ETS (2012) carbon tax or offsets (2014) Mexico South Korea (2015) Learning from the EU ETS

Markets reflect local circumstances South Africa: one 90% of national industrial emissions so prefer carbon tax Tokyo – electricity consumption in buildings New Zealand – include protection of forests California – 8% limit on offsets to reflect desired level of in-state reductions

One global carbon market? Learning by doing Minimum requirements are necessary to one day link carbon markets Provides investment in clean, green technology Source: World Bank, 2013, Mapping Carbon Pricing Initiatives.