Linking trading schemes – considerations and lessons learned from EU ETS Jill Duggan IISD/WRI - Chicago November 2007

Outline EU Experience Benefits of linking What do we need to link International Carbon Action Partnership

European Union 25 Member States Countries joined EU in 2007

EU Experience Different Targets within EU Bubble (-8%) UK -12.5%, Germany -21%, Spain +15% Single Directive but interpreted in different ways Scope Rules Allocation methodolgies

Only 5% auctioning allowed Free allocation – significant lobbying and concern from industry Asymmetric information – industry on MAC and no clarity on OMS positions Result - overallocation

Percent emissions below allocationPercent emissions above allocation % difference between Member State allocations and emissions in 2005 Lithuania Denmark Latvia Finland Estonia Slovak Republic Czech Republic Hungary Sweden France Netherlands Belgium Germany Portugal Slovenia Greece Italy Austria Spain UK Ireland Member State Surplus of allocated allowances Shortfall in allocated allowances

More harmonisation on scope and rules Better data – ability to cut back allocation plans Greater transparency – standard format and information for National Allocation Plans But still cautious over positions relative to OMS And still lack of coordination – eg auctioning Linking – Norway, Lichtenstein, Iceland join EU ETS

ETS Review 2013 and beyond Less free allocation – less lobbying More centralisation – remove governments from front line of lobbying Better data – less reliance on Member States to produce NAPs? New ‘effort sharing’ More linking?

Larger market reduces leakage Level playing field for internationally traded sectors if covered by carbon price – eg iron and steel Larger market provides greater diversity, liquidity – reduces uncertainty and provides greater price stability Development of futures and derivatives markets helps create conditions for long term investment Helps underpin future framework Benefits of linking

Constraints Uncertainty over future framework Schemes at non national level – legal difficulties Non Kyoto ratifiers Numerous proposals for schemes – need common building blocks to make linking possible

Key Principles – both for linking to cap and trade use of offsets Confidence and credibility Environmental effectiveness Economic efficiency

What aspects should we consider? Mutual recognition of trading units or one way linking Monitoring Reporting Verification and Compliance Stringency Scope/coverage Two tier trading – eg Kyoto trading and EU ETS? Market function vs Administrative Burden Data exchange standards for electronic trading registries

Target setting, burden sharing Differentiated targets within EU – EU Kyoto targets – 8% by 2012; UK -12.5%, Germany -21%; Spain +15% EU pledged to unilateral 20% below 1990 by 2020 – 30% if other key developed countries apply similar effort US/Canada currently significantly above Kyoto and 1990 levels For linking would need to assess whether sufficient level of effort to avoid ‘free rider’ effect and creation of windfalls

Target setting mechanisms Equal percentage reduction of absolute emissions GHG intensity targets Convergence of emissions per GDP Convergence of emissions per capita The Brazilian historical responsibility proposal Triptych

What have we learned in the ETS Allocation – hidden state aid – is it a subsidised tonne? Compliance and penalties important – is someone else getting away with it – do we need an international standard and audit? Scope – competitiveness issue Some sectors good for trading at point source – eg energy intensive industry. Other sectors national/state trading may be better Harmonisation is a bigger prize than national/local interest

International Carbon Action Partnership Members – committed to mandatory, absolute cap and trade Observers – those still considering Forum for officials designing and implementing cap and trade to share thinking, best practice and consider compatibility issues Two public meetings next year – Monitoring, Reporting, Verification, Compliance and Penalties Auctioning and Allocation

Next steps Engage with design and development of schemes – International Carbon Action Partnership Assess the ‘building blocks’ already in place and which work best – share best practice EU ETS needs a critique from others – not a one way process

Contact Jill Duggan International Emissions Trading UK Department for Environment, Food and Rural Affairs Tel