Carbon pricing in practice: a review of existing emissions trading systems

This article analyses the implementation of emissions trading systems (ETSs) in eight jurisdictions: the EU, Switzerland, the Regional Greenhouse Gas Initiative (RGGI) and California in the US, Québec in Canada, New Zealand, the Republic of Korea and pilot schemes in China. The article clarifies what is working, what isn’t and why, when it comes to the practice of implementing an ETS. The eight ETSs are evaluated against five main criteria: environmental effectiveness, economic efficiency, market management, revenue management and stakeholder engagement. Within each of these categories, ETS attributes ? including abatement cost, stringency of the cap, improved allocation practices over time and the trajectory of price stability ? are assessed for each system. Institutional learning, administrative prudence, appropriate carbon revenue management and stakeholder engagement are identified as key ingredients for successful ETS regimes. Recent implementation of ETSs in regions including California, Québec and South Korea indicates significant institutional learning from prior systems, especially the EU ETS, with these regions implementing more robust administrative and regulatory structures suitable for handling unique national and sub-national opportunities and constraints. The analysis also shows that there is potential for a ‘double dividend’ in emissions reductions even with a modest carbon price, provided the cap tightens over time and a portion of the auctioned revenues are reinvested in other emissions-reduction activities. Knowledge gaps exist in understanding the interaction of pricing instruments with other climate policy instruments and how governments manage these policies to achieve optimum emissions reductions with lower administrative costs.

Key policy insights

• Countries are learning from each other on ETS implementation.

• Administrative and regulatory structures of ETS jurisdictions appear to evolve and become more robust in every ETS analysed.

• A ‘double dividend’ for emissions reductions may also exist in cases where mitigation occurs as a result of the ETS policy and when auction revenues are reinvested in other emissions-reduction activities.

     

Carbon emission trading and carbon taxes under uncertainties

The idea of market-based carbon emission trading and carbon taxes is gaining in popularity as a global climate change policy instrument. However, these mechanisms might not necessarily have a positive outcome unless their value reflects socioeconomic and environmental impacts and regulations. Moreover, the fact that they have various inherent exogenous and endogenous uncertainties raises serious concerns about their ability to reduce emissions in a cost-effective way. This paper aims to introduce a simple stochastic model that allows the robustness of economic mechanisms for emission reduction under multiple natural and human-related uncertainties to be analyzed. Unlike standard equilibrium state analysis, the model shows that the explicit introduction of uncertainties regarding emissions, abatement costs, and equilibrium states makes it almost impossible for existing market-based trading and carbon taxes to be environmentally safe and cost-effective. Here we propose a computerized multi-agent trading model. This can be viewed as a prototype to simulate an emission trading market that is regulated in a decentralized way. We argue that a market of this type is better equipped to deal with long-term emission reductions, their direct regulation, irreversibility, and “lock-in” equilibria.     

我国“十二五”时期建立碳交易市场的政策思考

基于对国际碳市场的调研和定量分析,建议我国碳市场建设之初,应首先选择电力、钢铁等对碳价格敏感的高排放强度行业进入碳市场;尽早开展跨地区交易,便于有效降低总体减排成本;同时碳排放总量上限的设定应与 “十二五”时期的碳强度下降目标挂钩;并在市场建立之初设定碳价格下限等。     

Cost benefits of forest restoration in a tropical grazing landscape: Thiaki rainforest restoration project

Global forest restoration is vital to mitigate climate change. Tropical forests are under the greatest threat from clearing while offering significant potential for restoration. Forest carbon credits through trading schemes have the potential to enable restoration, providing landholders with incentives to restore forests. Impediments to restoration are numerous, with one of the main ones being the unknown costs of forest restoration and uncertain returns from payment schemes, such as carbon trading programs. Many research and modeling papers on the potential of carbon markets to stimulate reforestation in agricultural landscapes rely on general estimates of reforestation. The reality, though, is that the benefits, returns, and break-even points of the reforestation costs and carbon price are highly sensitive to actual costs. Few papers actually investigate the real costs of farm-level restoration. Nearly all recent papers have used modeled scenarios in calculating Net Present Value (NPV), and so estimates of restoration cost and a return from carbon vary widely depending on modeled assumptions. Real data from a demonstration project in the Wet Tropics of Australia are provided in this paper. Three land use scenarios are compared: carbon only, cattle only, and a combination of carbon and cattle using on-ground data for restoration. Not surprisingly, scenarios of the highest carbon prices generate the highest net benefits in both carbon only and mixed carbon and cattle scenarios. A minimum carbon price of AUD$37 per ton of carbon dioxide equivalent is required to match income derived from cattle. The current policy environment that rewards the lowest cost abatement runs counter to Australia playing its role in the urgent need to limit global temperature rise to 2 degrees Celsius and preferably 1.5 degrees Celsius.     

Challenges to the development of carbon markets in China

China has introduced several pilot emission trading schemes to build the basis for a national scheme. The potential scale of this initiative raises prospects for a regional carbon trading network as a way to further engage other major Asian economies. However, the Chinese carbon markets rest upon a unique political-economic context and institutional environment that are likely to limit their development and viability. This article offers an overview of such structural economic and political constraints. Four main challenges are identified, namely, inadequate domestic demand, limited financial involvement, incomplete regulatory infrastructure, and excessive government intervention. The first two challenges concern economic dimensions and may be partially addressed by the incentives created by the newly introduced emission trading schemes. The other two are more deeply entrenched in the dominant political system and governing practice. They require fundamental changes to the ways in which the state and the market interact. The success of China's carbon market reform depends crucially on the ability of the ongoing efforts to transform the distorted state–market relationship.

Policy relevance

The burgeoning carbon markets offer opportunities for emissions mitigation at lower costs and enable circulation of a new form of capital, i.e. carbon credits, across borders. China accounts for a gigantic share of global GHG emissions and has the potential to significantly scale up these opportunities. There are clear implications for market developers and participants worldwide, including climate policy makers who attempt to link their emission trading schemes to other schemes, firms who seek to take advantage of the inexpensive carbon offsets generated in developing countries, international financial institutions who endeavour to establish their business in an emerging major carbon market, etc. This article can inform their decisions by identifying key issues that may undermine their ability to achieve these goals. Policy makers and stakeholders will benefit from this analysis, which shows how the Chinese carbon markets operate in ways that may be different from their experience elsewhere.     

Carbon leakage in aviation policy

ABSTRACT

The inherently global, connected nature of aviation means that carbon leakage from aviation policy does not necessarily behave similarly to leakage from other sectors. We model carbon leakage from a range of aviation policy test cases applied to a specific country (the United Kingdom), motivated by a desire to reduce aviation CO₂ faster than achievable by currently-planned global mitigation efforts in pursuit of a year-2050 net zero CO₂ target. We find that there are two main components to leakage: one related to passenger behaviour, which tends to result in emissions reductions outside the policy area (negative leakage), and one related to airline behaviour, which tends to result in emissions increases outside the policy area (positive leakage). The overall leakage impact of a policy, and whether it is positive or negative, depends on the balance of these two components and the geographic scope used, and varies for different policy types. In our simulations, carbon pricing-type policies were associated with leakage of between +50 and ?150% depending on what is assumed about scope and the values of uncertain parameters. Mandatory biofuel use was associated with positive leakage of around 0–40%, and changes in airport landing costs to promote more fuel-efficient aircraft were associated with positive leakage of 50–150%.

Key policy insights

• Carbon leakage in aviation policy arises from airline responses (typically positive leakage) and passenger responses (typically negative leakage).

• Depending on the geographical scope, policy type and values for uncertain parameters, leakage may be between around ?150 to +150%.

• Of the policies investigated in this study, leakage was typically most negative for carbon pricing and most positive for environmental landing charges.

• Absolute values of leakage are smallest where policies are considered on the basis of all arriving and departing flights.

     

Chinese business at the dawn of its domestic emissions trading scheme: incentives and barriers to participation in carbon trading

This article explores the incentives and challenges for Chinese business companies in participating in carbon emissions trading schemes (ETSs). Based on extensive interviews with the business managers and government officers who are currently involved in the ongoing policy experiments of pilot ETS programmes across China, the article identifies factors that either motivate or discourage companies in participating in carbon trading activities. It argues that different business groups, i.e. capped enterprises, uncapped enterprises, and carbon intermediaries, are affected by these factors to significantly different extents in terms of formulating their specific carbon strategies. It also illustrates some factors, such as a lack of stakeholder pressure and fragmented political interests, which have a distinctive Chinese character and are believed will have a fundamental impact on the quality and efficiency of Chinese ETSs in the future.

Policy relevance

At the outset, the successful implementation of any ETS depends critically on the active involvement of business actors across various industries. Hence, having an understanding of the business incentives and obstacles in participating in carbon trading is crucial, as these factors will ultimately determine the size and quality of the carbon market, and the total volume and integrity of the GHG emissions to be traded. This article also illustrates the common factors that affect business appetite for carbon trading throughout the world, as well as the factors that are unique to the Chinese political and economic context to constrain business in the market. Finally, a presentation of the business attitude towards the ETS experiment indicates the most worrying aspects of the policy design regarding carbon trading in China. As the construction and implementation of the ETS is a long-term undertaking, such investigation deserves attention from both policy makers and business leaders alike.     

Controlling GHG emissions from the transportation sector through an ETS: institutional arrangements in Shenzhen,China

Many different approaches are needed to achieve reductions in GHG emissions from the transportation sector. Carbon emissions trading schemes (ETSs) are widely used in industry and are effective in reducing the overall social cost of emissions abatement. This article reports the development of a downstream ETS for the transportation sector and its application in Shenzhen, China. The ETS was devised as a mandatory cap-and-trade scheme and, as a first step, was applied to public transportation. An integrated cap was set on the total emissions from buses and taxis: an absolute cap for existing vehicles and a relative increment for new entrants. Allowances were allocated by grandfathering or benchmarking and a ‘reverse mechanism’ was established to encourage the transformation of urban transportation to a low-carbon system. Online fuel consumption monitoring was used to quantify the emissions from vehicles, and the operators were required to surrender enough allowances or credits to account for their verified annual emissions. The mechanisms for allowance trading and carbon offsets provided sufficient flexibility to make emissions abatement and the use of new-energy vehicles and environmentally friendly travel within Shenzhen's urban transportation system economically attractive.

Policy relevance

The transportation sector is becoming a major contributor to the growth in China's GHG emissions. Achieving large reductions in GHG emissions from the transportation sector is a great challenge and requires both technology and policy innovation. The tradable carbon permit is a popular concept in mitigating climate change, but the introduction of a cap-and-trade ETS into the transportation sector is a relatively innovative concept. Shenzhen has launched the first cap-and-trade ETS in a developing country and is currently exploring ways to mitigate carbon emissions by a downstream cap-and-trade ETS for the transportation sector. This article considers the main institutional arrangements and regulatory framework of Shenzhen's transportation carbon ETS. It not only refreshes the theoretical analysis and practical application of downstream cap-and-trade carbon emissions trading in urban transportation, but also provides developing countries with a cost-effective instrument to mitigate their rapid growth in traffic carbon emissions during urbanization.     

Aligning emissions trading and feed-in tariffs in China

In 2013, China launched its domestic pilot emissions trading scheme (ETS) as a cost-effective strategy to reduce CO₂ emissions. Theoretically, the ETS can interact with the feed-in tariffs (FITs) applied to renewable energies (REN). This article presents a simple method to demonstrate how FITs can be adjusted based on the evolution of ETS carbon prices in order to provide a cost-effective climate policy package in China. First, by using provincial data and wind and solar power as examples, it calculates the implicit carbon prices that FITs generate in different Chinese provinces and finds that they are much higher than current carbon prices in the pilot ETS. This shows the necessity of using both instruments to guarantee current level incentives to develop REN for climate change purposes, at least in the short and medium terms. Second, by keeping the annual total carbon price level stable (the sum of the implicit FIT carbon price and the ETS carbon price), and taking into account the cost evolution of REN development, this article demonstrates, for the 2018–2020 period, that FIT should decrease at an annual rate of 3.04–4.63% (for wind) and 7.84–8.87% (for solar) based on different growth rates for progressive national ETS carbon prices.

Policy relevance

There are a number of studies and debates on the interactions between climate policies in Europe in particular, ETS and subsidies for REN. The key issue is that a climate policy package should be cost-efficient and the implementation of one policy should not jeopardise the performance of another. For a country like China, a considerable scale effect on climate target achievement and total cost savings could be produced by the careful design of the climate policy package. FIT and ETS, which are cost-efficient policies if implemented separately, will very probably constitute a major climate policy package in the future in China, which is aiming to limit the use of command-and-control policies. So far, there is some debate on how to reduce FIT for wind power in China due to development cost changes. But discussions are lacking on the linkage between FIT and ETS. This paper fills this gap.     

碳税政策的减排效果与经济影响

采用基于动态可计算一般均衡模型（CGE）构建的能源－环境－经济模型,模拟了在考虑能源利用效率提高的基础上,不同碳税税率以及碳税收入使用方式的减排效果及对经济的影响。结果表明,与基准情景相比,如果碳税收入直接归政府所有,征收30、60、90元/t CO₂碳税,2020年的减排率分别为5.56%、10.45%和14.74%,GDP损失率分别为0.04%、0.10%和0.18%。征收碳税可实现的减排量,分别相当于实现2020年CO₂排放强度比2005年下降40%的目标所需减排量的9.9%、18.6%和26.2%。将碳税收入返还给企业和居民,能在一定程度上缓解对企业和居民的负面影响。     

Tax and trade: a hybrid climate policy instrument to control carbon prices and emissions

This article describes a ‘tax and trade' emission regulations system that controls both emission costs and emission quantities. Emitters are taxed at a fixed price on carbon emissions and the government uses the tax revenue to buy carbon offsets on existing emissions markets. Unlike a traditional carbon tax, regulated firms may also produce carbon credits which may be sold to the government. Thus, the government bears the compliance cost risk rather than an individual firm and has control over the number of offsets purchased and the effective emission reduction. This unusual form of hybrid has potential political advantages of creating an economic incentive on corporate choices (at the margin) substantially greater than the actual trading price, and with lower financial transfers than in most schemes.

Policy relevance

The article presents a hybrid carbon emissions system that adds to the growing discussion of hybrid policy instruments which could be implemented by policy makers, particularly in nations without current cap and trade policies.     

Output and abatement effects of allocation readjustment in permit trade

In permit trading systems, free initial allocation is common practice. A recent example is the European Union Greenhouse Gas Emission Trading Scheme (EU-ETS). We investigate effects of different free allocation schemes on incentives and identify significant perverse effects on abatement and output employing a simple multi-period model. Firms have incentives for strategic action if allocation in one period depends on their actions in previous ones and thus can be influenced by them. These findings play a major role where trading schemes become increasingly popular as environmental or resource use policy instruments. This is of particular relevance in the EU-ETS where the current period is a trial-period before the first commitment period of the Kyoto protocol. Finally, this paper fills a gap in the literature by establishing a consistent terminology for initial allocation.     

湖北碳交易试点价格稳定机制、评估及启示

碳排放交易体系存在诸多影响配额供需两端的因素,为避免配额供需严重失衡和碳价格剧烈波动,湖北碳交易试点建立了一套系统的碳价格稳定机制。这套机制包括配额分类管理及注销机制、企业配额事后调节机制、配额投放和回购机制、碳价格涨跌幅限制机制,对湖北碳交易试点的平稳运行发挥了积极作用。本文对上述机制进行了分析评估,并据此提出了全国碳交易体系建设中建立碳价格稳定机制的政策建议。     

中国试点ETS的碳减排效果评估——基于分省高耗能工业子行业数据的分析

评估中国试点碳排放权交易体系(ETS)碳减排效果的现有研究普遍存在处理组样本选取范围明显大于试点ETS实际覆盖范围的问题。因此,文中对研究样本进行了更为严格的甄别：将2005—2017年各省的六大高耗能工业子行业中纳入试点企业的体量占相应子行业体量60%及以上的工业子行业作为处理组,将非试点地区的工业子行业作为对照组。基于双重差分法的分析表明,相较于对照组,试点ETS在启动后不仅促进了处理组工业子行业碳排放绝对量的下降,还促进了其碳排放强度的下降,说明试点ETS具有明显的碳减排效果。工业子行业的总产值和人均总产值分别与其碳排放量和碳排放强度呈现出一定的库兹涅茨曲线效应,工业子行业资产的流动性越强、盈利能力越强、面临的环境规制强度越大,越有利于碳减排。建议主管部门坚定依靠市场手段来控制温室气体排放,尽快将更多行业纳入全国ETS;另外,应提高体系运行相关数据的公开力度,定期对体系进行分析评估,并及时公布评估结果。     

全球实施碳税政策对碳减排及世界经济的影响评估

该研究模拟了全球各区域2008-2050年的经济发展和碳排放状况,并将该模拟结果设定为基准情景。在基准情景中全球GDP随时间增长,而全球的碳排放同样表现出增长趋势。为了模拟碳税政策的减排效应及其对经济的影响,本文构建了其他3种碳税政策情景。情景1,将碳税收入作为一般性财政收入,此时全球升温减缓,世界碳排放下降显著,但中国、印度、俄罗斯、马来西亚和印度尼西亚等发展中国家经济发展严重受创,世界经济不均衡加剧。情景2,将各区域的碳税收入汇总之后按照比例统一分配,该情景下,世界碳减排规模较情景1略有下降,但世界各区域的经济较基准情景得到更好的发展。情景3,碳税税率随时间阶段性增长,此时,碳税政策对全球升温的控制更显著;世界各区域,尤其是发展中国家（地区）,经济增长更迅速。另外,碳税收入用来提升区域技术进步,在一定程度上促进了产业的优化升级。碳税政策与技术进步的协同减排政策,考虑了区域经济发展的不均衡性,兼顾了气候治理的公平性,是一种有效、可行的全球气候治理政策。     

Uncertainty,cost-effectiveness and environmental safety of robust carbon trading: integrated approach

Carbon markets, like other commodity markets, are volatile. They react to stochastic “disequilibrium” spot prices, which may be affected by inadequate policies, speculations and bubbles. The market-based emission trading, therefore, does not necessarily minimize abatement costs and achieve emission reduction goals. We introduce a basic stochastic model integrating emissions reduction, monitoring and trading costs allowing us to analyze the robustness of emission and uncertainty reduction policies under environmental safety constraints asymmetric information and other multiple anthropogenic and natural uncertainties. Explicit treatment of uncertainties provides incentives for reducing them before trading. We illustrate functioning of the robust market with numerical results involving such countries as the US, Australia, Canada, Japan, EU27, Russia, Ukraine. In particular, we analyze if the knowledge about uncertainties may affect portfolios of technological and trade policies or structure of the market and how uncertainty characteristics may affect market prices and change the market structure.     

中国三氟甲烷处置运行补贴政策效果评估

三氟甲烷（HFC-23）是我国排放量最大的氢氟碳化物（HFCs）,受到《联合国气候变化框架公约》和《关于消耗臭氧层物质的蒙特利尔议定书》的管控。2015年我国出台了HFC-23运行补贴政策,支持国内企业开展HFC-23的处置。通过对2014—2018年公开减排数据的汇总分析,发现运行补贴政策的实施有效地激励了企业的减排,受补贴企业HFC-23处置率达98%。2014—2018年累计减排HFC-23约5.20万t,折合6.08亿t CO₂-eq。此外,对照国际公约未来履约义务,建议在运行补贴政策结束后尽快出台明确针对全行业的管控政策,包括定量化减排目标和统一的企业自主监测标准。     

基于CGE模型的上海市碳排放交易的环境经济影响分析

通过应用上海市能源－环境-经济CGE模型,针对碳排放交易机制所涉及的重要要素,包括覆盖行业和分配方式等设计不同的情景,模拟了在不同的就业条件下碳排放交易机制对经济的影响和对传统污染物的协同减排效应。结果表明,如果碳交易纳管行业释放出来的劳动力能及时被其他行业吸纳和消化,则碳交易对GDP的整体影响为正,碳交易的实施产生了双重红利。若劳动力不能及时转移,则碳交易对GDP的整体影响为负,2020年不同情景下GDP损失为1.5%～2.4%;相比覆盖部分行业,在覆盖全部行业的情景下,碳价格最低,从2013年的30元/t增加到2020年的202元/t,对高耗能行业的竞争力影响相对较小,但是由于所有行业都纳入到纳管范围,使得对GDP的负面影响最大;此外,实施碳交易能明显改善环境效益,有助于推动SO₂和NO_X减排目标的实现。     

The differentiated impact of emissions trading system based on company size

Most countries implementing an emissions trading system (ETS), such as EU member states, California in the US, or South Korea, are generally targeting large sized companies, which consume energy above a specific threshold. However, previous studies using computable general equilibrium (CGE) models have analyzed climate policies without considering company size. This may have led to inaccurate results because the impacts of climate policy would differ depending on the coverage of regulated companies. Accordingly, this study examines the environmental and economic impacts of greenhouse gas emission reduction policies, assuming policy results vary by firm size, as covered by the Korean emission trading system. To this end, a CGE model with a separate social accounting matrix based on company size is used to compare three scenarios that reflect different types of carbon pricing methods. The results show that greenhouse gases will be reduced to a lower extent and utility will decrease more if mitigation policies are only imposed to large companies.

Key policy insights

• Carbon pricing policies should consider the different impacts on companies of different sizes and industry sectors.

• Without considering the different sizes of companies covered by an ETS, the expected carbon price and its economic impact will be underestimated.

• Small and medium-sized companies will face more negative impacts than large companies in some industry sectors under an ETS, even if the mitigation burden is only faced by large companies.

     

Mapping and clustering the adoption of carbon pricing policies: what polities price carbon and why?

Carbon pricing, including carbon taxes and emissions trading, has been adopted by different kinds of polities worldwide. Yet, beyond the increasing adoption over time, little is known about what polities – countries as well as sub- and supranational entities – adopt carbon pricing and why. This paper explores patterns of adoption (both implemented policies and those scheduled to be) through cluster analysis, with the purpose of investigating factors that could explain polities’ decisions to adopt carbon pricing. The study contributes empirically by studying carbon taxes and emissions trading together and by ordering the polities adopting carbon pricing into clusters. It also contributes theoretically, by exploring constellations of variables that drive the adoption of carbon pricing within individual clusters. We investigated 66 adopted policies of carbon pricing, which were divided into five clusters: early adopters, North-American subnational entities, Chinese pilot provinces, second-wave developed polities, and second-wave developing polities. The analysis indicates that the reasons for adopting carbon pricing have shifted over time. While international factors (climate commitments or influences from polities within the same region) are increasingly salient, domestic factors (including crises and income levels) were more important for the early adopters.

Key policy insights

• Carbon pricing has become a global mainstream policy instrument.

• Economic and fiscal crises provide windows of opportunity for promoting carbon pricing.

• The international climate regime can support the adoption of carbon pricing through mitigation commitments and international financial and technical assistance.

• Learning between polities from the same region is a useful tool for promoting carbon pricing.

• Carbon intensive economies tend to prefer emissions trading over carbon taxes.