Sectoral targets for developing countries: combining ‘common but differentiated re-sponsibilities’ with ‘meaningful participation’

Although a global cap-and-trade system is seen by many researchers as the most cost-efficient solution to reduce greenhouse gas (GHG) emissions, the governments of developing countries refuse to enter into such a system in the short term. Many scholars and stakeholders, including the European Commission, have thus proposed various types of commitments for developing countries that appear less stringent, such as sectoral approaches. A macroeconomic assessment of such a sectoral approach is provided for developing countries. Two policy scenarios in particular are assessed, in which developed countries continue with Kyoto-type absolute commitments, while developing countries adopt an emissions trading system limited to electricity generation and linked to developed countries' cap-and-trade systems. In the first scenario, CO₂ allowances are auctioned by the government, which distributes its revenues as a lump sum to households. In a second scenario, the auction revenues are used to reduce taxes on, or to give subsidies to, electricity generation. The quantitative analysis, conducted with a hybrid general equilibrium model, shows that such options provide almost as much emissions reduction as a global cap-and-trade system. Moreover, in the second sectoral scenario, GDP losses in developing countries are much lower than with a global cap-and-trade system, as is also the effect on the electricity price.     

Common but differentiated convergence (CDC): a new conceptual approach to long-term climate policy

Abstract

This article describes a new concept for an international climate regime for differentiation of future commitments: the ‘common but differentiated convergence’ approach (CDC). Under CDC, Annex-I countries' per-capita emission allowances converge within a convergence period to a low level. Individual non-Annex-I countries' allowances converge to the same level also within the same period (‘common convergence’), but starting when their per-capita emissions are a certain percentage above global average (‘differentiated’). Until then they may voluntarily take on ‘positively binding’ targets. This approach eliminates two concerns often voiced in relation to gradually converging per-capita emissions: (i) advanced developing countries have their commitment to reduce emissions delayed and their targets are not the same as Annex-I countries with equal per-capita emissions; (ii) CDC does not provide excess emission allowances to the least developing countries. Under CDC, stabilizing greenhouse gas concentrations at 550 and 650 ppm CO₂-equivalent can be reached with participation at roughly 0% and 50% above global average and convergence to around 3 and 4.5 tCO₂-eq/cap within 40 years. Even if the CDC approach is not implemented in its entirety, it is possible that the step-by-step decisions on the international climate regime can be guided by the principles provided in the CDC approach.     

Carbon taxes,cap-and-trade administration,and US legislation

An upstream cap-and-trade system that rations allowances for the carbon content of fuel inputs could achieve wider coverage than existing CO₂ emission programmes or most of those proposed in draft US legislation, but would risk shortages and price spikes. Allowance price volatility could be avoided with a CO₂-price corridor established through auctions, similar in some respects to how central banks manage short-term interest rates with open market operations. Building on the central bank analogy, a Greenhouse Gas Board could be established with the ‘instrument independence’ to set annual CO₂-price corridors in line with broadly-framed, long-term climate goals laid out in legislation. National and regional Boards of this nature might also help facilitate the international coordination of climate policies.     

Stabilizing CO2 concentrations with incomplete international cooperation

Many stabilization scenarios have examined the implications of stabilization on the assumption that all regions and all sectors of all of the world's economies undertake emissions mitigations wherever and whenever it is cheapest to do so. This idealized assumption is just one of many ways in which emissions mitigation actions could play out globally, but not necessarily the most likely. This paper explores the implications of generic policy regimes that lead to stabilization of CO₂ concentrations under conditions in which non-Annex I regions delay emissions reductions and in which carbon prices vary across participating regions. The resulting stabilization scenarios are contrasted with the idealized results. Delays in the date by which non-Annex I regions begin to reduce emissions raise the price of carbon in Annex I regions relative to the price of carbon in Annex I in an idealized regime for any given CO₂ concentration limit. This effect increases the longer the delay in non-Annex I accession, the lower the non-Annex I carbon prices relative to the Annex I prices, and the more stringent the stabilization level. The effect of delay is very pronounced when CO₂ concentrations are stabilized at 450 ppmv, however the effect is much less pronounced at 550 ppmv and above. For long delays in non-Annex I accession, 450 ppmv stabilization levels become infeasible.     

Linking the CDM with domestic carbon markets

Certified emission reductions (CERs) from Clean Development Mechanism (CDM) projects have traditionally served as an indirect link between cap and trade systems around the world. However, since 2010, import restrictions have increased. Reasons for import limitations include the supplementarity principle, genuine concerns about the environmental integrity of CERs and social benefits of CDM projects, pressure from domestic emissions mitigation industries, concerns about competition in the industries in which reductions take place, as well as the attempt to pressure advanced developing countries to accept national emissions commitments under a future international climate policy regime. It is shown that import limitations lead to a decrease in CER prices and a race to generate CERs as quickly as possible. Such effects are visible in the CDM market after the EU announced its import limitations. The exclusion of CERs from specific project types will distort the CDM supply curve and increase the CER price unless the marginal abatement costs of the excluded project type are above the CER world market price. Similarly, exclusion of CERs from specific host countries will increase the price. Substantial differences are found in CER access to national carbon markets around the world.Policy relevanceCDM regulators could try to improve access of CERs to cap and trade schemes through improvements to additionality testing, standardizing baseline and monitoring methodologies and stakeholder consultation. However, regulators should be aware that standardization is no panacea, and controversies may resurface if standardized additionality determination (e.g. through benchmarks or positive lists) are applied for a certain period and found to be problematic. However, domestic policy concerns such as an unwillingness to send money abroad to buy credits, an inability to control market prices, and competitiveness impacts cannot be resolved by CDM reforms. If, despite such reforms of the CDM, blatant protectionism continues, a challenge before the World Trade Organisation (WTO) could be launched to stop discrimination of service exports from specific countries.     

Striving for equivalency across the Alberta,British Columbia,Ontario and Québec carbon pricing systems: the Pan-Canadian carbon pricing benchmark

The Pan-Canadian Framework on Clean Growth and Climate Change is designed to put Canada on track to meet its Paris commitments. A key pillar of the plan is the introduction of a pan-Canadian carbon price by the end of 2018. However, four Canadian provinces, nearly 85% of the Canadian economy and population, have already implemented carbon pricing systems. British Columbia (BC) has a carbon tax. Alberta is transitioning from an output-based allocation system for industrial emitters to a hybrid system combining a carbon levy and refined output-based system. Québec and Ontario have implemented cap-and-trade systems, linked to California. Recognizing these existing systems, rather than impose a single carbon pricing mechanism, the Pan-Canadian Approach to Carbon Pricing gives provinces and territories the flexibility to adopt a carbon tax, a hybrid system, or a cap-and-trade system. To address concerns relating to ‘fairness’ and equivalency of carbon price, a federal carbon pricing benchmark establishes criteria relating to minimum ‘common scope’ and ‘increases in stringency’ that provincial and territorial carbon pricing systems must meet. This article explores the design features of the existing Alberta, BC, Ontario and Québec carbon pricing systems, and considers how the benchmark affects stringency and addresses equivalency of carbon price across these different systems.

Key policy insights

• Canada is taking advantage of its federal structure of government to introduce a minimum pan-Canadian carbon price of $10/tCO₂e in 2018, rising by $10/year to $50/tCO₂e in 2022.

• Rather than imposing a uniform pricing mechanism, the Canadian federal government is recognizing existing subnational carbon pricing mechanisms with very different design features – BC’s carbon tax, Québec and Ontario’s cap-and-trade systems, and Alberta’s hybrid system – to deliver the pan-Canadian carbon price.

• In order to deliver a minimum level of increasing stringency and to address issues of equivalency of carbon price across sub-national jurisdictions, the federal government is in the early stages of implementing a federal carbon-pricing benchmark.

• The lessons learned from the Canadian experience will be relevant to harmonizing carbon pricing systems across both other federal jurisdictions and countries.

     

Aligning climate action with the self-interest and short-term dominated priorities of decision-makers

The global and long-term nature of climate change conflicts with the self-interest and short-term dominated priorities of decision-makers. Climate change mitigation makes sense at the global level, but not at the level of the individual decision-maker. This conflict has been and remains the main obstacle to effective global cooperation and mitigation. This paper proposes a framework that aligns climate action with short-term self-interest through results-based payments to governments. Its key components are: determining an emission benchmark for each country as well as a price for carbon saving; paying countries annually for reducing emissions below their respective benchmark; a new international fund to finance these annual payments by borrowing capital from private investors; and repaying borrowings in the long-term through payments made by countries to the fund based on a pre-determined allocation mechanism. This framework would offer important benefits over an approach focused on allocating climate action or a carbon budget among countries. These include the improved prospect of reaching an effective climate agreement and delivering fast and dramatic mitigation thanks to stronger political commitment, the transformation of short-term self-interest from an obstacle into a driver of climate action, and the additional financing created. The paper also proposes a pilot scheme focusing on hydrofluorocarbon emissions with a considerably lower financing requirement. This offers the possibility of an alternative financing mechanism, and thus a faster and more straightforward implementation path. Short-term financial incentives offered to governments could turn policy action from a burden into an opportunity from their perspective unlocking a huge potential for timely mitigation.

Key policy insights

• A new international framework that offers short-term, results-based payments to governments to promote mitigation action could lead to much more effective global mitigation and international cooperation.

• The financing of such an approach could be solved through a novel financing structure, backed by the long-term commitments of participating countries and thus aligning the timeframe of the financial costs of mitigation with its climate benefits.

• The effectiveness of results-based payments and the concept behind this new approach could be proven through a pilot scheme focusing on hydrofluorocarbon emissions.

     

Slovenia's climate policy efforts: CO2 tax and implementation of EU ETS

Slovenia is required to reduce its greenhouse gas emissions to an average of 8% below the base year 1986 in the period 2008–2012, due to the ratification of the Kyoto Protocol in 2002. It was the first of the transition countries to implement a CO₂ tax in 1997. At the beginning of 2005, Slovenia joined other EU Member States by implementing the Emissions Trading Scheme. In contrast with other new EU Member States, Slovenia will be a net buyer of allowances. Therefore future movements on the emissions market will play an important role in the compliance costs of achieving the Kyoto target. The main purpose of this article is to present the establishment and characteristics of the first national allocation plan (NAP1) and to describe the main elements of the second national allocation plan (NAP2) for Slovenia within the EU Emissions Trading Scheme, the expected movements on the emissions allowances market in Slovenia, the expected compliance cost of achieving the Kyoto target and to present the main characteristics and efficiency of the CO₂ tax in Slovenia.     

The Korean emissions trading scheme: business perspectives on the early years of operations

Korea’s domestic emissions trading scheme commenced in January 2015. It targeted mainly industrial and power sectors, and compelled companies to transform how they manage energy efficiency and mitigate GHGs. This study sets out to explore how Korean companies evaluated their allocation position and engaged in emissions trading in the first compliance period, and to identify their views on trading barriers and policy expectations at the start of emissions trading. Questionnaire surveys and on-site interviews targeting Korean companies under the Korean emissions trading scheme were conducted at the start of operations (February to March 2015) and after the first compliance year (May 2016), respectively. Actual operation results are observed and compared with the survey findings. This study extrapolates implications for policy and presents suggestions for the government and the target companies in terms of how to improve the current emissions trading scheme in order to further stimulate emissions trading.

POLICY RELEVANCE

This study attempts to bridge the gap between companies and government policy in operating the domestic emission trading scheme in Korea. Empirical results, based on analysis of company-level data, reveal how businesses perceive K-ETS and how this relates to the operating results, which saw only limited trading of surplus emissions taking place in the early phase. Key barriers to active trading identified in the study include supply–demand imbalance, policy uncertainty and lack of preparedness of companies over carbon pricing. These barriers could be addressed by improved transparency of allowance allocation methods, possibly restricting carry-over of surplus allowances, ending policy uncertainty and providing more information to companies that can support companies’ policy understanding of the carbon pricing based on the market mechanism. Targeted companies should proactively participate in emissions trading in the early phase, in order to learn from it and prepare for the future introduction of auctioning.     

Assessing the EU ETS with a bottom-up,multi-sector model

The European Emissions Trading System (EU ETS) is the central pillar of the EU response against climate change. This trading mechanism is considered, from the theoretical point of view, as the most cost-effective method to reduce GHG. However, previous studies show that the agents who participate in these markets may behave in a way that may lead to inefficient CO₂ prices, creating doubts about the static and dynamic efficiency of the system. This article analyses these possible anomalies by first trying to model the ETS in a more realistic way, addressing some of the limitations of previous models, and second, by comparing the results with real market transactions. For this, a bottom-up, multi-sector model has been built, which represents the EU ETS in an integrated, cross-sectoral way, paying particular attention to the interactions among the most emissions intensive industries. The results show the benefits of this modelling approach and how it better reflects real market conditions. Some preliminary conclusions regarding the behaviour of the agents in the ETS market are also presented.

POLICY RELEVANCE

Low allowance prices in the EU ETS have put into question the dynamic efficiency of the EU ETS system, prompting various ideas for structural reform. However, determining the right reform also requires estimating correctly how agents will respond to it. This article proposes a tool to realistically simulate the EU ETS under the assumption of rational agents, and compare it to real market outcomes, in order to understand better the behaviour of agents in this carbon market, and therefore how to design better policies.     

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.

     

Addressing regional disparities in allowance allocation in China’s national emissions trading scheme

China's national emissions trading scheme (ETS) is expected to be operational in 2017. Effectively addressing regional disparities at the provincial level in allowance allocation will greatly affect the acceptance of the allocation approach and thus deserves careful consideration. This article aims to explore possible approaches for addressing regional disparities, by introducing regional adjustment factors (RAF) in free allowance allocation. Based on the principle of ‘national unified rules?+?stricter adjustment by provincial authorities’, four single factorial and three multi-factorial methods are proposed to calculate the RAFs, through a normalization process. These methods are associated with the most acknowledged factors dealing with regional disparities, including per-capita GDP; per-capita CO₂ emissions; industrial sector contribution to GDP; economy-wide emissions control targets and CO₂ emissions per unit GDP, per unit power and heat output and per unit industrial added value. A comparative analysis is made for the seven methods, in regard to value distribution and level of matching regional political demand.

Key policy insights

• ‘Allowing stricter regional adjustment’ represents a dominant feature for China's national ETS, which aims to address regional disparities and government demands.

• How the adjustment plan is designed will have a major influence on the operation of the national ETS and regional business competitiveness. Provincial governments need to consider the trade-off between auction revenue and local business competitiveness.

• Applying the different methods leads to more scattered results for some regions, for whom the choice of adjustment approach will therefore have a greater impact.

• Based on the analysis, four adjustment methods that generate similar results – the per-capita GDP-based method, the intensity reduction target-based method, the 12th FYP target-based method and intensity-based grandfathering – are recommended for most provincial-level regions, with some exceptions.

     

Credible commitment in carbon policy

In this article the problem of credible commitment in carbon policy is discussed. Investors favour long-term predictability of the policy, but without any external enforcement mechanisms a commitment made by a government can be withdrawn, leading to scepticism and lack of credibility. This results in increased market risks and investment hold-up. Regulatory uncertainty stems from (i) strategic interactions between government and firms, (ii) potential learning about climate damage and abatement cost and (iii) political volatility. Although commitment to future policy encourages private investment, it also imposes costs in the form of reduced flexibility to accommodate new information or preferences. The article reviews devices that may help policy makers raise the level of commitment while also leaving some room for flexible adjustments. In particular, legislation of a long-term governance framework, delegation to an independent carbon agency and securitization of investors' stakes in emission markets offer palliative approaches.     

International trade undermines national emission reduction targets: New evidence from air pollution

Many developed countries in Annex B of the Kyoto Protocol have been able to report decreasing emissions, and some have officially fulfilled their CO₂ reduction commitments. This is in part because current reporting and regulatory regimes allow these countries to displace emissions intensive production offshore. Using a new highly detailed account of emissions embodied in international trade we investigate this phenomenon of emissions leakage. We independently confirm previous findings that adjusting for trade, developed countries emissions have increased, not decreased. We find that the sectors successfully holding or lowering their domestic emissions are often the same as those increasing their imports of embodied CO₂. We also find that the fastest growing flow paths of embodied CO₂ largely originate outside the Kyoto Annex B signatory nations. Finally, we find that historically the same phenomenon of emissions displacement has already occurred for air pollution, with the result that despite aggressive legislation in major emitters total global air pollution emissions have increased. If regulatory policies do not account for embodied imports, global emissions are likely to rise even if developed countries emitters enforce strong national emissions targets.     

Assessing the designs and effectiveness of Japan's emissions trading scheme

After years of discussions and trials, Japan's domestic emissions trading scheme remains purely voluntary. The newly elected Democratic Party of Japan (DPJ) has taken a firmer stance on climate change, initially intending to establish a nationwide mandatory cap-and-trade as early as 2011. This has promoted several questions regarding the possible designs and feasibility of such a scheme. This article describes the key features of the two trial schemes implemented, thus far, assesses the effectiveness of their implementation and discusses what will be the likely areas of contention should the Japanese government introduce a mandatory cap-and-trade in the future. The analyses indicate that the initial years of ‘Japan's Voluntary Emissions Trading Scheme’ (JVETS) implementation have shown positive performance, although its scale has remained limited. The ‘Trial Implementation of an Integrated Domestic Market for Emissions Trading’ emerged as a hybrid scheme, one that incorporated varying interests. Significant institutional developments have taken place in recent years, however the effectiveness of the present trial scheme also seems restricted.     

Financing climate adaptation with a credit mechanism: initial considerations

Climate mitigation credits have mobilized considerable resources for projects in developing countries, but similar funding to adapt to climate change has yet to emerge. The Copenhagen Accord targets up to US$50 billion per year in adaptation funding, but commitments to date have been trivial compared to what is needed. Although there are some studies and suggestions, it remains unclear where the money will come from and how it will be disbursed. Beyond this, many development experts believe that the main hurdle in climate adaptation is effective implementation. A framework, based on the polluter pays principle, is presented here regarding the mobilization of resources for adaptation in developing countries using market mechanisms. It is assumed that mitigation and adaptation are at least partly fungible in terms of long-term global societal costs and benefits, and that quantifying climate vulnerability reductions is possible at least sometimes. The scheme's benefits include significant, equitable and flexible capital flows, and improved and more efficient resource allocation and verification procedures that incentivize sustained project management. Challenges include overcoming political resistance to historical responsibility-based obligations and scepticism of market instruments, and, critically, quantifying climate impact costs and verifying investments for vulnerability reduction credits.     

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。     

Achieving additional emission reductions under a cap-and-trade scheme

Over the last decade, cap-and-trade emissions schemes have emerged as one of the favoured policy instruments for reducing GHG emissions. An inherent design feature of cap-and-trade schemes is that, once the cap on emissions has been set, no additional reductions beyond this level can be provided by the actions of those individuals, organizations and governments within the covered sectors. Thus, the emissions cap constitutes an emissions floor. This feature has been claimed by some to have undesirable implications, in that it discourages ethically motivated mitigation actions and preempts the possibility that local, state and national governments can take additional mitigation action in the context of weak national or regional targets. These criticisms have become prominent in Australia and the US within the public debate regarding the adoption of an emissions trading scheme (ETS). These criticisms and their potential solutions are reviewed. A set-aside reserve is proposed to automatically retire ETS permits, which would correspond to verified and additional emissions reductions. This minimizes the possibility that ethically motivated mitigation actions are discouraged, allows for additional action by other levels of government, while providing transparency to other market participants on the level of permit retirements.     

Differentiation of mitigation commitments: the multi-sector convergence approach

This paper presents a new sector-based framework — called the multi-sector convergence approach — for negotiating binding national GHG mitigation targets after the first budget period defined by the Kyoto Protocol (2008–2012). The major characteristics of this approach are that: (i) it is based on the distinction of different sectors within the national economy; (ii) it prescribes that, in principle, the amount of per capita emission assignments should ultimately converge to the same level for all countries; (iii) it accounts for differences in national circumstances by offering the opportunity to grant additional emission allowances to countries facing specific circumstances that justify higher emission assignments; and (iv) it offers a framework for negotiating mitigation commitments among parties of the UNFCCC, including a (gradual) participation of developing countries that pass a certain threshold level of per capita emissions. In addition to briefly discussing the underlying principles of promising proposals to differentiate future GHG mitigation commitments, the paper outlines the methodology and major characteristics of the multi-sector convergence (MSC) approach, followed by some numerical illustrations. The paper is concluded by a preliminary assessment of the MSC approach.