Energy-intensive industries play an important role in low-carbon development, being particularly exposed to climate policies. Concern over possible carbon leakage in this sector poses a major challenge for designing effective carbon pricing instruments (CPI). Different methodologies for assessing carbon leakage exposure are currently used by different jurisdictions, each of them based on different approaches and indicators. This paper aims to analyse the extent to which the use of different methodologies leads to different results in terms of exposure to the risk of carbon leakage, using the Brazilian industry sector as a case study. Results indicate that carbon leakage exposure is an expected outcome of eventual CPI implementation in Brazilian industry. However, results vary according to the chosen methodology, so the definition of the criteria is paramount for assessing sectoral exposure to the risk of carbon leakage.
Key policy insights
Despite increasing discussion about the implementation of carbon pricing on the Brazilian industrial sector, the evaluation of carbon leakage risks is still neglected.
Assessments of the risk of carbon leakage are directly related to the indicators and criteria used by each methodology. Thus, a given subsector may present different levels of exposure to carbon leakage depending on the methodological choice.
More than a purely technical discussion, the methodological definition of carbon leakage risk is a political discussion – it can be well-conducted, leading to the success of a CPI, or even sabotaged, by implicitly subsidizing energy-intensive industries.
Upon completion, China’s national emissions trading scheme (C-ETS) will be the largest carbon market in the world. Recent research has evaluated China’s seven pilot ETSs launched from 2013 on, and academic literature on design aspects of the C-ETS abounds. Yet little is known about the specific details of the upcoming C-ETS. This article combines currently understood details of China’s national carbon market with lessons learned in the pilot schemes as well as from the academic literature. Our review follows the taxonomy of Emissions Trading in Practice: A Handbook on Design and Implementation (Partnership for Market Readiness & International Carbon Action Partnership. (2016). Retrieved from www.worldbank.org): The 10 categories are: scope, cap, distribution of allowances, use of offsets, temporal flexibility, price predictability, compliance and oversight, stakeholder engagement and capacity building, linking, implementation and improvements.
Key policy insights
Accurate emissions data is paramount for both design and implementation, and its availability dictates the scope of the C-ETS.
The stakeholder consultative process is critical for effective design, and China is able to build on its extensive experience through the pilot ETSs.
Current policies and positions on intensity targets and Clean Development Mechanism (CDM) credits constrain the market design of the C-ETS.
Most critical is the nature of the cap. The currently discussed rate-based cap with ex post adjustment is risky. Instead, an absolute, mass-based emissions cap coupled with the conditional use of permits would allow China to maintain flexibility in the carbon market while ensuring a limit on CO2 emissions.
Aviation constitutes about 2.5% of all energy-related CO2 emissions and in addition there are non-CO2 effects. In 2016, the ICAO decided to implement a Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA) and in 2017 the EU decided on faster emission reductions in its Emissions Trading System (EU ETS), which since 2012 includes the aviation sector. The effects of these policies on the expected development of air travel emissions from 2017 to 2030 have been analyzed. For the sample country Sweden, the analysis shows that when emissions reductions in other sectors are attributed to the aviation sector as a result of the EU ETS and CORSIA, carbon emissions are expected to reduce by ?0.8% per year (however if non-CO2 emissions are included in the analysis, then emissions will increase). This is much less than what is needed to achieve the 2°C target. Our analysis of potential national aviation policy instruments shows that there are legally feasible options that could mitigate emissions in addition to the EU ETS and CORSIA. Distance-based air passenger taxes are common among EU Member States and through increased ticket prices these taxes can reduce demand for air travel and thus reduce emissions. Tax on jet fuel is an option for domestic aviation and for international aviation if bilateral agreements are concluded. A quota obligation for biofuels is a third option.Key policy insights
Existing international climate policies for aviation will not deliver any major emission reductions.
Policymakers who want to significantly push the aviation sector to contribute to meeting the 2°C target need to work towards putting in place tougher international policy instruments in the long term, and simultaneously implement temporary national policy instruments in the near-term.
Distance-based air passenger taxes, carbon taxes on jet fuel and quota obligations for biofuels are available national policy options; if they are gradually increased, and harmonized with other countries, they can help to significantly reduce emissions.
In principle, many climate policymakers have accepted that large-scale carbon dioxide removal (CDR) is necessary to meet the Paris Agreement’s mitigation targets, but they have avoided proposing by whom CDR might be delivered. Given its role in international climate policy, the European Union (EU) might be expected to lead the way. But among EU climate policymakers so far there is little talk on CDR, let alone action. Here we assess how best to ‘target’ CDR to motivate EU policymakers exploring which CDR target strategy may work best to start dealing with CDR on a meaningful scale. A comprehensive CDR approach would focus on delivering the CDR volumes required from the EU by 2100, approximately at least 50 Gigatonnes (Gt) CO2, according to global model simulations aiming to keep warming below 2°C. A limited CDR approach would focus on an intermediate target to deliver the CDR needed to reach ‘net zero emissions’ (i.e. the gross negative emissions needed to offset residual positive emissions that are too expensive or even impossible to mitigate). We argue that a comprehensive CDR approach may be too intimidating for EU policymakers. A limited CDR approach that only addresses the necessary steps to reach the (intermediate) target of ‘net zero emissions’ is arguably more achievable, since it is a better match to the existing policy paradigm and would allow for a pragmatic phase-in of CDR while avoiding outright resistance by environmental NGOs and the broader public.
Key policy insights
Making CDR an integral part of EU climate policy has the potential to significantly reshape the policy landscape.
Burden sharing considerations would probably play a major role, with comprehensive CDR prolonging the disparity and tensions between progressives and laggards.
Introducing limited CDR in the context of ‘net zero’ pathways would retain a visible primary focus on decarbonization but acknowledge the need for a significant enhancement of removals via ‘natural’ and/or ‘engineered’ sinks.
A decarbonization approach that intends to lead to a low level of ‘residual emissions’ (to be tackled by a pragmatic phase-in of CDR) should be the priority of EU climate policy.
