Carbon price is a success story: new ICAP report

Ilario D'Amato
Reading time: 6 minutes
10 February 2015

LONDON: The International Carbon Action Partnership (ICAP) has just released a report to analyze the impact and forecast of emissions trading schemes (ETS) around the world, concluding “the growth and diversification of carbon markets is a success story”. The "Emissions Trading Worldwide - Status Report 2015" also scrutinizes how the 17 systems implemented globally will play a crucial role in shaping the binding climate treaty to be signed in Paris this December.

An ETS mechanism, also called a ‘cap-and-trade’ system, is based on a ‘cap’ set by government on the total greenhouse gas (GHG) emissions allowed in the country. The companies within the national borders are then allowed to emit a certain amount of pollution. If they want to emit more GHGs, they have to ‘trade’ such allowances with other companies. And since the ‘cap’ is constantly reduced over time, the system aims to reduce total emissions of pollutants while incentivizing companies to invest in reducing their emissions.

Putting a price on carbon has been proven as a simple, fair and effective measure,” says Mark Kenber, CEO, The Climate Group. “Science demonstrates we need to reach zero emissions by mid-century, if we want to avoid catastrophic effects on both our environment and economy. We have the technology to achieve this inevitable goal, but we need more support from the national governments.

“The ETS allows forward-thinking companies to implement their low carbon strategy, while at the same time compelling polluters to pay for the direct and indirect costs of their emissions. It’s a win-win, and we urge governments to implement more, bold schemes like this to allow businesses of the future to prosper and create new jobs.”

The EU ETS was started ten years ago by the European Union. It is still the largest in the world and now comprises global jurisdictions that account for 40% of world’s GDP. This year marks a milestone in the growth of global cap-and-trade, as South Korea officially launched the second largest ETS in the world in January. However, when China launches its own ETS next year, this market will become the biggest in the world.

Europe is showing the way

The EU ETS has achieved many bold results. According to the ICAP report, one of its major achievements has been to raise companies’ awareness of their carbon costs and mitigation potentials. In turn, this has brought behavioural changes, which are the main scope of the whole system. In fact, from 2005 to 2013 the sectors covered by emissions trading have reduced their emissions by 13%.

But it is difficult to directly link the two, as the economic recession could also have played a role in emissions reductions. The EU-ETS has also been criticized for the price of the allowance, which is too low to be an incentive for companies. This is due to a simple rule of the market itself: since there is a surplus of about 2.2 billion allowances, the price falls dramatically.

Simply lowering the number of European allowances is not an easy solution. Some national governments – in particular the less developed ones that rely more on fossil-fuelled power – see the ‘cap’ as a burden for their economies. But there is more than one ray of hope. The European Council is debating stricter rules to allocate the free allowances granted to each nation, and in particular the annual reduction factor will be raised from 1.74% to 2.2% from 2021 onwards.

The EU ETS is the main instrument of Europe’s domestic GHG reduction policy, which is set to reduce emissions by at least 40% in 2030 compared to 1990 levels. The target will be delivered by a 43% reduction in ETS sectors and a 30% reduction in non-ETS sectors, compared to 2005 levels.

North American carbon price

The Canadian province of Québec, a member of The Climate Group States & Regions program, has been at the forefront of the ETS mechanism since 2013, and covers 75 companies producing over 25,000 tons of GHGs every year.

By the end of this year, Québec’s carbon market is expected to cover 85% of the province’s GHG emissions and contribute a large part of the province’s 2013?2020 Climate Change Action Plan, funded with an estimated CAD$3.3 billion (US$2.65 billion).

Last November, Québec held its first joint auction on GHGs with the US State of California, also part of The Climate Group States & Regions program. “The linking of the Québec and California systems seemed a natural and logical choice as both governments knew that a broader, more liquid carbon market would induce greater GHG emissions reductions and drive down the overall cost of mitigation,” states the report. The joint auction put up for sale a total of more than 23 million units for 2014 and almost 11 million units for 2017, at a minimum price of CAD$12,82 (USD$11,34).

The ICAP report praises the “very collegial” process that has brought the two regions to link their climate efforts, which is shaping the political debate in North America. Québec announced last year a joint agreement with Ontario, another valuable member of The Climate Group States & Regions program, to exchange electricity capacity and help keep power affordable and reliable for people in both provinces. Last September, the two most populous provinces of Canada also publicly agreed to bold initiatives to address climate change at the sub-national government level.

China’s low carbon economy

In 2009, China announced its commitment to lower its GHG emissions per unit of GDP by 40-45% from 2005 levels by 2020. To achieve this important goal, a ETS soon appeared as a cornerstone of the new government’s strategy. Since 2013, China has set seven ETS pilots and next year will launch a national market – the largest in the world.

The combined market value of Chinese pilot schemes had reached CNY536 million (US$85.9 million) as of December 1, 2014 – and the combined trading volume reached 14.4 million tCO2, led by the Hubei pilot. But while the road toward a national carbon market seems strong, there are still concerns about how the Chinese bureaucracy will handle such a complex mechanism, and how the regions not involved in the pilots will handle this new instrument.

“The future national carbon market offers invaluable opportunities for business,” highlighted Changhua Wu, Greater China Director, The Climate Group. “It would help transform China’s economic development towards strong, sustainable, green growth. The Government is showing how political commitments can be followed by bold actions. China can be an inspiring example for every nation that is willing to maintain high levels of productivity while looking at citizens’ need for healthier, cleaner air.”

“2 out of 5 people worldwide live in a jurisdiction either considering, preparing or operating an ETS,” concludes the report. “With 17 ETS in operation and another 12 in preparation or under consideration, this policy instrument will continue to play a key role in reducing GHG emissions worldwide.”

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by Ilario D'Amato

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