As Phase 3 of the European Union’s Emissions Trading Scheme (EU ETS) will begin in January 2012 when airlines operating flights to or from Europe will have to buy carbon permits to help offset their emissions under EU legislation, carbon finance and trading in Europe is set to proceed to a new horizon. Launched in January 2005, EU ETS is one of the established multilateral measures in the broader climate deals which are tackling the vertiginous growth of carbon emissions in the region on its way to attain its “20-20-20” targets. Illustrating the background of and the relevant operational aspects of the EU ETS, this article will investigate the efficacy, potential problems, business opportunities and uncertainties of the ETS by taking a SWOT analysis. It will lead to a discussion on the system’s usefulness in mitigating the ‘common’ problem of climate change.
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“The rational man finds that his share of the cost of the wastes he discharges into the commons is less than the cost of purifying his wastes before releasing them. Since this is true for everyone, we are locked into a system of ‘fouling our own nest,’ so long as we behave only as independent, rational, free-enterprisers.”
Introduction
Garrett Hardin in ‘The Tragedy of Commons’ (1968)
The European Union (EU) is more than halfway towards reducing its 1990 level of carbon emissions by the year 2020 according to a recent assessment report by the European Environment Agency. It reveals that emissions across the 27 member states dropped by 11.3% during 2008. (Kinver, BBC News, 2010) This may be partially attributable to the EU Emissions Trading Scheme (EU ETS) which was launched on 1 January 2005 with approximately US$ 50 billion worth of carbon allowances allocated annually across the 25 EU participating countries. Covering some 13,000 installations and over 4,000 companies, the EU ETS was designed to enable the EU to fulfil its commitment of cutting its greenhouse gas emissions by 8% below the 1990 level by 2012 as agreed in the Kyoto Protocol. It is the world’s largest mandatory carbon emissions trading system where governments cap national emissions and allow polluters to trade permits for releasing CO2 (a so-called cap-and-trade policy). This article aims to illustrate the background of, and to give an overview of, the relevant operational aspects of the EU ETS. It will also investigate the efficacy, potential problems, business opportunities and uncertainties of the EU ETS by taking a SWOT analysis, followed by a discussion on whether an ETS is at all useful in the context of mitigating the ‘common’ problem of climate change.
The Background of emission trading
Emission trading is the widely accepted economic solution to global warming. The increasing global mean temperature, melting of ice caps, rising sea levels, more powerful hurricanes and frequent flooding, etc. are ramifications of climate change. Science has proved that global warming being anthropogenic is caused by the continuous combustion of fossil fuels, change of land use and deforestation that substantially increases the amount of greenhouse gases (GHG) in the atmosphere.[1] (Baede, 2001) To avoid a climatic catastrophe, the world is to half the global GHG emissions by 2050 using various mitigation options of cost and environmental effectiveness.[2] International agreements, including the most recent Copenhagen Accord [3], strive to limit the average temperature increase to 2oC via a cut of 550ppm CO2e. At present, environmental regulations, renewables subsidies, carbon taxes and emission trading are mainstream solutions at national and international levels, but the effectiveness of each option in combating climate change has been a subject of controversy. This will be discussed later. In 1960, economist Ronald Coase first argued that if the rights to pollute could be bought and sold polluters could bargain and find an efficient way to distribute those rights. In tandem, as various discussions and studies have developed, GHG emissions are considered by Sir Nicholas Stern in his 2007 report, ‘The Economics of Climate Change’ (‘Stern Review’) as “the greatest market failure the world has seen”. (Stern, 2007) Using this evidence, climate experts agree that the best action to take against such market failure is to attach a market value (price) to emissions through creating global carbon markets. This would provide large polluters with a financial incentive to clean up and decarbonise carbon-intensive economies as any business is looking to improve its profit margins. The extensive acceptance of this pollution control system would signify a gradual movement towards market-based environmental policies.
International negotiations under the UN Framework Convention on Climate Change (UNFCCC) culminated in Kyoto Protocol that includes the key provision of a carbon market, which was supported by 165 countries at the COP (Kyoto) in 1997. As the Protocol was ratified in 2005, it became international law and thus provided the legal foundation that allowed the creation of the EU Emissions Trading Scheme and the Clean Development Mechanism, providing preferential treatment for developing nations. The author who designed the wordings for Kyoto Protocol carbon market within the 1997 accord was Graciela Chichilnisky, then US Lead Author of the IPCC and Acting Advisor to the Lead Negotiator of Kyoto Protocol. Since 2005, Kyoto Protocol and its CDM have been critical to decreasing the emissions of EU and developing nations as it has transferred about US$50 billion in funding for clean technology in private projects and creating entire industries in the developing world. Such new form of clean development, although in its infancy, has the potential to change the course of the global economy towards a green direction.
The operation of an emission trading system
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Figure 1 Emission trading between companies (Global Carbon B. V., 2010) |
Kyoto Protocol and the EU ETS
After years of public pressure and international negotiations, the Kyoto Protocol, adopted in 1997, marked the first political acceptance of an increasingly convincing but gloomy scientific consensus. The agreement demands that the world’s industrialised countries, such as the UK, must reduce their absolute emissions by at least 60% of their 1990 level before 2050 This has been endorsed in the DTI White Paper 2003 and Energy White Paper 2007. They acknowledge that emission trading will be the prime instrument used to enable these countries to meet their target. In the EU, that the carbon/energy tax policy failed to be implemented in 1992 prompted the European Communities to incubate a new emissions trading scheme – the EU ETS – introduced in 2005 to drive EU countries towards their Kyoto commitment.[4] It was built on the earlier experience of the SOx Emissions Trading Schemes in the USA. According to WWF-UK, “If the EU is to maintain its status as a major player in global climate change negotiations, then it must put its own backyard in order first and ensure that Europe is placed firmly on a path towards a low carbon economy”. (World Wildlife Fund-UK, 2007) Today, EU ETS boasts the largest and the most ambitious Emissions Trading Scheme in the world with established verification systems.
In fact, the EU ETS is being implemented in three phases: Phase 1 (2005-2007); Phase 2 (2008-2012) and Phase 3 (2013-2020). The first phase covered 25 member states and circa 11,500 sites but decentralised cap-setting with a few pre-set targets resulted in poor quality data being returned. In accordance with the Emission Trading Directive, the situations of the three implementation phases are summarised in the table below:
Phase | I | II | III |
Years | 2005-2007 (Learning stage) | 2008-2012 (Kyoto commitment period) | 2013-2020 (Proposals) |
% of emissions covered | ca. 45% of carbon emissions (11,500 installations) | Member states can decide whether the scheme expands to cover other gases and sectors in their own territories | 100% of GHG (with concessions to new entrants) |
Sectors covered | · Energy-related activities (i.e. power generation, industrial boilers/ generators) · Iron and steel plus non-metallic minerals (cement, glass, ceramics and bricks) · Pulp/paper | · All sectors, including aviation, maritime transport and forestry | |
Allocation of emission allowance | · Each member state submitted national allocation plan that specifies the proposed maximum allowance (tCO2) for each installation (‘bottom-up’ approach) · Allowances virtually all grandfathered (i.e. issued free with some reference from past emissions) | · NAPs submitted to the European Commission for review by the end of Nov 2006 · Some auctioning · Up to 14% of the cap may be met by importing CDM/JI credits (see Figure 2) · Member states can decide if banking credits from Phase I are allowed | · Replacing NAPs with centralised allocation (‘ top-down’ approach) · Auctioning a far greater share of emission permits (ca. 60% in 2013, growing annually afterward) · Accepting unlimited banking credits from Phase II and credits from pre-2012 projects in developing countries · Tightening the use of offset project credits |
Carbon trading prices | €1.2/t in March 2007 €0.10/t to September 2007 | €20/t in early 2008 €22/t in late 2008 €13/t in early 2009 | Should be higher than Phase II |
Penalty for non-compliance | €40/tCO2 | €100/tCO2 | Pending |
Target of emissions cap | --- | 6.5% below 2005 levels | 21% below 2005 levels[5] |
Table 1 Summary of EU ETS in three phases
Since Kyoto Protocol 2005, the value of international carbon trades in the carbon trading market grew more than 80% between 2006 and 2007 (from €22 billion to €40 billion). However, two markets dominated the world carbon trading during 2007. The EU ETS demonstrates a remarkable achievement, accounting for 70% of the €40 billion spent worldwide to purchase carbon emission allowances. (Roine, 2008) The USA, Canada, Australia and Japan are also developing their own emission trading systems to encourage the extensive use of clean fuels and technologies.
Flexibility mechanisms
Accounting for the remaining 30% of the carbon market, the flexibility mechanisms, i.e. CDM and JI, under the Kyoto Protocol form an integral part of the EU ETS. On the assumption that many emission reductions can be achieved in less developed countries at lower costs, the twin programmes allow companies in industrialised countries to offset some emissions by investing in, or buying credits from, carbon-reduction projects elsewhere if they cannot reach the required reductions. Both CDM and JI enable some developing countries to profit from projects which reduce GHG emissions causing climate change.[6] Credits become tradable if the relevant CDM emissions-saving projects in non-Annex I countries are approved as Certified Emissions Reduction (CER) by the CDM Executive Board or Emission Reduction Units (ERU) by the Supervisory Committee for JI projects between Annex I countries. These are mainly the transitional economies in the former Soviet Union (in Annex I), each representing one avoided ton of CO2. (See Figure 2) However, projects in both systems must demonstrate that the offsets are ‘additional’ to business-as-usual reductions which would have happened anyway.[7] Currently over three-quarter of CDM projects are carried out in China. Thus, both the Kyoto mechanisms pave the road to sustainable growth without a binding commitment of overall reductions for developing countries, but doubts about ‘additionality’[8] and actual mitigation effects exist.
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Figure 2 Flexibility mechanisms in Kyoto Protocol (Terranova Market, 2010) |
SWOT Analysis
Now that the operational aspects of emission trading have been briefly explained and the implementation of the EU ETS and its associated carbon offset mechanisms – CDM and JI roughly explored, we can turn to a SWOT analysis that delineates the major strengths, potential problems, business opportunities and uncertainties identified along with the development of the emission trading system.
Strength
Cost-effectiveness
Unlike carbon levies and traditional environmental legislations, EU ETS revolutionises the methodology used by governments to control emissions. It is widely believed to be the most cost-effective approach[9] as producers who should master their own costs and production methods better than regulators do could decide who would clean up and find the best possible ways to do it. Canadian economist John Dales (1968) suggests that a market of pollution rights requires no person or agency to set the price, instead it is set by the competition among buyers and sellers of pollution rights. (Dales, 1968) Moreover, a recent report released by Britain’s Institute for Public Policy Research positively commended the EU ETS as “a sure way of capping and reducing total emissions from the installations covered by the Scheme” and “the single most important policy instrument in the EU climate change programme”. (Kelly, 2006) In operation, the limit or ‘cap’ on the number of EU Allowances (EUA) of GHG emissions allocated in the region creates the scarcity necessary for a trading market to emerge. Such market-based policy instrument ensures that CO2 emissions are curbed in the most economical way. (European Commission, 2005) By balancing the marginal abatement costs across diverse sources regulators would no longer need to access the individual abatement costs. Experts estimate that EU ETS, the cap-and-trade regime, would enable the EU to reach its Kyoto target at a cost between €2.9billion and €3.7billion annually, which equals less than 0.1% of the EU’s GDP in 2005. In contrast, without EU ETS, but a command-and-control policy, the total compliance cost could amount to €6.8billion a year, achieving a saving of at least 45%. (Helm, 2003)
Financial incentive for green innovations
EU ETS provides a continuous financial incentive for polluters to innovate in ways to reduce emissions. The Scheme encourages the use of clean fuels and technologies because firms which cut their own emissions can sell their unneeded allowances. Its links to CDM and JI under the Kyoto treaty from which companies can obtain credits and it creates additional incentives for large polluters to invest in emission-reduction projects in non-EU member states in Europe and other developing countries. In return, this trading bloc will accelerate clean technology transfers to the developing world.
Certainty of meeting reduction target
Compared with environmental taxes, EU ETS, which is defined by the number of permits, enhances the certainty of environmental outcomes. Effective implementation will guarantee no quantity risk but the pollution targets will be achieved. Economics tells us that the (carbon) market adjusts automatically to exogenous changes, e.g. inflation and varied number of installations. Companies being rational decision-makers are already changing their corporate behaviour under the ETS. (European Commision Directorate-General for Environment, 2005) Research by the International Emissions Trading Association and the World Bank also report that EUAs and European markets for natural gas, petroleum, power, fuel and weather derivatives have been interacting with each other as shown on the latest market data. Thus, business decisions are beginning to be made with carbon price being a key criterion, indirectly ensuring that the national emission limits are met.
Weaknesses (Potential problems)
Northcott (2007) writes that “The new global carbon market is not incentivising real reductions in emissions. But it has created tremendous, new trading opportunities and new opportunities for fraud and injustice”. (Northcott, 2007) This could be true of the EU ETS’s offset arms – CDM/JI which may contain loopholes, but the potential problems identified in the EU ETS per se are by and large technicalities.
Inharmonic allocations of allowances
In Phases I, carbon allowances were allocated grandfathered to companies based on their past emissions instead of being auctioned. From an economic perspective, auction remains a more efficient way to allocate emission allowances in creating a carbon market. Nevertheless, Article 10 of the Directive 2003/87/EC stipulates to the EU delegates the power of allocation to member states through developing their National Allocation Plans (NAPs).[10] Consequently, large corporations lobbied for the largest possible allowances when NAPs were too ‘charitable’ with surplus allowances of 2.4% in 2005. Installations across the EU emitted 1.785 billion tCO2, but national authorities had issued allowances for 1.829 billion tons. (Datamonitor, 2006) This allocation approach without harmonisation across 27 member states may weaken the integrity of the EU ETS. Some countries such as Germany, France and Poland, were assigned more emission allowances than needed while a few such as the UK, Ireland and Spain were spared due to their genuine determination to curb emissions. Thus, countries in the latter batch buy EUAs from those in the former and the market is unfairly draining resources from ‘honest users’ to ‘bogus users’ of the Scheme.
Weak commitment of member states
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Figure 3 Illustrative changes to proposed caps for member states |
The weak commitment of member states is a fundamental problem. Not to mention that 8 out of 27 member states had not notified their NAPs before the deadline (29 November 2006), those submissions from some nine states were not complete for EC’s reviews. As various countries aimed at minimising their emission reductions, a majority of member states, apart from the UK, continued getting their generous allowance allocation and proposed national caps for Phase II, which may again have damaged the credibility of EU ETS. As a result, the caps proposed by nine member states were sent back for revision and the allowed caps for most of the member states were significantly lower than their proposed caps. (see Figure 3) In the end, the EC mandated member states to adopt tougher caps in the second phase and cut all NAPs by an average of 7% below the 2005 emission levels. This weak commitment leading to ‘generosity’, together with the fact that the Czech Republic, Estonia, France, the Netherlands and Sweden released their emission data, showing their over-allocation of allowances in 2005 ahead of schedule in April 2006, shook the whole carbon market in the last week of that month. The carbon trading price plunged from €30/t to €9/t. (see Figure 4) Price-sensitive companies have, as a result, been de-incentivised to reduce their carbon emissions.
Price volatility
Price volatility or fluctuation is predestined in every established market that is underpinned by demand and supply. The trend of crude oil prices is an important factor affecting carbon prices. (See Figure 6) But volatile prices attributable to irresponsible actions by some of the aforementioned member states can never engage stakeholders in the emission-trading business. It also conveys a negative message to developing countries that their carbon offset credits (CERS in CDM) might just be worth a penny, causing a ‘chain effect’ in undermining investors’ confidence and, more importantly, causing the collapse of the international commitment towards combating climate change.
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| Figure 4 Carbon prices and trading volumes in Europe (Centre for Global Energy Studies, 2010) |
Overuse of carbon offset credits
The EC has also issued warnings to some member states regarding the overuse of carbon credits earned by emission-offset investments abroad. Consumption of JI or CDM credits are meant to be ‘supplementary’ to the reductions covered under the EU ETS. For instance, Ireland was instructed that credits from Kyoto’s flexible mechanism cannot exceed 22% of their emissions reductions. (The Economist Intelligence Unit, 2006) Thus, for a more effective ETS, corrective measures such as devaluing the carbon offset credits from JI and CDM projects and restricting the use to a fixed percentage will be essential in the future.
Otherwise, the WWF’s warning in its 2007 report that: “The ETS will not contribute towards achieving [carbon reductions] if it continues to transfer most of the responsibility for tackling climate change to the developing world and allow the sectors within the scheme to simply buy their way out of the problem.” (World Wildlife Fund-UK, 2007) will be undesirably true forever.
Learning from the first compliance cycle, EU ETS, if enforced in the same manner in the coming phases, may not be adequate to help the EU fulfil its Kyoto obligations. It is important to point out that an effective carbon market is impossible without new and realistic targets for reducing emissions as well as some technical adjustments to the game rules.
(Business) Opportunities
Business opportunities emerge whenever there is a growing market demand for a product/service whilst supply is temporarily limited. By the same token, business opportunities such as environmental consultancies, financial investment and CDM project management are arising because of the exponentially expanding emission trading markets in Europe and beyond. Before outlining the business opportunities, we may observe the growing size of the carbon market.
The Carbon trading market
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Figure 5 Emission Trading Market (2005-2011) (Porto, 2011) |
The potential of the world’s carbon trading market is massive. Following the current development (see Figure 5), the New Carbon Finance estimated in October that the total value of the world’s carbon trading would amount to $550 billion (around €397 billion) by 2012 and just over $2 trillion (around €1.4 trillion) by 2020, even without participation by the US. If the US launches a federal cap-and-trade system, those figures would reach $680 billion (€490 billion) by 2012 and more than $3 trillion (€2.16 trillion) by 2020. (New Carbon Finance, 2008) US$3 trillion is approximately the size of the world markets for oil, coal, natural gas and electricity today combined. (Kennedy, 2007) The expansion of the EU ETS will bring more emitting sectors and GHGs under the emissions cap with more frequent, accurate emission and allowance data, as well as better regulation of the member states enabling the EU to meet the Kyoto targets. It will also offer a working cap-and-trade model for a global Emissions Trading
Scheme. Under the spotlight is the fact that the European Parliament has already agreed to include aviation emissions in the ETS since 2012 (Milmo, 2008) whilst EU lower their emission caps. Aviation is the fastest growing emitting sector which shares 3% in the EU’s total carbon emissions. In the Washington Legislator’s Forum Statement, attendees “urge leaders to work towards a global carbon market, where appropriate, by linking the scheme in Europe with others emerging across the globe, to provide a deeper and more liquid market, helping to drive down emissions at least cost.” (Globe International, 2007) The market base will be further expanding when it is connected to all compliance carbon markets such as the Regional Greenhouse Gas Initiative (RGGI) in the north-eastern United States and New South Wales carbon market in Australia. [11] Canada and Japan are also developing their own national carbon markets in coming years, looking closely at the European experience. If the US curbs emissions at federal level, this will certainly encourage other big emitters like China and India to accept binding emission targets, which multiplies the carbon market size in turn.
Given the potentially huge market, a regional cap-and-trade regime can create a wide range of business opportunities. Apart from environmental or energy consultancies providing organisations with strategic advice on performance improvement which is already becoming quite common in the business sector, the writer will focus on business opportunities pertaining to green project development and green finance.
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Figure 6 Trends of EUA and crude oil prices (2007-09) Source: http://inbalance.wordpress.com/ |
Profitability of green projects
Linked to Kyoto’s offset mechanisms – CDM and JI, EU ETS incentivises the developing countries and transitional economies to limit emissions and adapt to global warming with emission-reduction projects in their own territories. These are convertible into millions of dollars worth of carbon-offset credits to be sold to wealthy countries struggling to meet their targets. Companies working on these offset projects, including identification, development, management, marketing and even brokerage will benefit from optimum profitability as the demand for those credits are increasing. A good example is the REDD forestry projects in Indonesia which qualified for CDM carbon offset credits, a way Greenpeace called “one of the easiest and cheapest” to solve the carbon conundrum.[12] Preserving the forests in the Indonesian province of Aceh alone could prevent 100 million tons of carbon from entering the earth’s atmosphere and these ‘money trees’ will therefore attract further ‘green’ investment. The Carbon Conservation (Australia-based) and Merrill Lynch (US bank) which brokered and invested in the Aceh deal respectively are gaining profits from the credits. (Marshall, 2009)
Prospects of Green finance
Carbon trading is set to stimulate research and development of new, clean technologies and associated investment derivatives. Decisions taken at The Copenhagen Summit last year will result in the next wave of investment in carbon reduction projects and make the carbon market the world’s largest commodity market.
(1) Venture capital investment opportunities
EU ETS stimulates the demand for anything which helps enterprises reduce or offset emissions. Looking for a profitable outcome in infant companies engaged in renewable energy and clean technologies, investors or enterprises are increasingly interested in releasing capitals for longer-term investments in wind, solar and bio-fuel energy projects, etc. Venture capital investment, which is regarded commonly as a prime indicator of overall investment patterns, recorded a sizeable growth in the clean-tech and renewable sector for the seventh consecutive year. In 2008, clean technology venture investments in the US, Europe, China and India reached a record $8.4billion (Cleantech Group, 2009). Venture capital investment in clean technology is growing swiftly and second only to that in IT and biotechnology in the US. In early 2009, for example, the Bank of Ireland launched a new €100million green fund as part of its recapitalisation package which focuses on renewable energy investment. Also in Ireland, the Electricity Supply Board’s €200million Novus Modus venture fund is set up for clean-tech investments. (Wallace, 2009) These may be indicative of the abundance of opportunities that the investment market is looking towards.
(2) New banking opportunities
The third phase of EU ETS would allow banking emission allowances between phases, which would smooth carbon prices over time and encourage companies to partake in the ETS more actively. That the Scheme is expanding to cover all the GHG, auctioning emission allowances and linking other emerging trading schemes will soon improve the market liquidity. Inherited from the current well-established financial structures, the banks may find numerous opportunities in trading ‘carbon’ stocks, futures, securities and even related insurance products, etc. Financial institutions also have the motivation to conduct more research into the development of emissions trading-related investment funds and other derivatives to attract corporate clients in the trading market.See the full article published in the International Journal of Green Economics, Volume 5 (No. 3). Geneva: Inderscience Publishers (Forthcoming, Nov/Dec 2011).
[1] In the twentieth century alone, owing to industrialisation and various human activities which emit such greenhouse gases (30% more than pre-industrial times; 70% more since 1970) as carbon dioxide and other trace gases, the global mean temperature has risen by 0.4-0.8°C; Sea level has risen by 10-20 cm. A rise of further 2°C in the global mean temperature to 16°C will lead to disasters to human civilisation. (Baede, 2001) (IPCC, 2007) To achieve the target of stabilisation in 2050, a cut of 550ppm of CO2 emission is necessary.
[2] Mitigation options have to be economically and environmentally effective, which roughly summarises the three conditions that The UN Framework Convention on Climate Change (UNFCCC) imposes on the goal of stabilization: (i) it should take place within a time-frame sufficient to “allow ecosystems to adapt naturally to climate change; (ii) to ensure that food production is not threatened and; (iii) to enable economic development to proceed in a sustainable manner” (Art. 2). Several guiding principles of the mitigation process are: “equity, common but differentiated responsibilities, precaution, cost-effective measures, right to sustainable development, and support for an open international economic system” (Art. 3).
[3] As the emissions limits for Appendix I (OECD) countries under Kyoto Protocol will require renewal in 2012, The 2009 United Nations Climate Change Conference, also known as the Copenhagen Summit, was held in Copenhagen in December 2009 to create an international framework for post-2012 climate change mitigation policies according to the Bali Road Map 2007.
[4] Kyoto Protocol is an international agreement signed in 1997 and enforced in 2005 as a protocol to 1992 UN Framework Convention on Climate Change (UNFCCC). As at December 2007, it has been ratified by at least 175 countries. The purpose is to stem global warming by requiring major industrialised countries (except the US which did not ratify the Protocol) (Annex I countries) to cut their GHG emissions by an average of 5.2% below 1990 levels with voluntary participation of developing countries (non-Annex I countries). The 2012 targets enshrined in Kyoto Protocol are legally binding and outlined in percentages for different signatories with reference to their emissions levels. EU member states promised to reduce their emissions farther to 8% below 1990 levels by 2012. There are flexibility mechanisms designed to allow countries to achieve their emissions targets cost-effectively, including emission trading (carbon markets), Clean Development Mechanisms (CDM) and Joint Implementation (JI).
[5] In Phase 3, the EU seeks to put forward a 20-20-20 package by 2020. Member states will achieve a 20% reduction in GHG emissions from 1990 levels; a 20% share of renewables in final energy use; a 20% cut in energy consumption through improving energy efficiency. This target will rise to 30% if adequate international agreement is secured.
[6] For example, an electric power company in Germany might buy credits to cover excess CO2 emissions created by its coal-fired plants. These credits could come from CDM projects reducing other GHG emissions through actions such as collecting methane emissions from landfills. By using the GWP values for these gases, projects owners can calculate the number of tons of CO2 equivalent the project releases or voids, and then sell the reduction credits across international borders.
[7] One of the eligibility criteria of CDM and JI projects is to pass the ‘additionality test’, demonstrating that the carbon reductions are ‘additional’, they would have happened without the CDM/JI component. For example, if local regulations already require incinerators to cap emissions instead of releasing them into the air, they should not be able to market that action as a CDM/JI project and sell the emission credits to a company in an industrialised country.
[8] Offset projects sometimes credit ‘anyway tons’ – reductions from projects that would have gone forward anyway. Reductions are supposed to be ‘additional’ to business as usual, but that is difficult to prove. ‘Additionality’ often comes down to subjective decisions. For instance, in a 2008 paper law professors Michael Wara and David Victor at Stanford University pointed out that nearly all new renewable and gas-fired power plants in China are applying for CDM credits despite the fact that China’s energy sector is growing rapidly and the Chinese government have asked companies to invest in non-coal energy sources. Therefore, China would probably be moving toward lower-carbon fuels even without CDM credits for new power plants. So in reality, much of the current CDM market does not reflect actual reductions in emissions. (Wara & Victor, 2008) Companies heavily relying on offsets will have little incentive to reduce fossil fuel use or develop cleaner technologies in their own installations.
[9] Suppose there are two factories and each emit 100 tCO2. The cap is 50 tons each. Assume Factory A can abate at €2/t while Factory B at €1/t. Without trading, it would cost Factory A €100 to abate 50 tons of emissions while Factory B €50 for the same. Therefore, the total abatement cost without trading is €150. With emission trading, both factories can benefit at any traded price between €1/t and €2/t, say €1.50/t. To meet the required reduction of 50 tons, Factory A buys 50t of allowances from Factory B for doing no abatement and the cost is €75 (50t X €1.50). Factory B will do 100t of abatement at a cost of €100, but receive €75 from Factory A. So, the cost of Factory B to do the abatement will only be €25 (€100 - €75). After all, the social costs of emissions abatement will be reduced significantly.
[10] National Allocation Plan (NAP) specifies the total number of emission allowances issued by a member state and the number of allowances which each installation under the EU ETS coverage will be granted.
[11] Although the US has not ratified Kyoto Protocol, almost half of all states including California (the first US state which has launched a state-wide mandatory programme to cap GHG emissions at 1990 levels by 2020 through the Global Warming Solutions Act of 2006) as well as nine north-eastern states which participated in the Regional Greenhouse Gas Initiative (a cooperative effort to design a regional cap-and-trade programmelaunched in 2009); and more than 100 cities such as Portland, Chicago and Oakland; and about 50 big American companies,including Ford Motor Company, IBM, Motorola, DuPont, and American Electric Power, have taken voluntary steps to confront climate change. Besides, Chicago Climate Exchange (CCX) has provided continuous electronic trading of GHG emission allowances and offsets (including carbon offset projects in Brazil) since December 2003. In Australia, all the eight provincial and territory governments have been developing a national emissions trading scheme, following the New South Wales Government’s mandatory GHG emissions trading scheme - the Greenhouse Gas Abatement Scheme (GGAS). (Harvey, 2008)
[12] UN Reducing Emissions from Deforestation and Forest Degradation in Developing Countries (UN-REDD) programme is set up to create a financial value for the carbon stored in forests. It aims to provide developing countries with incentives to reduce emissions from forested lands and invest in low-carbon paths to sustainable development. According to UN-REDD programme, currently almost one-fifth of global GHG emissions come from deforestation and forest degradation due to agricultural expansion, infrastructure development, destructive logging and fires, etc., which emit carbon more than the total from transportation and is second only to the energy sector. As natural regulator of climate, forests stockpile an estimated 300 billion tons of carbon, equivalent of 40 times the global total GHG emissions that cause global warming. REDD is estimated to generate US$30 billion a year for developing countries. (UN-REDD programme, 2009)
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2. BBC News. (2009, October 21). India-China climate change deal. Retrieved October 21, 2009, from BBC News: http://news.bbc.co.uk/1/hi/world/south_asia/8318725.stm
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4. Cleantech Group. (2009, January 6). Clean technology venture investment reaches record $8.4 billion in 2008 despite credit crisis and broadening recession. Retrieved August 12, 2010, from Cleantech Group: http://cleantech.com/about/pressreleases/010609.cfm
5. Dales, J. H. (1968). Pollution, Property and Prices. Toronto: University of Toronto Press.
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11. Hardin, G. (1968, December 13). The Tragedy of the Commons. Science , 162 (3859), pp. 1243-1248.
12. Harvey, F. (2008, May 7). World Carbon Trading Value Doubles. Financial Times .
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Email me at winstonkm.mark@googlemail.com
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