Public Policy to Mitigate Climate Change: Europe’s Experience with Cap-and-Trade


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  • Source of carbon market figures: World Bank, State and Trends of the Carbon Market 2012
  • EUA future prices 2008-2012. The EUA prices reflect daily over-the-counter (OTC) closing prices for EUAs to be delivered at the end of 2012.
  • Based on options identified by the Commission in its November 2012 report on the state of the European carbon market.
  • Public Policy to Mitigate Climate Change: Europe’s Experience with Cap-and-Trade

    1. 1. Public Policy to Mitigate Climate Change: Europe’s Experience with Cap-and-Trade St. John’s College The University of British Columbia Vancouver, BC | 22 November 2013 Stefan U. Pauer PhD Student, Faculty of Law The University of British Columbia @StefanPauer
    2. 2. Roadmap The problem: man-made climate change Possible solutions Policy options, and how to choose Europe’s experience with cap-and-trade How does it work? History: How did the system come about? Future: Carbon market reform
    3. 3. The Problem: Man-Made Climate Change “Warming of the climate system is unequivocal, and since the 1950s, many of the observed changes are unprecedented over decades to millennia.” “Human influence on the climate system is clear. (…) It is extremely likely that human influence has been the dominant cause of the observed warming since the mid-20th century.” Impacts affect all components of the climate system Temperatures, precipitation patterns, extreme weather events, ocean warming and acidification, sea level rise “Limiting climate change will require substantial and sustained reductions of greenhouse gas emissions.” Source: IPCC (AR5, 2013)
    4. 4. Possible Solutions: The Policy-Maker’s Toolbox Voluntary programs Subsidies Taxation Market-oriented regulation Cap-and-trade Artificial niche market regulation (e.g. RPF, VES) Command-and-control regulation Performance/technology/fuel standards
    5. 5. Instrument Choice Each instrument has advantages and disadvantages Instrument choice involves trade-offs, often difficult Hybrid instruments / combinations possible Criteria for making trade-offs, aiding instrument choice Environmental effectiveness Cost-effectiveness Distributional impact Political feasibility Administrative feasibility
    6. 6. Instrument Choice Environmental effectiveness of voluntary programs and subsidies relatively low Leaves carbon taxes, cap-and-trade, and commandand-control regulations on the table Main differences: Cost-effectiveness, political feasibility Endless debates about which instrument is the “best” can delay policy action May be a strategy pursued by those who seek to delay action due to vested interests
    7. 7. Europe’s Experience with Cap-and-Trade How does cap-and-trade work? Some design features of the EU ETS History: How did the system come about? Future: Carbon market reform
    8. 8. How Does Cap-and-Trade Work? Companies must hand in “allowances” whenever they release emissions into atmosphere Determine an absolute maximum of emissions allowed (“cap”) Cap on emissions creates scarcity, ensuring that allowances have economic value Market-based system: allowances can be traded
    9. 9. How Does Cap-and-Trade Work? Companies have a choice: reduce emissions, or buy allowances If reducing emissions is cheaper: Companies can sell unused allowances to others If reducing emissions is more expensive than price of allowances: Companies buy allowances from others Emissions reductions take place where they are the cheapest
    10. 10. Overview of the EU ETS EU’s main climate policy instrument Largest cap-and-trade system in the world 84% (value) and 76% (volume) of global carbon market In 2011, EU carbon market was worth over €100 billion In operation since 2005 Mandatory system
    11. 11. Overview of the EU ETS 31 countries All 28 EU Member States Norway, Iceland, Liechtenstein (EEA-EFTA states) >12.000 large installations Incl. electricity and heat producers, steel, chemicals, cement, glass, pulp & paper, … ~2.000 Mt CO2e per year Almost half of EU’s total annual emissions
    12. 12. Enforcement and Compliance Each year, operators must report verified emissions and hand in allowances to cover for their emissions No or insufficient surrendering entails high penalties €100 per t/CO2e not covered by surrendered allowances Payment does not release operators from surrendering obligation Compliance rate usually higher than 99%
    13. 13. Declining Emissions Cap EU-wide cap on total emissions in the system Determines and guarantees environmental outcome Declines, ensuring reduction of emissions over time (21% in 2020 compared to 2005)
    14. 14. Distribution of Allowances Auctioning >50% of allowances auctioned between 2013 and 2020 Revenues distributed to EU Member States Free allocation Based on greenhouse gas performance benchmarks System rewards best practice in low-emissions production Long-term goal to phase out free allocation
    15. 15. Carbon Leakage Issue: Absence of comparable carbon constraints in third countries could lead to Economic disadvantage for domestic industry from international competition (competitiveness impact) Potential overall increase in GHG emissions in case of relocation (environmental impact) Policy response: More free allocation for sectors at risk of carbon leakage
    16. 16. History: Creation of the System In 1992 EU Commission proposed a carbon-energy tax But not approved in Council of the EU – main reasons: Resistance from industry Unanimity required in tax matters at EU-level Kyoto Protocol (1997) prompted EU Commission to focus on cap-and-trade Seen as economic opportunity, reducing compliance costs Qualified majority sufficient to pass into EU-law
    17. 17. History: Creation of the System Commission crafted support among stakeholders Industry: Cost-effective, economic opportunities NGOs: Environmentally effective, cap guarantees emissions reductions Member States: Combination of above, highlighting ET as tool for achieving emissions targets agreed under Kyoto Protocol US withdrawal from Kyoto Protocol in 2001 Unified Member States and EU institutions, eager to become leaders on global climate diplomacy Formal proposal of EU ETS in 2001 – adoption in 2003
    18. 18. Future: Carbon Market Reform The problem Causes Consequences of inaction Possible solutions
    19. 19. Carbon Price Evolution 2008-2012 Source: Point Carbon
    20. 20. Causes and Consequences Some of the main causes Over-generous free allocation by national governments Economic recession = Imbalance of supply and demand Consequences Weak price signal weakens incentive to invest in lowcarbon technology Reduced government revenue from auctioning Risk of fragmentation
    21. 21. Possible Solutions Need to address imbalance between supply and demand Some options Increasing the EU’s emissions reduction target / tightening the emissions cap Removing allowances from the system Extending the scope of the system by including other sectors (e.g. transport, shipping) Introducing a price management mechanism
    22. 22. Thank You Thank you for your attention! Any questions or comments? @StefanPauer