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8th Strategic Dialogue of the CMP - Stefano De Clara, International Carbon Action Partnership

Session 1B presentation from the 8th Strategic Dialogue of the Carbon Market Platform, 23-24 October 2023

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International Carbon Action Partnership 1
Interplay between carbon credits and compliance instruments
Stefano De Clara
Head of Secretariat, International Carbon Action Partnership (ICAP)
23 October 2023
25.10.2023 2
Sectoral coverage
of ETSs
• Most systems cover
power and industrial
sectors
• Increasing number of
systems are covering
buildings and
transport
• Only NZ covers the
forestry sector
25.10.2023 3
• Regulated entities can surrender a carbon
credit instead of ETS allowance
• Rationale:
– More flexibility for regulated entities
– Can lower compliance costs (if credits are
cheaper than allowances)
– Provides incentives for abatement outside
of ETS scope
– Stimulates learning outside the system
• What happens in practice:
– Qualitative and quantitative restrictions on
carbon credits use
Interplay on the demand side: carbon credits in ETS (and CPIs)
Source: ICAP & PMR ETS Handbook (2021)
25.10.2023 4
Interplay on the demand side: carbon credits and
compliance instruments
Source: Own elaboration based on WB State & Trends of carbon pricing (2023)
• At present, compliance instruments only
represent a small portion of the demand
for carbon credits
• This can change over time: in the past they
represented virtually the only source of
demand (EU ETS and NZ ETS for the CDM)
• At present, compliance‐driven demand is
highly fragmented and characterized by
low‐fungibility
• Different approaches to:
geographical/sectoral scope, level of
reliance on offsets, use of standards and
methodologies for generation.
Retirements of carbon credits in 2022
25.10.2023 5
Interplay on the demand side: Offsets and ETS
Source: adapted from: ICAP Offset Use Across ETS (2023)
25.10.2023 6
Takeaways on carbon credit use in compliance
instruments
Looking back, looking ahead
• Clear move away from international and independently‐administered crediting
mechanisms in the last decade, in favor of domestic credits from ‘domestic’
mechanism
• Where allowed, carbon credit use is carefully regulated by governments
• Credit eligibility rules are highly fragmented and characterized by low‐fungibility
• Compliance eligibility requirement can set quality standards for the crediting
market
• Carbon credits look to play a prominent role in the next generation of ETS/CPIs, but
mainly at the domestic level: often countries setting up domestic mechanisms
targeting domestic supply
• Removal credits will likely play a key role in the longer term, but will come with
broader design changes to compliance systems

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8th Strategic Dialogue of the CMP - Stefano De Clara, International Carbon Action Partnership

  • 1. International Carbon Action Partnership 1 Interplay between carbon credits and compliance instruments Stefano De Clara Head of Secretariat, International Carbon Action Partnership (ICAP) 23 October 2023
  • 2. 25.10.2023 2 Sectoral coverage of ETSs • Most systems cover power and industrial sectors • Increasing number of systems are covering buildings and transport • Only NZ covers the forestry sector
  • 3. 25.10.2023 3 • Regulated entities can surrender a carbon credit instead of ETS allowance • Rationale: – More flexibility for regulated entities – Can lower compliance costs (if credits are cheaper than allowances) – Provides incentives for abatement outside of ETS scope – Stimulates learning outside the system • What happens in practice: – Qualitative and quantitative restrictions on carbon credits use Interplay on the demand side: carbon credits in ETS (and CPIs) Source: ICAP & PMR ETS Handbook (2021)
  • 4. 25.10.2023 4 Interplay on the demand side: carbon credits and compliance instruments Source: Own elaboration based on WB State & Trends of carbon pricing (2023) • At present, compliance instruments only represent a small portion of the demand for carbon credits • This can change over time: in the past they represented virtually the only source of demand (EU ETS and NZ ETS for the CDM) • At present, compliance‐driven demand is highly fragmented and characterized by low‐fungibility • Different approaches to: geographical/sectoral scope, level of reliance on offsets, use of standards and methodologies for generation. Retirements of carbon credits in 2022
  • 5. 25.10.2023 5 Interplay on the demand side: Offsets and ETS Source: adapted from: ICAP Offset Use Across ETS (2023)
  • 6. 25.10.2023 6 Takeaways on carbon credit use in compliance instruments Looking back, looking ahead • Clear move away from international and independently‐administered crediting mechanisms in the last decade, in favor of domestic credits from ‘domestic’ mechanism • Where allowed, carbon credit use is carefully regulated by governments • Credit eligibility rules are highly fragmented and characterized by low‐fungibility • Compliance eligibility requirement can set quality standards for the crediting market • Carbon credits look to play a prominent role in the next generation of ETS/CPIs, but mainly at the domestic level: often countries setting up domestic mechanisms targeting domestic supply • Removal credits will likely play a key role in the longer term, but will come with broader design changes to compliance systems