Session 2 presentation from the 4th Strategic Dialogue of the Carbon Market, 15-16 May 2019

1. Latest developments on carbon
pricing as seen by EDF
Dr. Pedro Piris-Cabezas
Senior Economist – Global Climate
CARBON MARKET PLATFORM 2019
MAY 15-16, 2019
PARIS

2. Key questions
1. Modeling Article 6 of the Paris
Agreement
Estimating the Power of
International Carbon Markets to
Increase Global Climate Ambition
2. Biofuels and Carbon Markets
Latest developments from ICAO-
CORSIA on how to properly
account for the contribution of
alternative fuels in carbon markets

3. 1. MODELING ARTICLE 6 OF THE
PARIS AGREEMENT

4. Source: EDF based on Enerdata/POLES, IIASA, FAO
NDC ambition is perspective

5. Model overview and assumptions
• Partial equilibrium model solving for intertemporal equilibrium
(with risk premium to account for policy uncertainty); 36
countries/regions with global coverage, 6 GHGs; MACCs from
POLES & IIASA
• Banking (carry forward) of emissions units allowed based on
emissions below annualized target trajectory of NDCs.
• Nations achieve NDC targets based on an annual trajectory
that establishes an absolute limit on emissions for each
sector (and similarly for international aviation).
• All traded units represent real mitigation, with no double
counting of reductions.

6. 1.1 GLOBAL COVERAGE SCENARIO

7. Total emissions reductions from 2020-2035 in billion tonnes CO2e
Source: EDF
Global carbon markets can enable almost double the emissions
reductions at the same total cost as current policies

8. • Ambition! But also…
• Environmental and sustainable development benefits
• Enhanced trade cooperation in other products and
services of interest to cooperating jurisdictions
• Strengthened political, economic, and cultural alliances
• Synergies with other foreign policy priorities (food and
energy security, innovation, regional air quality, etc.)
“Co-benefits” of international carbon market
cooperation

9. Source: EDF based on Enerdata/POLES, IIASA, FAO
The role of banking to keep the 2ºC
window open

10. 1.2 PARTIAL COVERAGE BASED ON
‘HEAT MAP’ ANALYSIS

11. MARKET READINESS AND PRIORITY
“Carbon Markets Heat Map”
Source: EDF

12. Breaking down Indicators…
GOVERNANCE
Capacity
• Government Effectiveness
(WB)
• Political Stability (WB)
• Regulatory Quality (WB)
• Perception of Corruption (TI)
• Control of Corruption (WB)
• Ethics & Corruption (WEF)
• Undue Influence in Government
(WEF)
• Rule of Law (WB)
• Public Sector Performance
(WEF)
• Security (WEF)
• Average Trust in Institutions *
(E)
• Total number of government
organizations registered as an
observer to the COP
• Total number of government
organizations as signatories to
the UN Global Compact
Motivation
• Enforcement of Environmental
Regulations (WEF)
• Number of Ratified
International Treaties (WEF)
• Potential Revenue or Cost
from full carbon pricing (WB)
• Adjusted Trade with ETS
countries
• Stringency of Environmental
Regulations (WEF)
• Trends in Carbon Intensity
(Yale)
• Trends in CO2/kWh (Yale)
ENTERPRISE
Capacity
• Macroeconomic Environment (WEF)
• Financial Market Efficiency (WEF)
• Strength in Private Institutions (WEF)
• Business Sophistication (WEF)
• Extent of Corporate Transparency
(WB)
• Herfindahl-Hirschmann Index
• Total number of business / private
organizations registered as an
observer to the COP
• Total number of business/ private
organizations as signatories to the
UN Global Compact
Motivation
• RECAI Score
• GCII Score
• Carbon
Disclosure
Project Score
• Innovation
Index (WEF)
CIVIL
Capacity
• KPMG Change Readiness Score
• Voice & Accountability (WB)
• Number of Registered Economic Institutions
• Higher Education Index (WEF)
• Graduates in the Environmental Protection Field
(OECD only)
• Total number of civil organizations registered as an
observer to the COP
• Total number of civil organizations as signatories to
the UN Global Compact
• Environmental Democracy Index – Legal Score
• Environmental Democracy Index – Practice Score
Motivation
• Public Concern for
Climate Change
• Average Exposure – NO2
Air Pollution (Yale)
• Average Exposure –
PM2.5 Air Pollution
(Yale)

13. Carbon market readiness and priority score

14. Partial coverage scenarios
• ‘Heat Map’ Scenario.
– EU, US, China and 25 highest-
ranking countries (79% coverage)
• Asia-Pacific Scenario.
– Current markets plus highest-
ranking countries from heat map
scenario in Asia-Pacific region
(36% coverage).
• Americas Scenario.
– Current markets plus highest-
ranking countries from heat map
scenario in Americas (42%
coverage).
Asia-Pacific
Americas
Heat-Map
c

15. Source: EDF
‘Heat Map’
Asia-Pacific
Americas
Significant increases in ambition could still be achieved
even with limited international emission trading

16. Key findings on Art. 6 and ambition
• Global use of carbon markets could allow nearly double
climate ambition relative to current NDCs at the same total
cost.
– Significant increases in ambition could still be achieved even with
limited international emission trading.
• Reducing deforestation is a key driver (~1/2) of greater
ambition.
• Banking allows keeping the 2ºC window open, under certain
conditions.
• Priority to ensure the development of well-designed,
high-integrity international market approaches.

17. 2. BIOFUELS AND CARBON MARKETS

18. How are biofuels defined as being
eligible under CORSIA SARPs?
 Paragraph 6 of the Assembly Resolution A39-3 requests,
“[...] that a methodology should be developed to ensure that
an aircraft operator’s offsetting requirements under the
scheme in a given year can be reduced through the use
of sustainable alternative fuels […]”
 First edition of the SARPs: the mechanism is Paragraph 6
now applies to ”CORSIA eligible fuels” (CEF): (1)
sustainable aviation fuels and (2) “lower carbon aviation
fuels”, which are fossil fuels.
 ICAO Documents with Implementation Elements still
missing.

19. SARPs approach to CEF in a nutshell
• Under CORSIA, all aeroplane
operators report all CO2
combustion emissions from
fuel use (both conventional
aviation fuel and CEF). (Part II,
Chapter 2)
• Aeroplane operators can
reduce their offsetting
obligations by claiming
emissions reductions from
the use of CEF. (Part II,
Chapter 3)

20. Computing CEF Emissions Reductions
• To compute CEF emissions reductions (ER) the aeroplane operator
multiplies the total mass of net CEF (MS) by the CEF emissions
reduction factor and the fuel conversion factor (FCF) to CO2
emissions (CORSIA SARPs Part II, Chapter 3)
The CEF emission reduction factor (1-LS/LC) is inversely
proportional to the CEF life cycle emissions benefit as compared to a
baseline of 89 gCO2e/MJ (representing conventional jet fuel.
The CEF life cycle emissions value accounts for both core-LCA and
Induced Land Use Change values.
“The offset test” …if it looks like a offset, swims like a
offset, and quacks like a offset, then it probably is an
offset.

21. A note on avoiding double-counting
of CEF reductions
• If an alternative fuel reduces emissions over its life
cycle, that’s good for the climate.
• When the fuel is burned in an aircraft, emissions come
out the back of the engine. Any fuel-related
reductions occur in the territory of the country
where the fuel is produced.
• If the host country reports those reductions under Paris
(by claiming zero CO2 emissions from combustion), and
an airline also claims those reductions under CORSIA,
that’s double-counting.
• Double-counting can and must be addressed.

22. STATE
YEAR X
International Bunker (fossil fuel)
MEMO ITEM IN NATIONAL INVENTORY
International CO2
emissions (ICAO)
National GHG
emissions inventory

23. STATE
YEAR X
International Bunker (fossil fuel)
MEMO ITEM IN NATIONAL INVENTORY
CEF mitigation outcomes for CORSIA
National GHG
emissions inventory
The national GHG inventory of the host State will capture mitigation
outcomes that occur over the lifecycle of the CEF.
DOBLE CLAIMING: To avoid double-claiming, the host State must
make a corresponding adjustment (see next slide) to its emissions
account for the mitigation outcomes of the CEF transferred to
CORSIA.
International CO2
emissions (ICAO)

24. STATE
YEAR X
International Bunker (fossil fuel)
MEMO ITEM IN NATIONAL INVENTORY
Operator must inform the host State about CEF
mitigation outcomes for CORSIA and the State
must make a corresponding adjustment
STATE
YEAR X + n
Transferred mitigation outcomes
(emissions balance)
National GHG
emissions inventory
CEF mitigation outcomes for CORSIA
CORRESPONDING ADJUSTMENT
International CO2
emissions (ICAO)

25. Discussion
• Double Counting. Paragraph 77d - enhanced
transparency framework: Corresponding adjustment and
authorization.
• The economics of biofuels for aviation are changing
swiftly.
– Since Jan. 2019, opt-in under California Low Carbon Fuel
Standard and Oregon Clean Fuels Program.
– EU Renewable Energy Directive II (EU RED):
“1.2 multiplier” and opt-in.
• Biofuels in EU ETS & California ETS: zero CO2
emissions from combustion following IPCC guidance
meant for national GHG emissions inventories…
• …meanwhile CORSIA only recognizes actual
emissions reductions.

26. Thank you!
Pedro Piris-Cabezas
ppiris@edf.org

27. Carbon Market Model:
Extensions/caveats
• Politics of resource transfers.
• Considering other economic/co-benefits.
• General equilibrium and trade in goods provides more
complex picture.
• Role of ‘bundled” mitigation transferred via trade in
biomass/biofuels.
• Uncertainty/shocks will increase gains from linking (Doda,
Quemin and Taschini 2018)
• Considering radiative forcing contributions as ultimate target
provides further opportunity for cost savings.

28. Carbon market model overview
• Partial equilibrium model with banking solves for intertemporal
equilibrium
– market clears in each period
– price rises at the rate of interest (plus risk premium to account
for policy uncertainty)
• Mitigation potentials (MACCs)
– Energy, transport and industry sectors (from POLES-Enerdata model)
– Avoided tropical deforestation and forest degradation (i.e. REDD+)
(from IIASA model)
– Six major GHGs (CO2, methane, nitrous oxide, SF6, HFC and PFC).
• 36 countries/regions
• NDC scenarios
– Emissions trajectory consistent with NDC pledges (POLES-
Enerblue)
– Forsell et al. (2016): NDC global goals for land sector.