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Michael Mehling (CEEPR) - Transatlantic Perspectives After Paris: Carbon Markets and the Linking of Emissions Trading Systems


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As part of the ELEEP Transatlantic Energy and Climate Dialogue, Ecologic Institute and Climate Strategies organized a UNFCCC Side Event entitled "Transatlantic Perspectives After Paris: Carbon Markets and the linking of Emission Trading Systems".

The Bonn Climate Change Conference in May 2016 marked the beginning of the Paris Agreement’s implementation and comes at a time that discussions on carbon markets are gaining renewed prominence:

- The Paris Agreement provides the framework for new mechanisms in its Article 6 and leaves room for interpretation in its implementation.
- While facing legal challenges, Obama’s Clean Power Plan could enable US States to achieve GHG reduction targets with the support of carbon market mechanisms.
- Within the EU Emission Trading System, options like the Market Stability Reserve are being explored to improve on the balance of allowances’ supply and demand.
- Additional states and regions (ex. China) have started carbon markets in recent years and could provide powerful partners for the linking of Emission Trading Systems.

In this context, our experts Aki Kachi and Michael Mehling discussed existing options for the development of carbon markets post-Paris and provided a perspective on what they could mean for carbon markets in the US and the EU. Our experts’ presentations were followed by a discussion, moderated by Matthias Duwe.

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Michael Mehling (CEEPR) - Transatlantic Perspectives After Paris: Carbon Markets and the Linking of Emissions Trading Systems

  1. 1. Transatlantic Perspectives After Paris: Carbon Markets and the linking of Emission Trading Systems Michael Mehling 26 May 2016
  2. 2. • 1969: Canadian John H. Dales explores the idea of emissions trading in a book (Pollution, Property and Prices, U. Toronto Press) • 1982: First market-based instruments used for conventional environmental pollutants (1982: lead; 1995: SO2; 1998: NOx) • 1993: President Clinton proposes a broad energy tax (“BTU Tax”) in his State of the Union Address, but the measure fails • 2001: President Bush declares withdrawal from the Kyoto Protocol • 2005: Seven U.S. states announce regional trading system (RGGI) • 2007: Supreme Court Decision in Mass. v. EPA; WCI emerges • 2009: Emissions trading begins in ten U.S. states (RGGI) • 2010: Broad cap-and-trade bill fails in Senate after passing House • 2013: Emissions trading begins in California and Québec (WCI) • 2014: California and Québec link their trading systems (WCI) • 2015: EPA passes final rule on Clean Power Plan Evolution of Carbon Markets in North America
  3. 3. 5/26/2016 2008-2012 Carbon Markets in the Americas
  4. 4. 5/26/2016 2009 Carbon Markets in the Americas
  5. 5. 5/26/2016 2013 Carbon Markets in the Americas
  6. 6. 5/26/2016 2017 Carbon Markets in the Americas Existing Intended Mention in INDC Considering
  7. 7. U.S. Clean Power Plan On 3 August 2015, the EPA issued a final rule (“Clean Power Plan”) for existing power plants under Sec. 111(d) CAA: • Aims to achieve a 32% reduction from 2005 in emissions from existing power plants nationwide by 2030, with State Implementation Plans due at the latest by September 2018 • States are assigned rate- and mass-based mitigation goals, reflecting the degree of abatement achievable through application of a source-specific best system of emission reduction (BSER) given the current generation portfolio • BSERs are based on an analysis of what is technically feasible using three categories of abatement opportunities: • Increasing the operational efficiency of coal-fired power plants • Shifting electricity generation to natural gas-fired power plants • Increasing electricity generation from zero-emitting sources
  8. 8. U.S. Clean Power Plan: A Court Drama • 2007: With Mass. v. EPA, Supreme Court opens the door to regulation of greenhouse gas emissions under the CAA • 23 Oct. 2015: CPP enters into force with publication in the Federal Register • 23 Oct. 2015: Coalition of states, utilities and other parties file CPP lawsuits before U.S. Court of Appeals, D.C. Circuit • 9 Feb. 2016: Supreme Court narrowly votes to stay imple- mentation of Clean Power Plan pending review of its merits • 13 Feb. 2016: Justice Scalia, one of the supporters of the stay, passes away, vacating a seat in the Supreme Court • 17 May 2016: District Court decides to forego three-judge panel and instead opts for ‘en banc’ hearing in September
  9. 9. Trading under the U.S. Clean Power Plan • Under the CPP, states have emission performance rates and mass-based emission budgets • 23 Oct. 2015: Federal plan and model trading rule proposal • Rate-based and mass-based federal plan • Rate-based and mass-based model trading rule • Mass-based trading: • EPA-operated tracking system; banking; set-asides for clean energy incentive program, output-based allocation and renewable energy • Rate-based trading: • Unit: Emissions Rate Credit (ERC) = 1 MWh @ 0 lbs. CO2 • ERCs can be generated from RES and nuclear generation, overachieving subcategory emissions standard and NGCC redispatch
  10. 10. Clean Power Plan: Compliance Options
  11. 11. Integrating Markets through Linking 5/26/2016 U.S.-Canada Joint Statement on Climate, Energy, and Arctic Leadership, 10 March 2016: ”Recognizing the role that carbon markets can play … both countries commit to work together to support robust implementation of the carbon markets-related provisions of the Paris Agreement … will explore options for ensuring the environmental integrity of transferred units, in particular to inform strong INDC accounting and efforts to avoid ‘double-counting’ of emission reductions … will expand their collaboration in this area over time.” Maroš Šefčovič, European Commission Vice President for Energy Union, 25 February 2016: “We’re ready to explore with our international partners like China, Quebec, Ontario, Manitoba, California and South Korea the possibilities of a global system of linked markets.”
  12. 12. Are We Any Closer Than a Decade Ago? 5/26/2016 California Governor Arnold Schwarzenegger Executive Order S-20-06, 16 October 2006: “[S]hall develop (...) a comprehensive market-based compliance program with the goal of creating a program that permits trading with the European Union (...) and other jurisdictions.” German Foreign Minister Frank-Walter Steinmeier Strategy Paper, 5 July 2007: “[For] the next phase of international climate negotiations (...) the goal has to be a powerful new trans-Atlantic market”
  13. 13. Linking in a Multilevel Trading Architecture: Case Study on California and Québec 5/26/2016
  14. 14. Accounting under the WCI 5/26/2016 Accounting under WCI rules
  15. 15. Potentially: Accounting under the CPP 5/26/2016 Accounting under WCI rules Accounting under Clean Power Plan rules
  16. 16. Accounting under the Paris Agreement 5/26/2016 Accounting under WCI rules NDC Accounting under UNFCCC rules Accounting under Clean Power Plan rules
  17. 17. Heterogeneity as a Challenge for Linking 5/26/2016 • Heterogeneity of Targets – Absolute emissions limitation or reduction targets – Relative emissions limitation or reduction targets (GDP, BAU, MWh) – Renewable energy or energy efficiency targets • Heterogeneity of Units – Allowances issued under mass-based cap-and-trade systems – Credits issued under baseline-and-credit systems (incl. ERCs, but also offset projects, sectoral crediting, REDD+ (?), SDM (?)) – Renewable energy or energy efficiency credits/certificates (incl. ERCs, but also RECs or Green Certificates, White Certificates ) • Heterogeneity of Policies and Measures – Quantity rationing (emissions trading) – Pricing (carbon taxes, fees and charges) – Regulation (e.g. performance standards)
  18. 18. Managing Heterogeneity: Two Options 5/26/2016 A D F E CB A Hub D F E CB Source: Mehling and Görlach, 2016 Harmonization Approach Hub-Based Approach
  19. 19. Harmonization Approach 5/26/2016 Example: Western Climate Initiative • Based on a “Western Regional Climate Action Initiative Agreement” signed on 26 February 2007 • WCI members adopted a common “Design for the WCI Regional Program” in 2010, setting out a template for a regional emissions trading system • California and Québec have each adopted mandatory mitigation targets, emission reporting rules, and emission trading systems based on the common design • Joint administrative organization (WCI, Inc.) created in 2011 maintains a registry, manages joint auctions, oversees offset crediting and monitors the market
  20. 20. Emergence of Clusters or “Clubs” 5/26/2016 Eurasian Market Asia-Pacific Market North American Market South American Market
  21. 21. From Compatibility to Comparability 5/26/2016 Source: World Bank, 2014Rating = f {program rating, credibility rating, ambition adjustment} ICAR Rating Agency Rating Agency Rating Agency Settlement Platform Offset Offset A D C B Rating Agency Offset A Settlem ent Platform ICAR Direct Link Direct Link (via Hub) Emissions Trading System Offset Crediting System International Carbon Reserve International Settlement Platform Independent Rating Agency Networked Carbon Markets (All Systems Linked via Hub with Risk-Based Rating)
  22. 22. Please come visit us! Center for Energy and Environmental Policy Research Massachusetts Institute of Technology (MIT) MIT Building E19-411 400 Main Street, 4th Floor Cambridge, MA 02142-1017 @  617-253-3551  617-253-9845