Carbon Trading Framework

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This presenation outlines a CO2 trading framework to that tries to address issues with the current Cap and Trade and emissions taxing solutions.

This is acheived by initiating a carbon reserve that is funded by a tax on carbon credits traded, rather than carbon emissions.

The carbon reserve acts as a powerful tool to drive desired policy outcomes.

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  • Purpose of CO2 Reserve  Provides leverage to policy makers to achieve global outcomes

    Encourages real progress in CO2 reduction rather then market manipulation:
    Excessive trading implies that members are not succeeding in meeting CO2 caps
    Increased CO2 credits in reserve can be used to drive policy
    Bail out certain members
    Rebates for use of particular technologies or increased efficiency in certain industries
    Little trading implies members are meeting caps through CO2 emissions reduction
    Not much involvement required by Reserve

  • Carbon leakage occurs when there is an increase in CO2 emissions in one country as a result of an emissions reduction by a second country with a strict climate policy.
    Carbon leakage may occur for a number of reasons:
    if the emissions policy of a country raises local costs, then another country with a more relaxed policy may have a trading advantage. If demand for these goods remains the same, production may move offshore to the cheaper country with lower standards, and global emissions will not be reduced.

    if environmental policies in one country add a premium to certain fuels or commodities, then the demand may decline and their price may fall. Countries that do not place a premium on those items may then take up the demand and use the same supply, negating any benefit.

    Marginal Abatement Cost (MAC) Curve is an accounting methodology used to present graphically, and in a quantifiable manner, the investment performance of different energy, water and waste reduction projects. The methodology ranks the various projects from the most cost effective, to the least cost effective, whilst illustrating the total carbon, water or waste abated by each individual project.
  • Carbon leakage occurs when there is an increase in CO2 emissions in one country as a result of an emissions reduction by a second country with a strict climate policy.
    Carbon leakage may occur for a number of reasons:
    if the emissions policy of a country raises local costs, then another country with a more relaxed policy may have a trading advantage. If demand for these goods remains the same, production may move offshore to the cheaper country with lower standards, and global emissions will not be reduced.

    if environmental policies in one country add a premium to certain fuels or commodities, then the demand may decline and their price may fall. Countries that do not place a premium on those items may then take up the demand and use the same supply, negating any benefit.
  • Carbon Trading Framework

    1. 1. Outlines a CO2 trading framework to address issues with Cap and Trade and emissions taxing solutions. This is achieved by initiating a carbon reserve that is funded by a tax on carbon credits traded, rather than carbon emissions. The carbon reserve acts as a powerful tool to drive desired policy outcomes and drive innovation
    2. 2. CO2 Market - Background Although the UNFCCC failed to arrive at binding agreements, existing mechanisms can be modified to serve as a basis for implementing a possible accord Imperative to have as much infrastructure, processes, agreements and technology in place to minimize additional delays The solution should be refocused to include developing nations as a key driver for long-term, sustainable CO2 reduction ©2013 Mauro Forcolin2
    3. 3. Issues with Current Approaches ©2013 Mauro Forcolin3 1 • Current Cap and Trade mechanism results in high price volatility for CO2 • Makes large investments required for CO2 reduction unviable 2 • Taxing CO2 emissions removes instability, but does not guarantee reductions amounts 3 • No single mechanism or institution to incentivize and guide the process • Industry needs consistent regulation and policies in place • Reassurance of long-term stability
    4. 4. Goals of Proposed Approach ©2013 Mauro Forcolin4 1 • Minimize the extent that CO2 is traded in other currencies • Avoid excessive price fluctuations, hedging and rent-seekers 2 • Create a single market platform where CO2 is traded • Transparent to all members 3 • Create a International Carbon Reserve to stimulate positive outcomes • Reserve uses CO2 obtained through tax on trading not on emissions 4 • Incentivize the development of efficient industry in developing countries • Rather than remaining underdeveloped CO2 trading pools
    5. 5. CO2 Credit Trading Model CO2 Reserve Platform for effecting policies CO2 Credit Trading CO2 Credit Payment CO2 efficient Tech. & Services Traditional Payment Not part of model ©2013 Mauro Forcolin5
    6. 6. Int’l CO2 Credit Reserve Primary tool to drive global strategy and policies on CO2 reduction ©2013 Mauro Forcolin6 • Unlike a fiat currency, Reserve cannot create more CO2 to drive initiatives • Must obtain reserve from trading of CO2 by market members Works by stabilizing market and push desired outcomes • Does not interfere sovereign taxation policies • Discourages hedging and rent-seekers Deals only in CO2 credits, not currencies • Make-up of the Reserve members • Extent of powers • Accountability To succeed, all members of the CO2 market must agree on:
    7. 7. • No currencies • Traded among members • Paid to CO2 Reserve as a tax on trades CO2 market only deals with CO2 credits • Any member can obtain CO2 credits from another member All members are present along with known CO2 quotas • Incentivize member to reduce via innovation rather than playing the market The receiver must give a percentage to the Reserve • Considered a service used once received rather than a product that can be traded onwards • Member cannot trade away more than their quota minus what they use CO2 credits can only be traded once to prevent hedging CO2 Market - Trades ©2013 Mauro Forcolin7
    8. 8. • Credits collected via premiums paid on purchasing unused CO2 credits from developing countries • Rebates awarded for paying for CO2 credits in carbon-friendly currencies Credits collected by reserve are redistributed through rebates. • Drive progress in a given industry/geography • Compensate struggling members adversely affected by Reserve policies Rebates act as a tool for Reserve to: ©2013 Mauro Forcolin8 CO2 Market - Payments
    9. 9. Innovation Cycle ① Set Policy ② Establish Quotas ③ Carbon Trading/Leakage ④ Fill Carbon Reserve ⑤ Innovative Projects
    10. 10. Failure occurs when: •CO2 is too expensive to obtain •Not enough credits are available to foster innovation Policy should balance: •Driving innovation (distribute credits) •Maintain trading cycle (obtaining credits) Credits obtained from: • Purchasing unused carbon quotas from other countries (Carbon Leakage) Credits distributed for initiatives resulting in: • CO2-reducing technologies and services • Introducing CO2-efficient industries in riskier/underdeveloped locations • Compensate industries/locations adversely affected by policy ©2013 Mauro Forcolin10 Carbon Reserve Balance
    11. 11. Expectations ©2013 Mauro Forcolin11 1 •Large transfer of credits to developed countries thereby increasing the carbon reserve 2 •Reserve policy helps drive innovation in developing countries who begin to use their own credits rather than trade away 3 •Optimization of developed carbon industry as available credits from developing world become scarce 4 •Harmonized carbon usage Accelerated global carbon reduction with industrialization of the developing world CO2Emmissions Time Emissions - Global Emissions - Developed World Emissions - Developing World Quota - Developed World Quota - Devloping World
    12. 12. Challenges ©2013 Mauro Forcolin12 1 • Carbon Leakage • CO2 Reserve uses Carbon Leakage as a key driver • Encourage investment in CO2 efficient technologies abroad in return for entering the CO2 Trading scheme 2 • Monitoring & Transparency • Technological advances needed to viably implement monitoring • Willingness of participants to be monitored 3 • Conversion to another currency is still required to evaluate costs/returns & calculate MACs (Marginal Abatement Costs) • Price volatility persists despite efforts of CO2 Reserve, but incentives to innovate rather than trade will minimize the effect.
    13. 13. In Comparison – 1/3 ©2013 Mauro Forcolin13 Alberta Carbon Offset System Carbon Reserve Concept Only in Alberta Worldwide Between 2 companies Between 2+ countries Uses offsets based on emission reductions from non-regulated activity (i.e. farmers adopting no-till) Not part of model; Unused carbon “quota” traded on a national level  Perhaps its a misnomer to refer to “credits” Each country given a quota of carbon to use or trade away  How this is calculated is key and may change over time as developed countries become more industrialized Offset carbon usage through reductions in other areas (protocols) Offset inefficient carbon usage in developed world with increased, more efficient usage in developed world Buy time for big polluters through easier reductions in other sectors  Get credit for carbon that would have been used in previous practices Buy time for big polluters by transferring/developing operations in the developing world  Promote developing world to “burn” their way into a global solution Carbon leakage a concern Marketizing & regulating carbon leakage is the key aspect to the system
    14. 14. In Comparison – 2/3 ©2013 Mauro Forcolin14 Alberta Carbon Offset System Carbon Reserve Concept Fund credits  Target to improve “emissions intensity” (emissions per unit of production, such as per barrel of oil) by 12 per cent relative to the baseline, or typical emissions performance, for specific facilities.  Companies that can’t meet reduction targets by improving performance in their operations can pay into a technology fund instead, at a rate of $15 a tonne. o funds used to develop or invest in Alberta based technologies, programs, and other priority areas  The “40/40” approach would increase the target to 40 per cent and raise the technology fund price to $40 a tonne Carbon Reserve  Portion of carbon purchased by a country goes into the Carbon Reserve (assets + Policy driving body).  Carbon Reserve used to incentivize carbon- efficient projects in the developed world or subsidize as necessary.  Penalties yet to be defined for countries exceeding quotas  Portion of carbon deferred to the Carbon Reserve could be variable based types of projects (i.e. riskier, leading edge, regional instability, etc.) o May over-complicate things since this is already compensated by Carbon Reserve actions  Quota reduction based on Int’l agreed targets
    15. 15. In Comparison – 3/3 ©2013 Mauro Forcolin15 Alberta Carbon Offset System Carbon Reserve Concept Fundamental Principle: Activities and emission reductions must be above and beyond Business as Usual practices Fundamental Principle: Companies & countries’ targets & motivation may not align with global necessity. Concept helps bridge this difference by incentivizing participants to act for global benefit while still meeting local requirements Protocols and processes clearly defined Verification still a technical challenge Details and operating mode still to be developed Verification an even greater challenge Consider transfer vs. transaction tax as a means to prop up the reserve. The latter is:  Easier to manage  Aligns with the idea of carbon credits being real assets

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