Public Policy to Mitigate Climate Change: Europe’s Experience with Cap-and-Trade
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. 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. 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)
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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. Future: Carbon Market Reform
The problem
Causes
Consequences of inaction
Possible solutions
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. 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. Thank You
Thank you for your attention!
Any questions or comments?
@StefanPauer
Editor's Notes
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.
