5. Existing and emerging cooperative
5.2 Types of cooperative approaches
This section focuses on cooperative approaches that can have market-based applications. Such cooperative approaches may also be used for non-market applications, as discussed in Section 5.5.6 below.
Since the early 1970s, market-based schemes for pricing emissions have emerged alongside command-and-control policies, both for regulating greenhouse gases and other pollutants that are considered harmful for the environment. The main motivation for market-based instruments is enhancing the cost-efficiency of achieving a desired environmental outcome such as lower emissions. With differences in abatement costs across sectors and regions, introducing a price on emissions instead of tightening existing regulations reduces the cost of further emissions reductions. Carbon pricing plays an important role in in the Paris Agreement.
Market-based schemes typically fall into one of two categories: cap-and-trade (trading) schemes and baseline-and-credit (crediting) schemes. Both types of schemes are currently in operation around the world at both national and international levels.
5.2.1 Cap-and-trade schemes
Under a cap-and-trade scheme, emissions are capped over a predetermined period. As a consequence the number of allowances to emit are fixed. For a given sectoral and geographical scope, the cap is typically set to decline over time. The allowances can either be allocated for free (grandfathered) or auctioned across the entities that participate in the scheme. Once the initial allocation has been set, participating entities are free to trade the allowances between themselves – participants with an excess can sell the surplus to entities with a deficit.
Two types of cap-and-trade schemes can be identified based on who the participating entities are:
1. Between governments
2. Between companies that are part of regional/national/supranational schemes
Governments typically trade within the national carbon budgets, whereas companies trade within caps that cover only a share of national emissions.
An example of emissions trading between governments is International Emissions Trading (IET) under the Kyoto Protocol24. Under the Kyoto Protocol the emission reduction targets are expressed as levels of allowed emissions, or “assigned amounts,” over the commitment period. The allowed emissions can also be called a cap. The allowed emissions are expressed in terms of Assigned Amount Units” (AAUs). Under IET, countries with emission caps could trade AAUs to reach their targets under the Kyoto Protocol. In other words, countries that over-perform can sell the over-performance to countries that underperform, relative to set targets.
There are currently 16 emission trading schemes in operation worldwide25, the largest of which is the EU ETS.26 All the existing schemes are listed in Table 1 of section 5.3 below. The table summarises selected design parameters of fundamental nature: the coverage in percentage, the point of regulation (upstream/downstream), linkages with other schemes and rules for the use of offsets.
An example of emissions trading between companies is the EU Emissions Trading Scheme (EU ETS). The position by the EU Commission is that the EU ETS is and continues to be the main instrument to achieve EU’s GHG reduction target.27 The EU ETS was launched in 2008 and has since then gradually been expanded both in terms of gas coverage, sectoral coverage and geographical coverage. Currently, it covers slightly less than half of EU emissions.
There are examples of emissions trading schemes with small geographical coverage (see table 1 below in section 5.3 of current trading schemes). Different ETS’s can also be linked, meaning their units are mutually accepted and can thus units can be traded between two schemes. While EU ETS and other trading initiatives of trading between companies are not governed internationally under the UN, they represent a way for governments to reach internationally agreed mitigation targets, such as those set in the Kyoto Protocol.
24 http://unfccc.int/kyoto_protocol/mechanisms/emissions_trading/items/2731.php
25 ICAP: Emissions Trading Worldwide - International Carbon Action Partnership (ICAP) Status Report 2016
26 http://ec.europa.eu/clima/policies/ets/index_en.htm
27 http://ec.europa.eu/clima/news/articles/news_2014121901_en.htm
In addition to the existing schemes, a number of new schemes have been suggested, of which the most important is China’s National ETS, which is expected to launch in 2017. The operation of the national ETS is expected to be delayed to the second half of 2017, but its emission cap is likely to be backdated to the beginning of the year, meaning that only the start of trading is delayed.28 The National ETS is an evolution and expansion of the ongoing seven regional pilot schemes in China. By June 2014, all seven carbon trading pilots started trading. Jointly the pilot schemes, cover 1919 entities, and their emissions have been capped at 1.2 billion tons of CO2e per year.29 The national scheme is expected to cover approximately 10,000 entities.30 In Australia, the main opposition party has revived the plan for an emissions trading scheme, which was repealed by the previous government. According to the revived plan, Australia will allow for the use of international offsets and link to other cap-and-trade schemes.31 In Canada’s Ontario province, its government voted on 18 May 2016 to establish the province’s cap-and-trade system, with the intention of linking to Québec and California’s joint market in late 2017 or 2018.32
5.2.2 Baseline-and-credit schemes
Under a baseline-and-credit scheme, allowances are issued relative to a baseline. Under a mandatory sectoral crediting scheme, entities with emissions above the baseline would be obliged to acquire allowances from entities with emissions below the baseline. In a voluntary project-based baseline-and-credit scheme, the credits are awarded to projects that reduce emissions below the baseline. In a voluntary project-based baseline-and-credit scheme, there is typically no demand, just supply. The demand must come from external sources. The baseline can either be project-specific or standardized. The baseline is a hypothetical reference case, representing the volume of greenhouse gases that would have been emitted if the project were not implemented.
Clean Development Mechanism (CDM) and Joint Implementation (JI) are examples of international baseline-and-credit schemes that generate credits from emission reduction projects and programmes in countries without (CDM) and with (JI) binding targets under the Kyoto Protocol. Credits are generated by projects or programmes that have been deemed additional, for emission reductions relative to a pre-approved baseline that have been measured and verified in accordance with specific standards and procedures. For CDM, these standards and procedures are developed at the international (UN) level while JI projects may apply either national (Track 1) or international (Track 2) rules and procedures. These credits can be transferred to other Parties who may use them for complying with their emission targets under the Kyoto Protocol. By 2016, there were some 7,700 projects registered under the CDM and JI. Of these, some 2,900 had issued CERs and ERUs corresponding to 1,660 MtCO2e in avoided emissions.
Japan has operated its bilateral baseline-and-credit mechanism, the Joint Crediting Mechanism (JCM), since 2013, for the purpose of quantifying Japan’s contributions to GHG reductions and removal activities, with
28 Carbon Pulse (March 2016): China national ETS launch likely in second half of 2017 –sources http://carbon-pulse.com/17057/
29 Zhang (2015): Carbon Emissions Trading in China: The Evolution from Pilots to a Nationwide Scheme https://ccep.crawford.anu.edu.au/sites/default/files/events/attachments/2015-04/paper_by_professor_zhang.pdf
30 Carbon Pulse (March 2016): China national ETS launch likely in second half of 2017 –sources http://carbon-pulse.com/17057/
31 Carbon Pulse (April 2016): Australian ‘soft start’ ETS would seek links to international carbon market, but demand seen limited http://carbon-pulse.com/18960/
32 https://www.ontario.ca/page/cap-and-trade
the objective of accounting them appropriately as Japan’s contribution.33 Compared with the CDM, JCM relies more on benchmarks and energy efficiency standards as baselines.34 In contrast with the CDM standards, the JCM standards are host country specific and must be approved bilaterally by the respective Joint Committee (of Japan and the host country). In that respect, JCM resembles Track 1 JI. Through JCM, the Ministry of the Environment of Japan supports part of the initial cost (up to half), with the objective of securing at least half of the issued JCM credits to the government of Japan. The budget for projects starting from 2016 is 6.7 billion JPY (approx. USD 56 million) in total by the fiscal year 2018.35
The UN body International Civil Aviation Organization (ICAO) has plans for a global market-based mechanism for civil aviation (from 2020). The mechanism, which is expected to be a baseline-and-credit scheme, is due to be voted on at ICAO’s full assembly in October 2016, but there has been little technical process by June 2016 and the issue has been controversial for many years.36 Under the ICAO negotiations, the conceptual basis of the proposed measure has not yet been elaborated in full detail. Preparatory work37 has identified three design options: global mandatory offsetting, global mandatory offsetting with revenue38, and global emissions trading. The aviation industry has repeatedly expressed its preference for offsetting, and ICAO has taken note of this position. It is therefore likely that, if adopted, the global MBM will take the form of mandatory offsetting (option 1), and this type of offsetting usually requires credits from a baseline-and-credit mechanism. Details on it are yet to be agreed.39