1 Post-Kyoto global emissions trading: Perspectives for linking national emissions trading schemes with the EU ETS in a bottom-up approach Barbara Pflüglmayer Sebastian Goers Energy Institute at the Johannes Kepler University of Linz 5th International Scientific Conference Energy and Climate Change Athens, October 11th, 2012

2 Structure » Motivation› Key design elements of emissions trading schemes and impacts of linking › Linking candidates › Notes on the institutional design of a bottom-up approach › Conclusion

3 Motivation (I) International climate policy in a nutshellSource: Own composition

4 Motivation (II) Uncertainty about a future global climate regimeKyoto reduction targets only binding until 2012 Post-Kyoto treaty prepared by 2015 and implemented by 2020? Role of flexible project-based Kyoto instruments? Is a top-down approach the only way? Bottom-up design as an alternative Copenhagen Accords as turning point in climate policies EU Emissions Trading Scheme (EU ETS) as a starting point for linking Benefits of linking ETS # covered sources ↑ → cost-minimization ↑ Market liquidity ↑, price volatility ↓ Carbon leakage ↓

5 Structure › Motivation » Key design elements of emissions trading schemes and impacts of linking › Linking candidates › Notes on the institutional design of a bottom-up approach › Conclusion

6 Key design elements of ETS and linking impacts (I)Table 1: Key design elements and implications for linking Source: Own composition and Mace et al. (2008)

7 Key design elements of ETS and linking impacts (II)ETS generated by linking systems with the EU ETS should fulfill the following requirements in order to provide economic efficiency and ecological effectiveness: Mandatory participation Stringent absolute caps displaying serious but realistic ecological targets Identical continuance levels Identical price caps Coverage of important emissions and emitters Penalty frameworks with monetary fine and obligatory delivery of missing allowances Allocation via auctioning Solid MRV frameworks

8 Structure » Linking candidates › Motivation› Key design elements of emissions trading schemes and impacts of linking » Linking candidates › Notes on the institutional design of a bottom-up approach › Conclusion

9 Linking candidates (I)Evaluated and other emerging emissions trading schemes EU ETS Operating ETS Planned ETS Emerging (too little publicly available information) Source: Own composition

10 Linking candidates (II)Table 2: General issues of different emissions trading schemes Level of imple-mentation Starting date Time scale / continuance Participating countries Relative vs. absolute cap Cap EU ETS Operating 1st January 2005 EU-27 + Iceland + Liechtenstein + Norway absolute : 4.3% reduction of proposed amount of allowances : 6.5% reduction of 2005 emissions : 21% reduction of 2005 emissions ETS Switzerland 1st January 2008 Switzerland 8% reduction of 1990 levels 2008: 3.3 MtCO2, 2009: 3.1 MtCO2, 2010: 3.4 MtCO2 JVETS since 2005 Japan 2005: 1.3 MtCO2, 2006: 1.1 MtCO2, 2007: 1.6 MtCO2, 2008: 3.4 MtCO2, 2009: 0.6 MtCO2 IDMET Autumn 2008 absolute / relative 50% of Japanese CO2 emissions, 70% of the Japanese industry’s CO2 emissions Tokyo ETS 1st April 2010 since 2010 Tokyo (Japan) : 6% reduction for 5 year average : 17% reduction for 5 year average South Korea ETS Planned 2015 South Korea 30% cut from “business as usual” emissions by 2020 CPM 1st July 2012 1st July th June 2015 from 1st July 2015 on Australia 5% cut from 2000 emissions by 2020; from 1st July 2015 annual cap setting New Zealand ETS 2008 New Zealand No overall reduction target; emitting as long as allowances are available RGGI 1st January 2009 9 North-Eastern + Mid-Atlantic US States : stabilisation at 2009 levels; 10% reduction below 2009 levels by 2018 WCI 1st January 2012 California + 4 Canadian Provinces 15% reduction below 2005 levels by 2020 GWSA California Alberta 2007 since 2007 relative Annual reduction of energy intensity by 12% Source: Own composition

11 Linking candidates (III)Table 3: Coverage issues of different emissions trading schemes Gas coverage Sector coverage Mandatory vs. voluntary participation Direct vs. indirect emissions Opt-in and opt-out provisions EU ETS CO2, N2O from acid production, PFCs from the aluminium sector Power stations, combustion plants, oil refineries, coke ovens, iron and steel plants and factories making cement, glass, lime, bricks, ceramics, pulp, paper and board, aviation Mandatory Direct Opt-out for small emitters and hospitals from 2013 to 2020 ETS Switzerland CO2 Cement, pulp and paper, glass, ceramic production Voluntary alternative to mandatory CO2 tax Participation of private sectors is possible JVETS energy-intensive industry, power generation, transport and service Voluntary - IDMET Tokyo ETS Commercial buildings and industrial facilities with consumption of fuels, heat and electricity ≥ 1,500 kBOE South Korea ETS Industry (power generation, manufacturing), buildings (universities, amusement parks), waste (incineration, waste water treatment), agriculture and forestry CPM CO2, CH4, N2O, HCFs, PHCs, SF6 Entities with emissions ≥ 25 ktCO2; stationary energy, industrial and fugitive processes, non-legacy waste, partly transport Entities acquiring, generating or importing amounts of taxable fuel New Zealand ETS Certain production and deforestation activities, fuel users and suppliers Mandatory for certain production and deforestation activities and fuel users and suppliers Direct and indirect RGGI Electricity sector (fossil fuelled electric power plants ≥ 25MW) Single states can opt in and out WCI CO2, CH4, N2O, JDCs, SF6 and NF3 Electricity and Industry (facilities ≥ 25 k t CO2e) from 2012, transport, commercial and residential fuel from 2015 GWSA Electricity and Industry (facilities ≥ 25 k t CO2e) from 2012, natural gas and liquid fuels and transport fuels from 2015 Alberta Facilities emitting ≥ 100 k t CO2 per year Source: Own composition

12 Linking candidates (IV)Table 4: Issues regarding trading, allocation, temporal flexibility and compliance in different emissions trading schemes Allocation Banking Borrowing Use of offsets Penalty system Price cap EU ETS Gratuitous (Grandfathering, benchmarking) : at least 90-95% : ~ 50% Yes No JI- and CDM-Offsets 100 €/tCO2 & delivery in next period ETS Switzerland Gratuitous, according to the firm’s targets From 2010: 36 CHF/tCO2 CO2 tax: 36 €/t CO2 JVETS Gratuitous, amount = base year emissions, average for past 3 years – committed reduction Disclosure of performance & redemption of subsidies for CO2 reduction IDMET Gratuitous - Tokyo ETS Gratuitous, amount = base year emissions x (1-compliance factor) x compliance period (5 years) Domestic Offsets Monetary fine (¥ 500,000) & requirement to reduce 1.3 times the shortage & disclosure of performance South Korea ETS Gratuitous (95%) based on historical emissions, designed capacity and best available technology (BAT) CDM Offsets 3 times of market price, disclosure of performance CPM Full auctioning from 1st July 2015; gratuitous allocation for emissions-intensive trade-exposed sectors Yes (from 1st July 2015) 5% of year ahead (from 1st July 2015) JI-, CDM- and domestic ACCU-Offsets from 1st July 2015 Strict civil and criminal penalties $A 20/tCO2 above international carbon price from July 2015 – July 2018; yearly increase by 5% New Zealand ETS Partial gratuitous allocation JI-, CDM-, Carbon Sinks-, Kyoto-Offsets NZ$/tCO2 & delivery in next period 25NZ$/tCO2 RGGI Auctioning of approx. 90% of allowances, allocation of rest is up to individual state law 3 allowances per missed t CO2 are automatically deducted for the next period WCI Auctioning of approx. 10% of allowances; rest is up to individual state law GWSA At the beginning high degree of free allocation, then gradual shifts to auctioning Alberta Purchase of Alberta-based offset credits, Emission Performance Credits or pay to the Climate Change and Emissions Management Fund Source: Own composition

13 Linking candidates (V)Linking the EU ETS with promising candidates Linked system covers ca. 4,200 MtCO2e EU ETS comprises approx. 46% and WCI approx. 25% of covered CO2e emissions in the linking scenario Linking scenario – covered CO2e emissions of candidates Source: Own composition

14 Structure » Notes on the institutional design of a bottom-up approach› Motivation › Key design elements of emissions trading schemes and impacts of linking › Linking candidates » Notes on the institutional design of a bottom-up approach › Conclusion

15 Institutional design (I)Suggestions from economic literature How should a bottom-up approach be regulated? How should the overall cap be set? Centralized setting – one single authority Decentralized setting – individual authorities remain in force Decentralized setup → international externalities of transboundary pollution are disregarded within the cap setting → first-best solution of a centralized cap can never be achieved (D’Amato and Valentini (2007, 2011), Helm (2003) and MacKenzie (2011))

16 Institutional design (II)From global commons to global governance Linking options from a legal point of view EU enjoys an exclusive competence to negotiate and conclude treaties regarding linkages of the EU ETS – Directive 2003/87/EC, Art. 25 Crucial point: limitation of certificates in a fair and effective way requires a central authority concerning cap setting and compliance → but national sovereignty is unlimited Creation of a new institution or improvement of the UNFCCC UNFCCC as a starting point? Uncoupling cap-setting from political negotiations by installing an independent scientific body? Linking climate and trade WTO constitutes one of the most effective international organizations with compliance rules Bringing together the objectives of fostering trade and climate change Adjustments in case of carbon leakage and considerations of WTO rules

17 Structure » Conclusion › Motivation› Key design elements of emissions trading schemes and impacts of linking › Linking candidates › Notes on the institutional design of a bottom-up approach » Conclusion

18 Conclusion Scenarios of linking the EU ETS with schemes of Japan, New South Wales and Alberta are dropped out because of their voluntary character and relative caps. Assuming an EU CO2e price below the other schemes price caps, the bottom-up approach of linked systems covers approx. 4,200 MtCO2e. Even a polycentric climate governance system created by multilateral treaties will require a central authority in order to secure efficiency and effectiveness of the linked system. A centralized regulation of the multilaterally linked ETS is economically desirable but legally and politically hardly feasible. The linkage of climate and trade may be the most promising field for future action in climate policies.

19 Thank you for your attention!Contact Thank you for your attention! Barbara Pflüglmayer Energy Institute at the Johannes Kepler University of Linz Altenberger Straße 69 4040 Linz Austria Tel: Fax: Acknowledgments: Financial support from the Austrian Climate and Energy Fund in the framework of the “ARCP” Program is gratefully acknowledged. 19 19