#5: Emissions trading



Constanze Haug, head of the secretariat, International Carbon Action Partnership

Michael Mehling, deputy director, MIT Center for Energy and Environmental Policy Research



Emily Dahl: From the Energy Initiative at MIT, welcome to today’s podcast. I’m Emily Dahl, and I’m here at the UN Climate Change Conference, COP24, talking with Constanze Haug, head of the secretariat of the International Carbon Action Partnership, ICAP, and Michael Mehling, deputy director of MIT’s Center for Energy and Environmental Policy Research. Thank you both for being here today. We’re here to talk about the linking of emissions trading systems, which Constanze and Michael have been discussing here at the COP. Constanze, could you start by telling us a little bit about what emissions trading systems are, and why linking them is something that governments might want to consider?

Constanze Haug: Emissions trading, or cap and trade, is one way for governments to put a price on carbon. To put a price on emitting greenhouse gas emissions. In a cap and trade system, the government sets a limit, or cap, on emissions of covered entities. These may be companies from the energy industry sectors, for instance. The companies can then reduce their emissions in-house, or buy permits to pollute from other companies that can reduce their emissions more cheaply or more quickly. Or they can buy credits from offset projects. There is certainty that the emissions cap will be reached, but at the same time, that will be done in a cost-effective manner.

Michael Mehling: Yes, and we have actually emissions trading systems in North America, even in the US, believe it or not. California has had an emissions trading system for several years now. Five years, since 2013. Then in the northeast and mid-atlantic, on the east coast, the Regional Greenhouse Gas Initiative has been a power sector admissions trading system, also in place for a considerable number of years. Coming from an academic perspective, economists widely agree that putting a price on carbon is the most cost-effective way of dealing with the externalities that cause climate change.

ED: As governments are considering linking their emissions trading systems, what are some of the most important points for them to keep in mind?

CH: In the ICAP Guide to Linking, we say we cover the whole lifecycle of linking. From the very early stage on, whom do you actually want to link with? What qualities should your linking partner have to satisfy you? To the question of how to make a link happen, so linking negotiations, what form of linking agreement would be possible between two jurisdictions, to the question of how similar the designs of the two cap and trade systems actually need to be, and what criteria to apply in that regard, probably the most important one there is that a jurisdiction needs to be satisfied. That the ambition level of their partner is adequate so as to ensure that the environmental integrity of the overall system is preserved and that the combined emissions trading system really drives emission reductions. Michael, I’m sure you have lots of points to add to that.

MM: I think the guide is wonderful in covering a number of the technical issues that have to be considered when thinking about linking of emissions trading systems. Frankly, this is a relatively new policy option for policymakers. North America and Europe and Japan have learned about linking by doing. The value of the guide is really for those jurisdictions that are now starting to explore or implement emissions trading systems of their own. They can learn from those experiences, from the good and some of the difficult experiences, and that really is where I see the guide being the most useful. Think of some countries in southeast Asia or Latin America or east Asia which are now really starting to talk about potential future linkage.

CH: We now have, at ICAP, we count 20 emissions trading systems worldwide. So a considerable number. Linking these systems, which means companies can buy emissions permits not just from their own country but from the market in the other country, makes reducing emissions even cheaper. At the same time, it enables governments to work together on climate change and show climate leadership. And it also makes cap and trade possible for small jurisdictions that might have a too-low number of entities to actually enable a liquid market. That’s why linking is considered beautiful and beneficial. Yet, the last couple of years have made it clear that linking is challenging. California and Quebec were pioneers in linking their emissions trading systems. They’ve taken a couple of years to actually make that link happen. But increasingly we now have first experiences that we can learn from. Those we try to consolidate in the ICAP Guide to Linking that we have just published and launched here at the COP.

MM: I think, as you said, it’s not easy to do, but we do see growing interest in linkage. The EU has just concluded a linking agreement with Switzerland, so there are two cap and trade systems that will be linked. We expect that, over time, that this is an option for countries to continue exploring for jurisdictions and it will continue to grow.

ED: Within the guide that you’ve developed, you talk about the importance of engaging stakeholders early in the process. What are some of the ways that can happen? Why is it important to have such early stakeholder engagement?

MM: Climate policies have distribution impacts. Even the best-designed climate policy will have some winners and some losers. There are ways to design policies to alleviate that. For instance, in France, these past weeks, there’s been, as you probably have heard, some unrests and even riots in the French capital and in other cities across France. One of the many elements that has caused wide dissatisfaction in the public is an increase of a carbon tax. This is not about linking emissions trading systems but it does show that climate policies are very vulnerable if they’re not based on a broad consensus and inclusive process that brings in the interests, concerns, et cetera, of all segments of the population, including low-income households, including those who would be potentially most affected by increases in, say, energy prices, et cetera, as those get passed through from climate policies to the consumer.

CH: I think with respect to linking and stakeholder engagement, there are probably two points in the process where that engagement is very important. At the outset, when considering linking to clearly explain the rationale, why that’s beneficial and why that’s relevant to the domestic audiences. Then the negotiations are probably going to be behind closed doors with the government, but then before the joint market starts up, for instance before a first joint auction of allowances across the link market, it is really important to really clearly explain to the covered entities, so to the companies and society at large, what that link will mean and how it will affect them. The second point in the process where engaging stakeholders is really important is then right before the launch of the joint market. There it’s important to assure stakeholders that everything will go alright.

ED: Here at the COP, negotiators are also talking about carbon markets. What are some of the issues that they’re grappling with?

MM: At COP24, as many will have heard, the big issue on the agenda is passing the Paris rulebook. Which is essentially a set of rules, modalities, procedures, guidance, et cetera. A number of documents and decisions that will help countries implement the Paris Agreement that was adopted in 2015. For those who don’t know, the Paris Agreement, that literally is the architecture, the framework for international climate cooperation under the United Nations. One of the agenda items has relevance for carbon markets, and thus, indirectly, also for linking. That is a provision in the Paris Agreement, Article 6—for those who want to be very precise—which contains a possibility or an option for countries to cooperate across borders, voluntarily, by transferring mitigation outcomes. For those who are familiar with carbon markets, they know that this essentially encapsulates the principle of emissions trading because it allows one jurisdiction to meet its climate pledges with mitigation outcomes, let’s say with mitigation efforts, achieved in another jurisdiction. That’s really the whole rationale of market-based approaches to climate policy.

CH: Yes, and I think issues that negotiators here are grappling with are primarily how to ensure that the overall climate change regime remains robust, even with such transfers between countries of mitigation outcomes. On the one hand, as I think we’ve explained before, this is very desirable because it overall cuts the cost of reducing emissions, but a key slogan that’s coming up here at the COP time and again is “avoiding double counting”. Avoiding that emission reductions are counted twice, first in the jurisdictions where they have been reduced, and second in the jurisdiction that buys these outcomes and then claims them again. Ensuring environmental integrity and double-counting are let’s say the key objectives at the negotiations. One of the applications of this Article 6, acting together through carbon markets on climate change, is of course the linking of emissions trading systems. Because if California and the Canadian province of Quebec have a joint carbon market, allowances and thus also emissions will shift between those two jurisdictions and it’s important to properly account for them in the context of the Paris Agreement. Linking is just a tiny piece of the larger picture of carbon market calibration under the Paris Agreement, but it’s one that also needs to be thought through and considered.

ED: Where could people learn more about your new guidance on linking emissions trading systems and more about ICAP?

CH: There’s plenty of information at our website, www.icapcarbonaction.com. We have an interactive map that shows all the cap and trade systems in force, planned and considered worldwide, with information on the design of all of these systems. We also have news on all the regulatory developments around emissions trading worldwide, and in our publications section you can find the ICAP Guide to Linking, as well as several other studies, and also simple two pages explaining the basics of cap and trade to a broad audience. So go check it out.

ED: That’s great, that’s great. Thank you both for being here with me today.

MM: Our pleasure. Thank you.

CH: Thank you.

ED: If you have any questions, comments, or feedback on this podcast, please tweet us @mitenergy. And of course, feel free to subscribe and review us where you get your podcasts. From MIT, I’m Emily Dahl, and thank you for listening.

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