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Volume 01
Issue 10
Dec 12/Jan 13
carbon-tradingmagazine.com
EU ETSCards on the table
Special report: UNNegotiations
Action stations
2012 Market SurveyThe results service
What impact will lawsuits have onCalifornia's cap-and-trade system?
ComING,REaDyoR Not
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Comment
EditorialRobin LancasterThe latest high-level round of UN climate change negotiations is almost upon us
once again. This is the rst such meeting since Durbans talks in December last
year agreed on a process that aims to achieve a new climate deal by 2015 that
has legal force.
That is still three years away and will be 18 years since the Kyoto Protocol, the only legally-
binding international treaty to cut greenhouse gas (GHG) emissions, was negotiated. For an
issue that is more urgent than ever to address if the scientic evidence is to be believed
that sense of urgency never seems to be much in evidence among many of the negotiators at
COP/MOPs.Yes, the nal 2448 hours of these meetings always resorts to frantic horse trading into
the early hours and beyond. But, more often than not, that activity aims to get a consensus
on some minor achievements so that there is at least something to show for the previous
two weeks.
I have attended the last nine COPs, and will probably be in Doha. In that time, I have
seen timetables come and go for new agreements to tackle global warming and countries
step away from mandatory targets to reduce GHG emissions. Over the same period, GHG
emissions have continued to grow at an alarming rate.
One of the problems with the current UN climate set up is that, for the part, delegations are
made up of environment ministries that have little clout at home. And, a lot of the money they
do have to spend probably goes on attending the COP for two weeks every year.
If climate change really is the urgent problem for politicians to deal with, we should also be
seeing delegations from nance and economy ministries in large numbers. There should more
efforts made to hear from entrepreneurs and companies that are willing to invest time and
money in developing new technologies to cut GHG emissions at scale.
Theres little or no public sector money available beyond what is already pledged. It is
focussed on keeping ailing economies aoat. But the UN process is not a lost cause yet.
The timetable has been set for achieving a new deal and so it is hoped that Doha can
show progress and send signals that 2015 will have a positive outcome. l
carbon-tradingmagazine.com Dec 2012/Jan 2013 | Carbon Trading | 01
Editor and Publisher Robin Lancaster
Art director Matt Hadfeld
Editorial enquiries
T +44 (0)1943 605279
T +44 (0)7841 979407
Sales
T +44 (0)1943 605279
Cover illustration David Lyttleton
ISSN 2049-565X
Olicana Publishing Ltd 2012. No part ofthis publication may be reproduced in any
format whatsoever without the permission
of the publisher
>
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Features
14 EU ETS
Cards on the table
The European Commission has put forward six options for
reforming the EU Emissions Trading Scheme. Robin Lancaster
reports.
16 2012 carbon market surveyThe results service
Robin Lancaster outlines the results of Carbon Trading
magazines 2012 market survey.
18 Linking
The only game in town?
What is required to link Californias and Europes cap-and-trade
systems, ask Daniel Engstrm and Lars Zetterberg.
22 Special report: UN negotiations
Action stations
Robin Lancaster looks at what is up for discussion at the UN
climate change talks in Doha.
A new approach for business
Would a bigger role for the private sector at the UN climate
change discussions lead to a more progressive outcome? Asks
Robin Lancaster.
26 Namas
The time for action
LauraWrtenbergerlooksatoptionsfornancingsupported
nationally appropriate mitigation actions in developing countries.
30 Opinion
Delivering change fast enough?
Sven Harmeling considers the progress or lack of it, so far, withthe UNs Green Climate Fund.
Contents
02|Carbon Trading | Dec 2012/Jan 2013
Regulars
01 Editorial
02 Contents
04 News
09 People changes
10 Cover Story: North America
Coming, ready or not
California and Quebec will start cap-
and-trade programmes in January. But
one faces legal challenges and the other
stillneedstonaliseitsrules.
Robin Lancaster reports.
32 Data
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Inside
carbon-tradingmagazine.com Dec 2012/Jan 2013 | Carbon Trading | 03
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The European Commission proposed
on 12 November to withhold 900 million
allowances scheduled for auction from the
early years of phase III (20132020) of the
EU Emissions Trading Scheme (ETS) and
backload them into the system during 2019
and 2020.
The idea is the commissions long-
awaited set-aside proposal, which aims to
boost the price of carbon. The December
2012 carbon price has traded at less than
10 ($12.7) a tonne of carbon dioxide (tCO2)
all year, compared with more than 17/t in
the rst half of 2011, because of oversupply
in the EU cap-and-trade system.
The growing overhang of allowances
predicted by most analysts to last beyond
2020 is the result of the economic
downturn, which has led to less carbon
emissions than expected. Adding to the
problem is a glut of carbon offsets coming
into the market this year, as a result of
regulatory changes coming into effect
next year that will ban much of this supply
thereafter.
The commissions proposal, if approved,
could give a short-term boost to Europeancarbon prices, but would only have a longer
term impact if the withheld allowances
(EUAs) are cancelled permanently, analysts
said.
This could push prompt EUA prices
back towards 15/t or higher over the 1218
months following the formal adoption of this
proposal, said analysts at Deutsche Bank in
a 13 November research note.
However, we remain of the view that
a structural solution to the problem of EU
oversupply is necessary, otherwise prices
would only fall again later during phase III
owing to the reintroduction of the EUAs
withheld over 20132015, the bank said.
Paolo Coghe, a European power, coal
News
and carbon analyst at France-based
investment bank Socit Gnrale, said the
market had been assuming the measure
would be signicant and prices had
increased accordingly from 7.0/t on
average in Q2, to 8.0/t on average in Q4 to
date (+14%).
Thus, we expect the effect of this release
of information to have a limited additional
absolute impact on prices. Moreover,
between now and the end of the year there
will be a very substantial amount of auctions
to keep the market well supplied, he said in
a 13 November research note.
He added that the banks current price
forecasts remain unchanged while we wait
to learn what the commission has in store
for structural long-term ETS options (read
permanent set-aside). Those forecasts are
9.3/t in 2013, 10.9 in 2014, 12.6 in 2015
and 14/t in 2020.
According to analysts at Thomson
Reuters Point Carbon in Oslo, if there is no
cancellation, the overall 20132020 market
balance will not change and EUA prices
will remain between 8/t and 10/t for the
20132015 period and then collapse to 6/tin 2020 when the volume is reinjected.
The set-aside idea, which would
involve amending the EU
ETS auctioning regulation,
has been sent to the EU
Climate Change Committee
for consideration. However,
even if the committee is
favourable to backloading
allowances, the formal
adoption would still
require the approval by
the European Council and
Allowance set-aside needs to bepermanent for lasting impact: analysts
04|Carbon Trading | Dec 2012/Jan 2013
Parliament of a separate amendment to the
EU ETS Directive.
The commission has sought the change
to the ETS Directive in order to provide
legal clarity on the alteration to the auction
regulation (see Carbon Trading, September
2012, pages 1014).
According to Deutsche Bank, a best
case scenario which would see all the
commissions necessary approvals made
on time would mean full legal authority
to make this back-end loading amendment
will not be nalised until mid-late Q2 at the
earliest.
But, it cautions, given the opposition to
the proposal Poland has been particularly
vocal against it the risk is that this
timeframe is over-optimistic, and the 900
million number proposed by the commission
may be subject to revision in the negotiations
that will now follow.
The backloading proposal is further
complicated by the commissions report
released on 14 November that includes a
set of options for more structural measures
to deal with the oversupply problems (see
pages 1415).Analysts at TRPC are more optimistic that
the commission will get its way on a set-
aside and a permanent cancellation
could be achieved.
We think that member
states will vote positively
on the backloading of
900 [million t], said
Marcus Ferdinand,
senior market analyst at
the company. We think
it likely that some 700
[million] allowances will be
cancelled permanently, with
just 200 [million] reinjected in
2019 and 2020, he added.
Marcus Ferdinand, TRPC: 700
million EUAs could be cancelled
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06|Carbon Trading | Dec 2012/Jan 2013
News
The European Commission
proposed on 12 November to
suspend EU Emissions Trading
Scheme (ETS) coverage for all
international ights to and from
Europe. However, the cap-and-
trade regulations will remain in
place for all intra-EU ights, the
commission said.
The suspension will continue
until after the next general
assembly of the International
Civil Aviation Authority
(Icao) the UN body taskedwith responsibility for global
aviation in October 2013, the
commission said.
The proposal comes a week
after, what the commission
described as very positive
discussions, at an Icao meeting
on a global market-based
mechanism to tackle aviation
emissions that coud be created
under the auspices of the UN
organisation.
The commissions decision
would mean that all international
ights beyond EU borders
will not have to surrender
allowances in April to meet
compliance obligations. Airlines
affected by the decision would
also no longer have to monitor
and report emissions during the
period.
The EU has always been
very clear: nobody wants an
international framework tackling
CO2 [carbon dioxide] emissions
from aviation more than wedo. Our EU legislation is not
standing in the way of this, said
Connie Hedegaard, European
commissioner for Climate
Action.
On the contrary, our
regulatory scheme was adopted
after having waited many years
for Icao to progress. Now it
seems that because of some
countries dislike of our scheme
many countries are prepared
to move in Icao, and even to
move towards a market-based
mechanism at global level, she
said.
EU to defer international aviation from ETS
But, Hedegaard added, If
[the Icao] exercise does not
deliver and I hope it does then needless to say we are
back to where we are today with
the EU ETS. Automatically.
According to analysts at
Thomson Reuters Point Carbon
(TRPC) in Oslo, the decision
will reduce aviations EU ETS
coverage by about 60%. But
the cut in airlines falling under
the scheme will only have a
small impact on demand for
allowances. This is because
the sector has been allocated
20 million tonnes more than it
needs this year, TRPC said.
That said, this decision
will keep airlines from buying
permits for 2013, and it casts
doubts on demand of EUAsthrough 2020 since it increases
the likelihood the aviation
sector will be taken out of
the ETS all together, placing
further downside risks to our
previous estimate of EUA
demand from the aviation
sector of 278 [million tonnes]
between 2012 and 2020, said
Emil Dimantchev, an analyst at
TRPC.
Aviation emissions were
not included in the 1997 Kyoto
Protocol. Instead, Icao was
tasked with dealing with the
sectors carbon footprint.
However, because of the lack of
progress at Icao on the issue,
the EU decided to include
aircraft carbon emissions in its
ETS from the start of this year.
Many countries have been
opposed to the EU move, such
as China, India and the US.
The former two countries had
previously said that their airlines
should ignore the ETS and laws
are in the process of being
enacted in the US to try and
circumvent the legislation.The commissions decision
was welcomed by some
industry groups, but attracted
the ire of green groups.
Commissioner Connie
Hedegaards announcement
that she has stopped the
clock on the imposition
of the EU ETS on ights to
and from non-EU countries
represents a signicant step
in the right direction and
creates an opportunity for the
international community, said
Tony Tyler, director general
and chief executive ofcer of
the International Air Transport
Associat ion.
The Commissions pragmatic
decision clearly recognises the
progress that has been made
towards a global solution for
managing aviations carbon
emissions by Icao, he said.
But Bill Hemmings,
programme manager for
international transport atBrussels-based NGO Transport
& Environment, said, the
commission has moved further
than necessary given the little
progress made, so far, at Icao
level. There is no excuse for
inaction left.
Opponents of the inclusion
of international ights in the
EU ETS have always said that
a global solution under Icao is
the way to go. Now it is time for
them to stop blaming the EU for
blocking a worldwide approach
and put their money where their
mouth is, he said.
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NewsNews
Companies in Australia covered by the
countrys carbon price mechanism could
face 93% higher costs, if European
Commission proposals to
change the auction prole
of the EU Emissions
Trading Scheme (ETS)
come to fruition,
according to carbon
analytics company
RepuTex.
On 12 November,
the commission
formally proposedremoving 900 million
allowances (EUAs)
from the rst three years
of phase III (20132020) of
the EU ETS. The EUAs would
come back into the market in 2019 and
2020. The so-called backloading plan is a
temporary measure to try to prop up carbon
prices in the wake of a huge oversupply of
allowances, which has resulted from the
economic downturn, and caused prices to fall.
Australian carbon price could be 93% higherThe proposal could affect Australia
because in September the government
and the commission announced
plans to link their ETSs from
2015, when the formers
xed price becomes a
cap-and-trade system.
The link will be one
way initially EUAs
and UN carbon
credits allowed into
Australia to cover up
37.5% and 12.5%
respectively of anentitys compliance
obligation and two-
way no later than 2018.
With the European
Commissions proposal to
remove 900 million carbon units from
the European market being towards the
upper end of market expectations, it will
materially impact Australian prices, said
Paul Bourke (pictured), an associate director
at RepuTex.
The effect of this would be an
immediate spike in European prices, owing
through to Australia from the end of our
xed-price period, but with prices falling to
around present levels when those permits
come back in, he said.
The company forecasts that Australian
carbon prices would be, on average, more
than 93% higher for the years 2016 through
2019 than if no European policy changes
were made. It said the Australian carbon
price would more than double from the
companys previous business-as-usual
forecast for 2018 of over A$18 (US$18.6) atonne of carbon dioxide. However, the price
would drop in 2020 to about A$9/t, when
the 900 million EUAs come back into the
market, the company said.
On 14 November, the commission also
outlined possible options for structural
reform of the EU ETS (see pages 1415).
One suggestion was for the permanent
cancellation of a portion of allowances. If
this was to occur, prices are likely to remain
high, RepuTex said.
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News
08|Carbon Trading | Dec 2012/Jan 2013
Delaying action on climate change is a
false economy, according to a new
report by the International Energy Agency
(IEA).
In the IEAs World Energy Outlook 2012
report, released on 12 November, the Paris-
based organisation said that for every dollar
of investment in clean energy that doesnt
take place before 2020, there will be an
additional $4.30 required to maintain the
UNs goal of keeping global temperature
increase to no more than a 2 Celsius abovepre-industrial levels.
The analysis fall under what the IEA
calls its 450 scenario in reference to
the atmospheric concentration of GHGs
scientists say should not be exceeded to
avoid dangerous global warming (450 parts
per million).
The report noted that four-fths of
total energy-related emissions allowed to
2035 are already locked-in by existing
capital stock. And, unless further action is
taken before 2017 to tackle growing GHG
emissions, the energy-related infrastructure
then in place would generate all the CO2
[carbon dioxide] emissions allowed in the
450 scenario up to 2035, the IEA said.
But, in the IEAs efcient world
scenario, the rapid deployment of energy-
efcient technologies is envisaged. This
approach would postpone the 2017
lock-in to 2022, which would buy time
to secure a much needed international
agreement to cut GHG emissions, the report
added.
Delaying action on climate change will cost
more in the long term: IEAGovernments need to introduce
stronger measures to drive investment in
efcient and low-carbon technologies,
said Maria van der Hoeven, IEA executive
director. The Fukushima nuclear accident,
the turmoil in parts of the Middle East
and North Africa and a sharp rebound in
energy demand in 2010, which pushed CO2
emissions to a record high, highlight the
urgency and the scale of the challenge,
she said.
However, in another IEA scenario newpolicies cumulative CO2 emissions over
the next 25 years amount to three-quarters
of the total from the past 110 years, leading
to a long-term average temperature rise
of 3.5C, the report said. And, it added,
Chinas per-capita emissions match the
OECD average in 2035. But were new
policies not implemented, we are on an
even more dangerous track, to an increase
of 6C, the IEA warned.
As each year passes without clear
signals to drive investment in clean energy,
the lock-in of high-carbon infrastructure
is making it harder and more expensive to
meet our energy security and climate goals,
said Fatih Birol, IEA chief economist.
The report said that to meet the 2C
challenge a carbon price as high as $120
a tonne of CO2 would be needed by 2035.
Current and new policies aimed at curbing
GHG emissions would mean a carbon price
in the range of $30 to $40/t in 2035, the
IEA said.
The report also said that no more than
one-third of proven fossil fuel reserves
could be used before 2050, if the 2C target is
to be met. This necessity could be overcome
if there is widespread deployment of carbon
capture and storage (CCS) technology, the
World Energy Outlook 2012 said.
Almost two-thirds of these carbon
reserves are related to coal, 22% to oil and
15% to gas. Geographically, two-thirds are
held by North America, the Middle East,
China and Russia, it added.
These ndings underline the importance
of CCS as a key option to mitigate CO2
emissions, but its pace of deployment
remains highly uncertain, with only a handful
of commercial-scale projects currently in
operation, the report continued (see Carbon
Trading, November 2012, page 4).
The city of Shenzhen, near
Hong Kong, has passed a law
that aims to cut greenhouse
gas (GHG) emissions, Reuters
reported on 12 November local
media sources as saying.
The bill was passed on 30
October, Reuters reported the
Shenzhen Special Zone Daily
as saying, and is expected to
establish a carbon emissions
trading scheme (ETS) some time
in 2013.
The ETS is one of seven
Chinas Shenzhen passes carbon trading law: Reuterspilots planned for four more
cities Beijing, Chongqing,
Shanghai and Tianjin and
two regions (Guangdong and
Hubei) in China, which is the
worlds largest emitter of GHG
emissions.
The pilot schemes are to help
China meet its pledge to cut its
carbon dioxide emissions per
unit of GDP by between 40%
and 45% by 2020 below 2005
levels.
The pilot programmes could
eventually become part of a
national ETS some time after
2015, the government has said
in the past.
The Shenzhen ETS will cap
emissions from about 800
companies covering 54% of
the citys GHG emissions, the
Reuters report said.
No information is available
about the size of the carbon
cap or the actual rms that will
fall under the scheme, Reuters
added.
.
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People changes
Dec 2012/Jan 2013 | Carbon Trading | 09
News/changes
Action on climate change and
jobs are not mutually exclusive,
said President Barack
Obama in his rst press
conference since re-
election of 6 November.
I am a rm believer
that climate change is
real, that it is impacted
by human behaviour
and carbon emissions.And as a consequence, I
think we've got an obligation
to future generations to do
something about it, he said on 14
November.
Theres no doubt that for us to take
on climate change in a serious way would
involve making some tough political choices.
And understandably, I think the American
people right now have been so focused, and
will continue to be focused on our economy
and jobs and growth, that if the message
is somehow were going to ignore jobs and
growth simply to address climate change, I
don't think anybody is going to go
for that. I wont go for that,
Obama said.
If, on the other
hand, we can shape
an agenda that says
we can create jobs,
advance growth, and
make a serious dent in
climate change and be
an international leader, Ithink thats something that
the American people would
support, he added.
President Obama beat his
presidential rival Mitt Romney in the 6
November election. This means he will serve
four more years as US president.
The results of the Congressional elections,
which also took place on 6 November, left the
make up of the House of Represenatives and
Senate close to how it was previously. The
Republicans hold the balance in the House
and Democrats with an advantage in the
Senate.
Tackling climate change
can stimulate jobs: Obama
The world is on track for global
temperature rises of 6 Celsius by 2100 at
current greenhouse gas (GHG) emissions
growth rates, according to a report by PwC
released on 5 November.
The PwC Low Carbon EconomyIndex, which measures
industrialised and emerging
economies progress
towards reducing emissions
linked to economic output,
said that the UN target
to limit global warming
to 2C would now require
an unprecedented rate of
emissions reduction.
The annual rate of
Global warming will be 6C at current emissionsgrowth levels: report
reduction of carbon emissions per unit of
GDP needed to limit global warming to 2C,
has passed a critical threshold ... The rate
of reduction now required has never been
achieved before, said PwC.
The report noted that GHG emissionsintensity had been reduced in 2010 by
0.7%. But the rate would need to
be 5.1% a year on average from
now until 2050. A performance
never achieved since 1950,
when these records began,
PwC said.
The report added that
governments and businesses
can no longer assume that a
2C warming world is the default
scenario.
The risk to business is that it
faces more unpredictable and
extreme weather, and
disruptions to
market and supply chains. Resilience will
become a watch word in the boardroom
to policy responses as well as to the
climate. More radical and disruptive policy
reactions in the medium term could lead to
high carbon assets being stranded, saidJonathan Grant, director, sustainability and
climate change at PwC.
The new reality is a much more
challenging future in terms of planning,
nancing and predictability. Even doubling
our current annual rates of decarbonisation
globally every year to 2050, would still lead
to 6C, making governments ambitions
to limit warming to 2C appear highly
unrealistic, he said.
The challenge now is to implement
gigatonne scale reductions across the
economy, in power generation, energy
efciency, transport and industry, as well as
Redd+ [avoided deforestation] in forested
nations, Grant added.
Jean-PhilippeJP Brisson has joined
the law rm Latham & Watkins in its
New York ofce as partner in the
environment, land and resources
department. He is also vice chair of
the rms air quality and climate
change practice group. He was
previously head of the US
environmental and climate change
practice at law rm Linklaters also in
New York. Bob Wyman, global chair ofthe environment, land and resources
department, at Latham & Watkins
said, Brisson is widely recognised as
the foremost expert in carbon credit
transactions in the US. He is regularly
called upon to advise industry groups
and develop rules for the markets. His
comprehensive knowledge of the
myriad legal, business and regulatory
structures for carbon emissions, as
well as aspects of the CFTC
[Commodity Futures Trading
Commission] regulatory regime, will
be invaluable to clients.
People
changes
Jonathan Grant, PwC: a more
challenging future
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The start of Californias and Quebecs cap-and-trade systems isjust a few weeks away, but the threat of litigation hangs over theformer and, for the latter, covered entities still await the nal rules
Words: Robin Lancaster
The long wait for the start of Californias and
Quebecs cap-and-trade programmes is
nearly over (see box). The two systems are
ofcially scheduled to begin on 1 January, a
postponement of one year from the original date set for
the US state, and almost six years since the establishment
of the Western Climate Initiative (WCI) to which both
jurisdictions are members.
California conducted its rst auction of allowances on
14 November, which offered 2013 and 2015 vintages for
sale. The results of the auction had not been released as
Carbon Trading went to press, but observers said it went
smoothly.
The event, delayed from August, is seen by many
people as a kick start for the programme. Yet, the threat
of legal action against aspects of the trading scheme has
led many people to project an under-subscription to the
allowances on offer in the auction.
The concern is, say experts, that companies are
worried about spending money in the auction
particularly on the longer-dated 2015 allowances
while there is uncertainty over the programme.
The worry is whether they will get money back if the
scheme or parts of it are invalidated in the courts.
One lawsuit regarding offset use in the
California scheme is ongoing since March. A
second was led on 13 November. The California
Chamber of Commerce launched an action that
seeks to invalidate the auction. It argues that the Air
Resources Board (ARB) the regulator has exceeded
the authority granted to it by the states climate change
law by establishing a revenue raising programme. It is
unlikely to be the last litigation against the system.
We know lawsuits are being prepared against the
programme that could eviscerate major components of
the system if they are successful, said Kevin Poloncarz,
a partner in the environmental and energy practice at law
rm Paul Hastings in San Francisco.
In the next six weeks or so, we expect to see litigation
from any number of plaintiffs, said Robert Wyman, a
partner and head of the environment practice at law rm
Latham & Watkins in Los Angeles.
The expected actions will focus on the cap-and-trade
programmes coverage of imported electricity in relation
to the dormant commerce clause and the federal power
act. Another possible source is so-called Proposition 26,
which refers to a successful vote in the 2010 elections
that requires any new tax in California to have the support
of a two-thirds majority vote in the states legislature. Theargument being that the cap-and-trade schemes auction
constitutes a new tax and so there cannot be a charge for
allowances unless it is backed by a so-called
super majority vote in the legislature.
Even if a judge agreed with a
plaintiff that the auction is effectively
a tax, it wouldnt necessarily mean
that the cap-and-trade scheme
is doomed. The programme can
go forward without an auction,
because ARB can use other
mechanisms, for example, direct
allocations, to get the allowances
to market. Only a small percentage
of allowances are included [in the
auction], said Wyman.
North America
10|Cb T | Dec 2012/Jan 2013
"Lawsuits are being prepared thatcould eviscerate components of theprogramme if they are successful"Kevin Poloncarz, Paul Hastings
>
Coming,readyor noT
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North America
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Many covered entities will receive most of their
allowances for free, a process designed to try and avoid
what is known as carbon leakage companies moving
production out of state to where there is no carbon
constraint.
The political landscape could come into play on this
issue, if a plaintiff was successful. California already had a
Democratic party governor in Jerry Brown and, following
Novembers elections in the US, both chambers of the
legislature are now controlled by the party with a super
majority. In theory, therefore, the Democrats have the votes
to pass a new tax, if the courts decided that is what the
auction is. In practice, the legislature is likely to be more
circumspect, said Wyman. Whether they would want
[the auction as a tax] to be the rst action is a separate
question, he said.
But, according to Paul Hastings Poloncarz, any claim
by a plaintiff on this issue is weak. It only constitutes a
tax if revenues generated are not used for greenhouse
North America
12|Cb T | Dec 2012/Jan 2013
gas mitigations purposes. Although [the auction revenue]
has a variety of purposes, above all else it must go to
greenhouse gas mitigation, he said.
Expected challenges on the coverage of imported
power could be more problematic for Californias
programme. It is worrisome for ARB; there is a signicant
risk, said Poloncarz. It had to ensure against leakage,
but had hoped that the WCI would have developed a
regional scheme that would have included all the power in
the region, he said.
When the WCI was established in 2007, Arizona,
New Mexico, Oregon and Washington state, as well
as California, signed the agreement to cap GHG
emissions, including developing and using market-based
mechanisms. By 2008, the Canadian provinces of British
Columbia (BC), Manitoba, Ontario and Quebec, and
two more US states Montana and Utah had joined.
In 2012, only California and Quebec remain committed
to the WCIs market-based ideals although BC andOntario could still set up cap-and-trade while the other
members have stepped away from their commitment to
the initiative.
California imports about 30% of its power needs and
in order to ensure there wasnt any carbon leakage, ARB
cap-and-trade rules cover power importers as so-called
rst deliverers of electricity. It also aims to stop so-
called resource shufing, whereby out of state power
generators have to show that they are not diverting more
In Quebec, covered entities still have no idea when
the rst allowance auction will take place. It had been
hoped to hold one jointly with California in November,
but changes to the criteria for linking the two systems
requiring the signature of the US states governor
meant California will go it alone to start with (see
Carbon Trading, July/August 2012, pages 1820).
Work is ongoing to try and nalise a link between the
programmes that could see a joint auction in the
new year.
The market is also awaiting approval of
amendments to the provinces cap-and-trade
regulations ostensibly to incorporate rules on the
eligibility of carbon offsets. Three protocols have beenproposed the destruction of methane from manure
storage and small land lls in the province and ozone
depleting substances from foam appliances in the US
and Canada.
The regulation could be different to the draft based
on the public consultation, but there is no feedback
until it comes out. The government is being very
tight lipped and not saying when it will be out, said
Douglas Clarke, a lawyer at law rm Therrien Couture in
Brossard, Quebec.
And, as a new Parti Quebecois government was
elected in September replacing Parti Liberal
questions are being asked as to whether or not it may
want to make some changes to the cap-and-trade
regulation approved at the end of last year.
The question in peoples minds is do they want to
re-tweak things. Theres been no conrmation of that,
said Clarke.
We are not seeing the amount of traction out
of Quebec one would expect or need to see for a
programme about to kick off on 1 January, said
Jonathan Burnston, carbon manager at environmental
markets brokerage and advisory rm Karbone in New
York. Quebec is lagging [behind California], he said.
Also in danger of falling behind are many of the
companies to be covered by the Quebec scheme,
said Clarke at Therrien Couture. General sentiment
is that there are two groups [of companies]. One is
highly informed, planning and ready. The other includesa signicant number of businesses that are not well
informed and [for whom] it is not high on their radar
screen, he said.
Many have delegated management of the cap-
and-trade programme to the environment department.
They are all over the reporting requirements, but it
hasnt gone to the nance function [of the business] in
terms of having a strategy for buying allowances and
what compliance options are available. Generally,
there is little expert discussion about a futures
market, he added.
For example, he said one company he had spoken
to covered by the scheme has a futures contract for
delivery of emissions reduction units, but has no idea
what that means, he said.
Where is Quebec?
"Generally, there is little expertdiscussion about a futures marketin Quebec"Douglas Clarke, Therrien Couture
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Cover story
carbon-intensive power away from California to
avoid the cap-and-trade rules.
A plausible theory can be developed
that the regulations electricity importer
and resource shufing provisions
are an attempt to regulate beyond
Californias jurisdiction in violation
of the dormant commerce clause. If
a law discriminates against out-of-
state entities, or attempts to regulate
beyond a states jurisdiction, then the
court applies a strict scrutiny standard,
said Poloncarz in an October paper to the
American Bar Association (ABA).
The clause is part of the US constitution that puts
the power to regulate interstate commerce in the hands
of Congress. And, if the dormant commerce clause was
raised in objection to the regulation of imported power,
it would not be the rst time the clause has been usedagainst California climate change laws. The states Low
Carbon Fuel Standard (LCFS) which aims to reduce
carbon intensity of transportation fuel in California fell
foul of the clause in a court ruling last December (see
Carbon Trading, March 2012, pages 1416). An ARB
appeal is ongoing over the decision.
Under pressure from the Federal Energy Regulatory
Commission (Ferc) an independent agency that regulates
interstate transmission of gas, oil and electricity ARB
has already decided to postpone for 18 months (since 16
August) the enforcement of the resource shufing rules
on the grounds that they are not well dened. At the time,
ARB chair Mary Nicholls said, additional rulemaking
is appropriate in order to dene the types of conduct that
would trigger a case of resource shufing.
The suspension of the rules on resource shufing
may not negate legal action on the issue, but ARB could
argue it is attempting to address companies concerns
by providing more time to nd a solution. However, the
imported power regulations could also be targeted by
other lawsuits. This is because the rules could intrude on
Fercs exclusive jurisdiction over interstate electricity
commerce, which includes ensuring rates are just and
reasonable.
But ARBs regulation is designed precisely to raise
the cost of imported electricity by requiring entities to
procure allowances equivalent to their GHG emissions andapplying a default emissions rate for unspecied imports
Through the default emission rate, the regulation then
essentially imposes a price per MWh on imported power
from unspecied sources, said Poloncarz in the ABA
paper. For this reason, the cap-and-trade rules could be
claimed to cover issues that are governed by Ferc.
Given that the cap-and-trade regulations have been
nalised for some time, including those on imported
power, it is perhaps interesting that a lawsuit has not yet
been led. One reason, said Latham & Watkinss Wyman,
could be that potential litigants and ARB are trying to
sort out the concerns and not resort to the courts. All
parties have been struggling with the questions and the
possibility that litigation has not occurred is because there
has been an honest effort to work it out among all the
parties, he said.
The offset lawsuit was not brought by
companies, but by two green groups
Citizens Climate Lobby and Our Childrens
Earth. They claim offsets should not
be allowed for compliance because
it is not possible to ensure that they
are additional to what would have
happened anyway without the trading
system.
The oral arguments on the case
are to be heard on 7 December, said
Latham & Watkinss Wyman. Hopefully,
there will be a decision by the judge before
the start of the programme, because [offsets]
are a primary cost containment mechanism, he
said, adding that the stability of the market would benet
from knowing the offset regulation wont be impeded.
According to Jonathan Burnston, carbon manager
at environmental markets brokerage and advisory rmKarbone in New York, the green groups lawsuit is one of
the reasons for a recent slowing up in offset trade in the
California market. The impact on the offset market has
been stark, he said, compared with earlier in the year.
This is because the lawsuit threatens the fundamental
stability of the sub-market for offsets in the cap-and-trade
market, he said.
But it is not the only reason for offset trade drying
up, he added. The other reason is interplay with the
allowance market. Allowance prices have dropped in
recent weeks from the highs of a couple of months
ago. Offsets are [priced] at a fundamental discount to
allowances, but since allowances fell so low, offsets have
also fallen so little trade can be done as developers can
barely cover costs, Burnston said.
The price of California carbon allowances for December
2013 delivery was $12.45 a tonne of carbon dioxide on
12 November on the Intercontinental Exchange. The
same unit was trading as at about $19/t in July. Prices
for California compliant offsets were at about $9.75/t in
mid-November compared with more than $12/t a couple
of months ago, he said.
While the ongoing lawsuits and any impending legal
action will be problematic for Californias embryonic
cap-and-trade market, there is no indication, at the
moment, that the system will be completely blocked in
the near term. Our assumption, at this point, is that theprogramme will continue and none [of the lawsuits] will
fully disable the programme, said Latham & Watkinss
Wyman. But they are not trivial actions and may warrant
some action and programmatic adjustments by the state,
he added.
California may also need to address
programmatic issues, even if the auction
has gone well, and the offset lawsuit is
dismissed. At the market level, there are
things to be worked out, said Karbones
Burnston, particularly over the supply of
offsets. Carbon credits that are able to
be generated [by the four approved offset
protocols in California] are nowhere near
what is needed to ll the supply/demand gap,
he said. l
North America
carbon-tradingmagazine.com
We are notseeing the tractionout of Quebec one
would expect to see fora programme about tostart on 1 January"
Jonathan BurnstonKarbone
Robert Wyman,
Latham & Watkins:
Hopeful that a decision
will be made on
the offsets lawsuit
before the start of the
California scheme
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mechanisms, such as a price oor for EUAs
scheduled to be auctioned.
Increasing the EUs 2020 reduction
target to 30% has already been
analysed by the commission in
2010. If it were to be agreed,
there would need to be either
a cancellation of some phase
III allowances or an increase in
the linear reduction factor, the
commission said.
The analysis estimates that
about 1.4 billion allowances would
need to be removed from phase III to
put the EU on track for a 30% 2020 target
and the blocs long-term aim to cut emissions
by between 80% and 95% below 1990 levels by 2050.
Taking this option would also impact the emissions
targets individual member states have taken on under
the so-called effort sharing decision for sectors not
covered by the EU ETS, the report said.
On 12 November, the commission put forward aformal proposal to withhold 900 million EUAs from the
rst three years of phase III and backload them into
the market in 2019 and 2020 (see page 4). This measure
will require a change to the auction regulation to be
agreed by the EU Climate Change Committee and an
amendment to the ETS Directive, which requires the
backing of the European Parliament and Council.
The proposal in the report to cancel permanently a
volume of phase III allowances would require primary
legislation and could be implemented by a separate
decision, to be taken by the European Parliament and
Council, rather than a fully-edged revision of the EU
ETS Directive, the commission said.
If allowances are to be cancelled, they would be
taken from what is to be auctioned. The decision would
not affect EUAs that are to be distributed for free to
The European Commission on
14 November released a
report that offered six
options for structural
reform of the EU Emissions Trading
Scheme (ETS). The aim is to
reduce the huge oversupply of
allowances in the market.
Analysts say the market is
oversupplied with allowances
(EUAs) and eligible carbon offsets
for the whole of phase III (2013
2020) and beyond. The overhang has
caused carbon prices to fall to levels
that will not inuence businesses away
from business-as-usual, say experts (see box).
The commissions six suggestions, which, it said, are
non-exhaustive, are as follows:
z increasing the EU greenhouse gas emission
reduction target to 30% below 1990 levels by 2020
from the current 20% cut;
z retiring a portion of allowances from phase III;z an early revision of the EU ETSs annual linear
reduction factor, which is currently 1.74%;
z increase the coverage of the EU ETS to other sectors it currently covers about 50% of the regions
economy;
z further limit access to international credits; andz introduce discretionary price management
Cardson thetable
The European Commission has outlined six options for structural
reform of the EU Emissions Trading SchemeWords: Robin Lancaster
EU ETS
14|Carbon Trading | Dec 2012/Jan 2013
"The decision to cancel allowanceswould not afect EUAs that are tobe distributed or ree to acilitiesdesignated as trade exposed"
>
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EU ETS
carbon-tradingmagazine.com
Feature
Dec 2012/Jan 2013 | Carbon Trading | 15
facilities that have been designated as trade exposed
because of their inclusion in the scheme.
The 1.74% linear reduction factor whereby the EU
ETS cap tightens by that percentage each year of phase
III and beyond is scheduled to be reviewed in 2020
and any changes to it adopted by 2025. Therefore, this
review could be taken earlier than planned, the
commission said.
The EUs executive noted that the current factor
only puts the region on course for a 70% cut in GHG
emissions by 2050 compared with 1990 levels, short of
the target highlighted above.
Because adoption of this option would impact the
EU ETS beyond phase III, several other policy questions
would have to be addressed also, the commission said.
They include: how to increase the EUs competitiveness
on important low-carbon technologies; how it would link
with the regions post-2020 policy framework; how it
would t with the development of an international carbonmarket; and what are the risks of carbon leakage?
As noted above also, the EU ETS will only cover about
50% of the blocs economy from 2013. Other burgeoning
cap-and-trade programmes around the world, such as in
California (see pages 1013), already have plans for wider
coverage approximately 75%85%.
The report said the EU ETS could be expanded to
other energy-related carbon dioxide emissions power
generation is already covered such as fuel consumption
in other industry sectors.
A more comprehensive extension to all energy-
related emissions would substantially increase the
emissions coverage and can impact the overall ambition
level, depending on the level of the cap foreseen for the
sectors included, the commission said.
On whom the ETS obligation would fall would need
to be worked out either fuel producers, consumers or
a hybrid of the two, the report said. More work would
need to be done on this option, in particular, how it
would impact policies already in place in these areas, the
commission added.
The introduction of discretionary price management
mechanisms would have a big impact on the European
cap-and-trade system, because it would alter the very
nature of the current EU ETS being a quantity-based
market instrument, the paper said. That is to say, the
scheme currently promotes cost-effective emissionreductions through the allocation of a pre-dened
quantity of allowances.
The commission highlighted two possible
mechanisms a price oor for auctioned allowances and/
or a price management reserve that would release EUAs
into the market, if the price rises above a set level. It
would withdraw some allowances to be auctioned, if the
price falls below a certain level.
There would be a downside to this option, said the
commission, because the carbon price may become
primarily a product of administrative and political
decisions (or expectations about them), rather than a
result of the interplay of market supply and demand.
It also raises other potential problems. If EUAs
withdrawn because of low prices are not cancelled, there
is no additional environmental benet. A too high a price
would reduce exibility and increase costs, while a too
low a price would not effect changes to businesses
behaviour. Set prices could boost low-carbon
technologies, but at the expense of ETS participants
and society as a whole, if there are technological
breakthroughs, which substantially lower abatement
costs, the commission said.
A formal stakeholder consultation on the options
will be launched soon. Any future proposal would then
require another public consultation and full assessment
of its impacts, the report concluded. l
The publication of six options for reforming the EU Emissions Trading Scheme
(ETS) has come about mainly because of oversupply in the market. The report
was originally scheduled to be released in 2013, but has been brought forward
because of the overhang of allowances in the EU ETS.
The ongoing economic crisis has resulted in less output than anticipated
and, in turn, less greenhouse gas (GHG) emissions than expected. While less
carbon emissions is a good thing in terms of tackling climate change, theway the EU ETS works means that many installations covered by the scheme
have been allocated far more allowances (EUAs) than they now need for
compliance. These EUAs can be banked for future use.
The issue has been compounded by a glut of carbon offsets which can
be used to cover a percentage of an entitys obligation coming into the
market ahead of restrictions on their use next year.
As a consequence of the above events, analysts project the market is
oversupplied by between 1 billion and 2 billion tonnes of carbon dioxide,
which means the EU ETS will be in surplus for the whole of phase III (2013
2020) and some of the years beyond under a business-as-usual scenario.
If that were to continue, the carbon price would continue to be at levels
not high enough to instigate changes to how businesses behave in relation to
GHG emissions. A price on carbon is a key reason for establishing the scheme
and so, if it were to be too low to make a difference to behaviour, it would
render the scheme irrelevant ultimately.
Why is structural reform needed?
Summary of the various European Commission
options to revise the EU ETS
Option Effects supply or demand Speed ofdeployment Changesambition post-
2020
Impacts freeallocation
Increasing EU GHG
target to 30%
Supply Depends on the
mechanism*
Depends on the
mechanism*
Depends on the
mechanism*
Retiring a volume of
allowances
Supply Relatively fast No No
Early revision of the linear
reduction factor
Supply Slow Yes Yes
Extend the scope of EU
ETS sector coverage
Demand Slow Depends on
design
No
Restrict international
credits further
Supply Slow No No
Discretionary price
management
Supply Slow No** No
* This depends on and corresponds to features of the mechanism that would operationalise the increase,
that is to say, retiring allowances or a revision of the linear reduction factor
**Assuming that the mechanisms would not result in the cancellation of those allowances that are
temporarily not auctioned
Source: European Commission
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2012 Carbon Market Survey
16|Carbon Trading | Dec 2012/Jan 2013
TheResultsServiceHere are the results of the rst Carbon Trading magazinemarket surveyWords: Robin Lancaster
EU Emissions Trading Scheme
Winner Runner up
Best trading company Vitol Barclays
Best brokerage rm Icap Evolution Markets
Best verication
companyDNV SGS
Best advisory rm ICF International Ecofys
Best law rm Baker & McKenzie Norton Rose
Best exchange IntercontinentalExchange (ICE)
European EnergyExchange
Clean Development Mechanism
Winner Runner up
Best trading company Vitol Orbeo
Best brokerage rm Evolution Markets Icap
Best project developer South Pole Carbon Tricorona
Best DesignatedOperational Entity
DNV TV Rheinland
Best advisory rm Climate Focus ICF International
Best law rm Baker & McKenzie Norton Rose
Best exchange ICE BlueNext
There was a time when a survey of the worlds
carbon markets would focus almost wholly
on the EU Emissions Trading Scheme (ETS)
and the UNs Clean Development Mechanism
(CDM). But the times they are a changing.
This, the rst Carbon Trading market survey, goes
beyond those two markets to include North America,
Australia and New Zealand and the voluntary sector.
Future years could see further expansion to countries
and regions, such as China and Kazakhstan, while others
could perhaps fall away.
Market participants were invited to vote in the survey
over a three-week period in late October and early
November. Voters were asked to make judgements
based on efciency and quality of service, reliability
in the market and ability to adapt to changing market
conditions.
The response, given the short time period that the
survey was open, was better than anticipated by the
magazine. More than 400 people completed the online
voting questionnaire during the three-week period in
future, it is likely that more time will be given to complete
the survey.
The EU ETS categories polled well, as would probably
be expected of what is still the worlds largest carbon
market. Trading giant Vitol topped the best trading
company, with Barclays coming in as runner up. Vitol
also won the same category for the Clean Development
Mechanism (CDM) and was second in North America.
London-based broker Icap topped the best brokerage
EU ETS category, just ahead of energy and environmental
markets specialist Evolution Markets. Evolution was
prominent in the other broking categories. The US-based
company was the winner of best brokerage rm CDM,
North America and the voluntary carbon market.
In the voluntary market, another sector that polled well
overall, UK-based Climate Care stood out taking top spot
in two categories best trading company and best project
developer as well as joint winner of the best advisory rm
category.
Through the last 15 years of constant innovation, a
key driver for us has always been working with partners
>
WinnerMarket survey
2012
Runner-upMarket survey
2012
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2012 Carbon Market SurveySurvey
Dec 2012/Jan 2013 | Carbon Trading | 17
Voluntary Carbon Market
Winner Runner up
Best trading company Climate Care Carbon NeutralCompany
Best brokerage rm Evolution Markets Armajaro
Best project developer Climate Care South Pole Carbon
Best validationcompany
Scientic Certication
SystemsSES Inc
Best verication
companyScientic Certication
SystemsSES Inc
Best advisorycompany
=Carbon NeutralCompany, Climate Care
-
Best law rm Baker & McKenzie Linklaters
Best standard Veried Carbon
Standard
The Gold Standard
Best registry Markit APX
Australia/New Zealand
Winner Runner up
Best trading company Westpac Macquarie Bank
Best brokerage rm OM Financial Carbon Match
Best project developer CO2 Australia Climate Friendly
Best advisory rm Climate Friendly CO2 Australia
Best law rm Baker & McKenzie Norton Rose
North America
Winner Runner up
Best trading company CE2 Capital Partners Vitol
Best brokerage rm Evolution Markets Karbone
Best project developer Environmental CreditCorp
EOS Climate
Best validationcompany
First Environment Scientic CerticationSystems
Best verication
companyFirst Environment Scientic Certication
Systems
Best law rm Baker & McKenzie Van Ness Feldman
Best exchange ICE (No clear 2nd place)
towards a shared end goal of maximising impacts for
people, for the environment and for our corporate clients
and investors. Strong, enduring relationships, as well as
continual benchmarking are essential to this success
and for this reason, peer and industry voted awards are
particularly important to us, said Edward Hanrahan,
director of Climate Care.
The Carbon Neutral Company was the other winner
of the best advisory company voluntary market, in what
turned out to be the most contested title in the whole
survey. The company also came in second in the best
trading voluntary market poll.
Another voluntary market category that drew a lot of
votes was best registry. This was won by Markit, with
APX coming in second. The best law rm in the voluntary
market was Baker & McKenzie. The global rm was alsosuccessful in all of the other law rm categories. Norton
Rose was runner up in the others, apart from the voluntary
market where Linklaters came second, and North America
which saw Van Ness Feldman as runner up.
Other companies successful in the voluntary market
part of the survey were US-based Scientic Certication
Systems (SCS), which won both best validation and
verication categories. SCS was also runner up in the
same groups for North America, which were headed by
First Environment.
The best voluntary market standard went to the US-
based Veried Carbon Standard (VCS), with Switzerland-
headquartered Gold Standard coming a close second. The
VCS started out as the Voluntary Carbon Standard, but
the name change last year signies that its work is now
stretching well beyond just the voluntary sector.
The CDM category also polled well, just behind the EU
ETS and voluntary carbon market. It will be interesting to
see how well the sector polls next year, after restrictions
on the use of CDM credits in the EU cap-and-trade system
the largest source of demand come into play.
This year, South Pole Carbon was the winner of the
best project developer category, closely followed by
Sweden-based Tricorona. Norway-based DNV topped the
best Designated Operational Entity (DOE) category a
DOE carries out validation and verication services on a
project and was also the best verier in the EU ETS poll.
Tv Rheinland came in second in the CDM.
Netherlands-based Climate Focus came out winner
of the best advisory rm CDM, with ICF International in
second place. ICF did, however, win the same poll in the
EU ETS section. The last category for the CDM was best
exchange. This was won by the Intercontinental Exchange
(ICE), which also headed the same category in the EU ETS
and North America sections.BlueNext, which recently announced that it will close,
still polled in second place in the CDM category, while
Leipzig-based European Energy Exchange came in
second in the EU ETS poll. There was no clear second
place in the North America section.
The North America section may well need to be split
into separate categories in the future, with California and
Quebec starting cap-and-trade schemes from 1 January.
This year the continent was treated a whole and polled
CE2 Capital Partners as best trading company and
Environmental Credit Corp as best project developer.
Another section that may need to be split in the future
is Australia/New Zealand. This years saw Australia-based
bank Westpac win the best trading company, OM Financial
win the best brokerage rm. CO2 Australia was best
developer and came second in best advisory company,
which was won by Climate Friendly. The latter company
was also runner up in the best project developer section. l
Carbon Trading would like to express its congratulations to all the
winners and thanks all the people who took the time out to vote in
the magazines rst survey of this kind.
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While international climate change
negotiations are characterised by slow
progress and frustration, regional emissions
trading systems (ETSs) are increasingly
gaining the attention of government leaders. Many
systems are springing up in various parts of the world,
including Europe, North America, Australia and China.
With the EU ETS the worlds largest carbon market
struggling with a huge surplus of allowances up to 2020
and beyond, increased attention is being given to the
possibility of linking the European system with these other
trading programmes.
Linking the EU ETS to other regional systems around
the world may prove an important stepping-stone to
reduce greenhouse gas (GHG) emissions and thus moving
the climate change regime forward. A rst step was taken
in August, when the European Commission and Australias
government declared the intention to link their respective
markets, partially by 2015 and fully by 2018 (see Carbon
Trading, October 2012, pages 1015).
In Europe, there has for several years been a clearly
stated ambition to establish a
transatlantic carbon market. When
a federal carbon cap-and-trade
programme was efciently dumped
by political deadlock in Washington,
Europe, instead, had to look to the
different regional initiatives in North
America. Californias cap-and-trade
system which ofcially starts on
1 January has drawn the most
The onlygamein Town?
There are technical obstacles to linking the EU and CaliforniaETSs, but political ambition will be the key to success
Words: Daniel Engstrm Stenson and Lars Zetterberg
attention given the size of the US states economy and its
emissions.
In 2011, EU Climate Commissioner Connie Hedegaard
met with the Californias Governor Jerry Brown and
conrmed plans to try and link the EU ETS with the
Californian system. Since, however, little has been heard
from respective politicians on the plans for linking.
A link between the two trading programmes, to a large
extent, depends on the political ambition and eagerness
of responsible decision makers. But it is crucial also to
discuss the technical conditions necessary for linkage
between the two markets to take place.
At a theoretical level, the benets of linking are well
known. It expands market size, increasing liquidity
and reducing the costs for reducing emissions in both
schemes. This is because more GHG reduction options
should be available in a larger system. Linking creates a
win-win situation with lower costs and higher efciency.
On the whole, both systems are better off, although
some actors could lose out for example, sellers
of allowances prior to linking might become buyers
afterwards. Some estimates of the impact of the Kyoto
Protocol have shown total costs savings of up to 50%
by creating a global carbon market with trade across all
countries, despite fears of imported price volatility andsellers taking advantage of linking to relax their cap in
order to sell more allowances.
Technical aspects o linking EU ETS and
Caliornia
Even if two systems could be a perfect match in
an economic sense, technical differences could
constitute a barrier to linking. The two systems
do not have to be identical. But a certain level of
compatibility is needed for linking to be possible.
In this respect, there are some features that are
more important than others.
The three technical features outlined below
represent the biggest challenges to a possible
link between the EU ETS and the Californian cap-
and-trade system.
Linking
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"A link between the two, to alarge extent, depends on thepolitical ambition and eagerness oresponsible decision makers"Lars Zetterberg
>
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Linking
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Feature
Dec 2012/Jan 2013 | Crb Trd | 19
Recognition o ofsets
Perhaps the most signicant of the technical barriers is
the use of offsets. It is crucial that both systems recognise
each others offset credits, since an offset credit from one
system should be available for compliance in the other
system after linking.
Currently, California accepts four domestic offset types
the destruction of ozone depleting substances, livestock
manure management, urban forestry and forestry that
can generate credits to meet no more than 8% of their
total compliance target. But the EU ETS does not currently
allow forestry credits to be used for compliance, because,
in its view, the sector has signicant faults in monitoring
and verication practices among other things.
The EU scheme also only recognises offsets created
under the Kyoto Protocols Joint Implementation system
and Clean Development Mechanism (CDM) to cover a
maximum of 11% of a covered facilitys total allowed
emissions. Californias cap-and-trade programme does
not recognise Kyoto credits and, in the US as a whole, the
protocol is viewed with scepticism.
Currently, the EU and California are far apart on offsets.
The issue will need to be dealt with before a linkage can
take place. The ongoing UN climate negotiations over new
market mechanisms could play a crucial role in convergingthe two systems view on offsets. A global agreement on a
new set of exible mechanisms and carbon credits could
change the dynamic of offsetting in all trading schemes
and force policymakers to take a new stand on which
offsets should be allowed for compliance.
Relative stringency o targets
The economic gain from linking depends on different GHG
reduction ambitions and costs in the various systems the
greater the price disparity and abatement costs between
the two systems, the greater the economic gain will be.
But different ambitions will prove challenging in many
ways, not least politically, when it comes to linking.
Linking to a system with signicantly looser reduction
targets will not only be perceived as undermining the
environmental integrity of the ambitious system, but it will
also lead to a ow of funds from the high-cost system
to the low-cost system. From the point of view of the
low-cost system, a link to a higher cost system will lead to
increases in the allowance price, which might prove to be
a domestic political challenge.
In percentage terms, the EU reduction target is more
ambitious than its Californian counterparts minus 21%
by 2020 compared with 2005 levels in Europe against
minus 9% for 2020 compared with 2005 for the US state.
But, when comparing targets, one needs also to consider
other aspects, such as population growth, economic
growth and available abatement options, which all have an
impact on allowance prices.Even if the EU has more stringent targets vis--vis
California in terms of the reduction percentage, the prices
of the two systems may more or less overlap due to the
higher costs of reducing emissions in California. This
higher cost depends partly on the fact that emissions from
the transport sector are included in the Californian ETS,
but not in the EU ETS.
However, the price uncertainty is signicant. Analysts
estimate allowance prices for 2020 at $17$37 a tonne of
carbon dioxide (tCO2) in the EU and between $15$75/t
of CO2 in California. Based on these gures, it is difcult
to conclude which system will have the highest allowance
price over the period 20132020 and, therefore, be the net
buyer of allowances.
The different levels of ambition should not be an
insurmountable barrier to a future linkage between the two
"It should be noted that the currenthuge surplus o carbon allowancesin the EU Emissions Trading Schemewould also impact the linkagediscussions"
Credits from reforestation are eligible in California, but not Europe
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systems, despite the uncertainty over the exact carbon
price levels in each scheme
Price managementOne of the pillars of carbon trading is the cap, which is set
to regulate the quantity of GHG emissions an installation
can discharge. Under the cap, businesses trade
allowances among themselves according to the premise of
supply and demand. As such, differences in price control
mechanisms in ETSs could create a barrier to linkage.
One possible scenario arises if a system introduces
a carbon price ceiling. The other programme has no say
in the matter, but the ceiling would become available
in the that system as well, not only pressing down the
carbon price in both schemes, but ultimately leading to an
increase in the two systems total emissions.
California will adopt a price ceiling ranging from
$4050/t of CO2. If the price ceiling is reached, allowances
are made available to the market from a reserve. This
reserve is limited to 4% of the total allowance volume and
is populated by borrowing allowances from future years.
The limitation of allowances in the reserve means that
there is still an absolute cap on emissions in Californias
system, which is a requirement for linking according to the
EU ETS Directive. Therefore, the price ceiling in California
is not a serious threat to linking with the EU scheme
where there is no price cap.
It is premature at this stage to assess how the ongoing
discussions in Brussels to try and deal with the lower
than expected European carbon price that has resulted
from the large surplus of allowances will affect linking
discussions.
Some people have called for the EU to look into a
reserve price system for auctions. Others have argued
for a one-off permanent cancellation of allowances.
Both suggestions are options put forward by the
commission for structural reform of the EU ETS (see
pages 1415). Another proposal would see allowances
scheduled for auction in the early years of phase III(20132020) of the EU ETS set aside until later in the
period (see page 4).
Should the EU decide to move into some form of
additional price management this could well affect the
possibilities of linkage to California. But it should also
be noted that the current huge surplus of allowances in
Europe would also impact the linkage discussions.
At the moment, a link between the EU ETS and
California seems unlikely. EU ETS decision-makers are
busy trying to sort out the schemes problems, highlighted
above. There is also more attention being paid to the plans
for the link between the EU and Australian systems.
On the other side of the Atlantic, California has, for
the moment, turned its attention towards the Canadian
province of Quebec and will likely focus on other North-
American linkages before turning to Europe. This does not
mean that linking with Europe is not on the table. Media
reports state that initial discussions between California and
Australia are already taking place.
In addition, the many emerging carbon markets will
make linking a more and more topical issue. In particular,
in the absence of progress at the UN-led climate
negotiations, it is tempting to state that linking existing
and planned carbon markets is the only game in town.
One should, however, not jump to conclusions and
underestimate the many challenges ahead.
When it comes to a possible link between Europe andCalifornia, there are technical obstacles that make joining
unlikely in the short term. In the longer term, however,
the current barriers to linking could be solved, if the
political will is there. Whether or not the necessary political
leadership for linking will be shown, remains to be seen. l
This article is based on the October 2012 paper Linking
the Emissions Trading Systems in EU and California
available at http://www.ivl.se/download/18.50367b6c13a6f
da0152376/1350970297329/B2061.pdf
Lars Zetterberg is a researcher at the Swedish Environmental
Research Institute. Daniel Engstrm Stenson is programme
manager environmental policies at the Sweden-based think tank
Forum Fr Reformer Och Entreprenrskap (Fores)
Linking
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"Diferent levels o ambition shouldnot be an insurmountable barrier toa uture linkage"Daniel Engstrm
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Carbon Trading is the new magazinecovering greenhouse gas markets.
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The next high-level international climate
change negotiations are almost upon
us with parties to the UN Framework
Convention on Climate Change (UNFCCC)
meeting in Doha, Qatar from 26 November to
7 December.
This is the rst so-called COP and CMP since
decisions were made in Durban, South Africa last
December setting a new timetable for agreement
on a climate regime for the post-2020 world. That
agreement is set to be concluded in 2015 and so
the expectations of many people are slim
for major progress on climate change in
Doha.
But that does not mean nothing
will happen in Doha. The talks will
need to move forward on a range
of issues to avoid a backlog of
decisions in 2015. As well as COP
18 and CMP 8 meetings, Doha
will also see the next sessions of
various subsidiary bodies and ad
hoc working groups (AWGs) to the
UNFCCC. It is these latter talks where
the most interesting work takes place.Perhaps most attention will be on the second
part of the rst session of the AWG on the Durban
Platform for Enhanced Action (ADP). The group was
set up in Durban and held its rst session in Bonn in
May, as well as holding informal sessions in Bangkok
in August and September. The aim of the ADP is to
develop a protocol, another legal instrument or an
agreed outcome with legal force under the UNFCCC
by 2015.
The ADP is currently split into two so-called
workstreams. In workstream one, parties to the
UNFCCC have started to discuss broad visions
and aspirations for the ADP, such as the key
characteristics and features of the new agreement. The
second workstream is considering concrete options
for broad measures and specic actions to enhance
ActionstationsWhat is on the agenda at the Doha climate change talks inNovember and December?Words: Robin Lancaster
ambition to reduce emissions to a level that will keep
global temperature rise to below 2 or 1.5 Celsius.
From the discussions, so far, countries have
identied several issues in both streams that should
be debated further, according to documents on the
UNFCCC website (see table). In workstream one, they
include: how the principles of the UNFCCC will be
applied to the new agreement; how national country
circumstances and changes to those circumstances
should be accounted for; and how other work under the
UNFCCC will be taken into account in the ADP.
Workstream two, among other things,
will discuss how to: increase the level
of ambition of countries emission
reduction pledges and encourage
nations that have not made pledges;
develop and expand initiatives with
the largest mitigation potential; and
ensure stakeholder engagement
and involvement.
The same document says that
Doha should send a clear signal that
[the ADP] is making progress towards a
new protocol, another legal instrument or
an agreed outcome with legal force, as wellas towards increasing the level of ambition. The
aim will also be to set a calendar and timetable for further
talks in 2013.
Two other AWG sessions in Doha have relevance
to the ADP, particularly as these groups are scheduled
to conclude in Qatar. They are the AWG on Long-term
Cooperative Action (AWG-LCA) and the AWG on Further
Commitments for Annex I Parties under the Kyoto
Protocol (AWG-KP).
The AWG-LCA talks cover a range of issues,
including mitigation, adaptation and technology
development and transfer. The talks on enhanced
national or international mitigation action on climate
change cover measurement, reporting and verication
(MRV) issues, nationally appropriate mitigation actions
(Namas) by developing countries; policy approaches
UN Negotiations
22|Carbon Trading | Dec 2012/Jan 2013
>
"Dohashould send a
signal that the ADP
is progressing on a
new protocol, another
legal instrument or
an agreed outcome
with legal force"
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UN Negotiations
carbon-tradingmagazine.com
Special report
Dec 2012/Jan 2013 | Carbon Trading | 23
and positive incentives for reducing emissions
from deforestation and forest degradation (Redd+);
cooperation on sectoral approaches to cut GHG
emissions; other opportunities including the use of
markets to mitigate climate change; and the economic
and social consequences of response measures.
The AWG-KPs main task will be to come up with
agreement on the second commitment period of the
Kyoto Protocol. Several countries, most notably those
that make up the EU, agreed in Durban to sign up to
a second period, after the rst concludes at the end
of this year. Although the number of industrialised
countries agreeing to emission cuts under Kyoto two
has fallen from those that ratied the original treaty,
there are still important issues to be discussed.
They include the future role in Kyoto two of the Clean
Development Mechanism (CDM) for example, will it
be restricted to countries that only agree new targets
under the protocol and when the second commitmentwill end. Currently, two dates are on the agenda the
31 December 2017 and 31 December 2020. The AWG-
KP talks will also need to agree on the caps countries/
regions will take on in the second commitment period.
The 37th session of the Subsidiary Body for
Scientic and Technological Advice (SBSTA) will meet in
Doha between 26 November and 1 December. SBSTA
has a wide range of topics on its agenda, with several
of them having possible relevance to participants in
carbon markets.
One area that SBSTA will discuss is Redd+ which
also includes the role of forest conservation, sustainable
management of forests and enhancement of forest
carbon stocks in developing countries. It is set to
complete in Doha its work on guidance for modalities
for forest MRV, further consider issues relating to the
drivers of deforestation, continue its work on safeguards
for local and indigenous peoples from Redd+
activities; and start working on guidance for assessing
forest reference emission levels.
SBSTA will also consider emissions from fuel used
for international aviation and maritime transport. While
emissions from