linking trading schemes – considerations and lessons learned from eu ets jill duggan iisd/wri -...
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Linking trading schemes – considerations and lessons
learned from EU ETS
Jill DugganIISD/WRI - ChicagoNovember 2007
Outline
• EU Experience• Benefits of linking• What do we need to link• International Carbon Action Partnership
European Union
25 Member States
Countries joined EU in 2007
EU Experience
• Different Targets within EU Bubble (-8%)• UK -12.5%, Germany -21%, Spain +15%
• Single Directive but interpreted in different ways• Scope• Rules• Allocation methodolgies
2005-2007
• Only 5% auctioning allowed • Free allocation – significant lobbying and concern
from industry• Asymmetric information – industry on MAC and
no clarity on OMS positions• Result - overallocation
Percent emissions below allocation Percent emissions above allocation
% difference between Member State allocations and emissions in 2005
Lithuania
Denmark
Latvia
Finland
Estonia
Slovak Republic
Czech Republic
Hungary
Sweden
France
Netherlands
Belgium
Germany
Portugal
Slovenia
Greece
Italy
Austria
Spain
UK
Ireland
-50 -40 -30 -20 -10 0 10 20
Mem
ber
Sta
te
Surplus of allocated
allowances
Shortfall in allocated
allowances
2008 - 2012
• More harmonisation on scope and rules• Better data – ability to cut back allocation plans• Greater transparency – standard format and information
for National Allocation Plans• But still cautious over positions relative to OMS• And still lack of coordination – eg auctioning• Linking – Norway, Lichtenstein, Iceland join EU ETS
ETS Review 2013 and beyond
• Less free allocation – less lobbying• More centralisation – remove governments from
front line of lobbying• Better data – less reliance on Member States to
produce NAPs?• New ‘effort sharing’• More linking?
• Larger market reduces leakage• Level playing field for internationally traded sectors if
covered by carbon price – eg iron and steel• Larger market provides greater diversity, liquidity –
reduces uncertainty and provides greater price stability• Development of futures and derivatives markets helps
create conditions for long term investment• Helps underpin future framework
Benefits of linking
Constraints
• Uncertainty over future framework • Schemes at non national level – legal difficulties• Non Kyoto ratifiers• Numerous proposals for schemes – need
common building blocks to make linking possible
Key Principles – both for linking to cap and trade use of offsets
• Confidence and credibility • Environmental effectiveness• Economic efficiency
What aspects should we consider?
• Mutual recognition of trading units or one way linking• Monitoring Reporting Verification and Compliance • Stringency• Scope/coverage
• Two tier trading – eg Kyoto trading and EU ETS?• Market function vs Administrative Burden• Data exchange standards for electronic trading registries
Target setting, burden sharing
• Differentiated targets within EU – EU Kyoto targets – 8% by 2012; UK -12.5%, Germany -21%; Spain +15%
• EU pledged to unilateral 20% below 1990 by 2020 – 30% if other key developed countries apply similar effort
• US/Canada currently significantly above Kyoto and 1990 levels
• For linking would need to assess whether sufficient level of effort to avoid ‘free rider’ effect and creation of windfalls
Target setting mechanisms
• Equal percentage reduction of absolute emissions• GHG intensity targets• Convergence of emissions per GDP• Convergence of emissions per capita• The Brazilian historical responsibility proposal• Triptych
What have we learned in the ETS
• Allocation – hidden state aid – is it a subsidised tonne?• Compliance and penalties important – is someone else
getting away with it – do we need an international standard and audit?
• Scope – competitiveness issue• Some sectors good for trading at point source – eg energy
intensive industry. Other sectors national/state trading may be better
• Harmonisation is a bigger prize than national/local interest
International Carbon Action Partnership
• Members – committed to mandatory, absolute cap and trade• Observers – those still considering• Forum for officials designing and implementing cap and trade to
share thinking, best practice and consider compatibility issues • Two public meetings next year –
• Monitoring, Reporting, Verification, Compliance and Penalties• Auctioning and Allocation
Next steps
• Engage with design and development of schemes – International Carbon Action Partnership
• Assess the ‘building blocks’ already in place and which work best – share best practice
• EU ETS needs a critique from others – not a one way process
Contact
Jill DugganInternational Emissions TradingUK Department for Environment, Food and Rural [email protected] +44 207 238 4752