Building a global carbon market

The European Union’s vision

Artur Runge-MetzgerHead of International Climate Negotiations, European

Commission

In-session workshop on means to reach emission reduction targets,

AWG 5.1, Bangkok, 1-3 April 2008

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The EU’s global vision – 2 degrees objective

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Mitigation by industrialised countries Common but differentiated

responsibility: take the lead and make most of the effort EU commitments:

20% unilaterally by 2020 30% in context global deal 60-80% by 2050

Carbon market as a key tool Binding and effective rules for

monitoring and enforcing commitments

Developed countries GHG emissions

0%

20%

40%

60%

80%

100%

120%

140%

1990 2005 2020 2030 2040 2050Baseline Reduction Scenario

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Mitigation in developing countries

Toolbox:o No commitments for least

developed countrieso Sustainable development

policieso Enhanced CDMo Performance-based fundingo Sectoral approacheso Quantified emission limits

Developing countries GHG emissions

0%40%80%

120%160%200%240%280%320%

1990 2005 2020 2030 2040 2050

Baseline Reduction Scenario

• Reaching development objectives will be imperative; mitigation and adaptation

• Reduce growth of emissions asap, and absolute reductions after 2020

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Building a global carbon market The carbon market: cost-effective and flexible

mitigation tool and source of finance for low-GHG technology development EU’s aim: progressive development towards

global carbon market Countries take part according to different

responsibilities and capabilities Backed by ambitious mitigation commitments in

line with 2 degree objective Build on existing mechanisms, link schemes and

develop new mechanisms

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The role of the carbon market (I):27 Gt CO2e emission reduction potential below € 40/ton CO2

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Each Parties’ opportunity + responsibility mainly in household, buildings, transport

Exchange good practice in policy design: e.g.– Abandon energy subsidies (fossil

fuels: ~ € 130 billion p.a.)– Domestic company-based

emissions trading– Set energy efficiency standards,

building codes, labelling schemes, 1-Watt-Initiative

– ‘Ban the bulb’: CFL, LED– Progressive taxation– Address potential cash flow issues,

e.g. targeted loan schemes (e.g. refurbishment of existing power plants)

The role of the carbon market (II):No. 1 = 6-7 Gt CO2e: Harvest all low hanging fruits by 2020

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Domestic emissions trading schemes to set carbon price for private sector. Less developed countries: strengthened CDM to drive technology transfer and

economic transformation Complementary approaches needed to address sectors not covered by the

carbon market, other barriers and possibly to scale up finance Advanced developing countries: move beyond offsetting, new mechanisms to

incentivise increased mitigation contributions Carefully watch demand and supply!

The role of the carbon market (III):No. 2 = 10 – 12 Gt CO2e: carbon market will be the main driver

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Promote co-operation for research and technology development (e.g. joint ventures, PPP)

Subsidies for demonstration, e.g. NZEC

Direct subsidies for deployment of clean technologies, e.g. GEEREF, export credits, PPP, concessional IFI loans

Reduce tariffs for advanced ‘GHG-efficient’ products and services

Promote regulatory approaches gaining energy security/clean air benefits: e.g. mandatory standards (cars, appliances), fuel taxes, portfolio standards (e.g. renewable energy, CCS)

The role of the carbon market (IV):No. 3 = 10 – 12 Gt CO2e: promote high-end options

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Clean Development Mechanism (I) CDM has delivered real and measurable benefits and

generated a multi-billion dollar market (€28 billion in 2007)

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Continuity for the CDM post-2012 EU Commission proposal would allow 2.63 Gt (1.4 Gt in the EU ETS,

1.23 Gt MS use) of CERs to be used until 2020 independent of an international agreement

Includes ongoing projects registered before 2012 and projects established post-2012 in LDCs

EU first to provide certainty for CER use post-2012 – no one else does so far!

About one third of the necessary reduction effort towards 20% target from CDM/JI - other two thirds ensure real emission reductions in Europe

Unlimited access to CDM/JI under the 20% target would lead to drop in CER price to €4 and increase of EU domestic emissions to about 4% above 1990 = contradicts EU objectives of climate policy leadership and energy security.

Substantial increase as part of Copenhagen agreement: EU Commission proposal would allow half of the additional effort (~1.2 Gt extra: totalling ~70bn€ of transfers, i.e. ~6bn€ annually) to be met by CDM/JI or new mechanisms.

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Clean Development Mechanism (II) Reform of CDM for post-2012 needs to address the following

concerns:– strengthen environmental integrity: ensure real and additional

emission reductions (key to offsetting mechanism)– address possible perverse incentives resulting from (low-cost)

CDM– review current institutional set-up and procedures (Article 9)

Strengthen CDM’s contribution to technology transfer and economic transformation in less developed regions

Need to move beyond offsetting for advanced developing countries will be key for post-2012 – explore new approaches, e.g. baseline/credit, sectoral approaches

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CDM – some proposals More executive and supervisory role of EB, including

delegation of decision-making and strengthened professional support staff

Revision of CDM decision-making procedures, including strengthening the basis and transparency of decision-making

Assessment of roles and responsibilities of DOEs Increased use of technology benchmarks for baseline

setting and additionality testing Dialogue with host countries on how to strengthen

contribution to SD and tech transfer More differentiated approach to CDM will help improve

regional distribution

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Joint Implementation JI has delivered benefits, but not yet realised its full potential Role for JI post-2012: stimulating international collaboration and

channeling investment and technology towards certain mitigation opportunities and sectors, which otherwise lack access to the global carbon market

JI allows for institutional learning about market-based approaches and a transitional step before wider application of cap-and-trade

Need to discuss JI post-2012 and explore new concepts:

– May need to continue with a two-track approach with internationally supervised procedure (track 2) for countries that still lack institutional and legislative framework for JI track 1

– Explore synergies and parallels with revision of CDM for track 2 procedure, e.g. on simplifying and streamlining institutional set-up and procedures and strengthening environmental integrity

– Explore new concepts such as programmatic JI

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Shared vision of a low-carbon future: Annex I “Offsetting” is not enough

How can the carbon market build on “measurable, reportable and verifiable mitigation action” by developing countries?

What means of support are needed in addition to the carbon market?

In which way can the carbon market most effectively contribute to sustainable development and technology transfer? What is needed in which countries and which sectors?

IPCC 2007, WGIII, ch. 13

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Need to explore new mechanisms to incentivise enhanced mitigation:e.g. no-lose sectoral crediting mechanism

Source: Ecofys

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Conclusions Significant role of the carbon market already

today – should be strenghtened post-2012. An environmentally more effective CDM should continue to play a role

Offsetting is not enough – carbon market offers promising potential if we succeed in developing new tools that build on differentiated contributions by developing countries

Carbon market is part of the solution but not a panacea – needs to be combined with other tools to further technology cooperation, financial flows and investment

Thank you!