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Global carbon trading markets opening up

Global carbon trading markets opening up

Aug 18, 2013

New carbon trading markets are opening, despite the lack of progress and urgency at the UNFCCC level.

Robbie Louw, a director of Promethium Carbon, a carbon advisory firm, says development and cooperation amongst localised carbon initiatives have overtaken the UNFCCC as the primary driver in the race to curb emissions.

He believes that a ‘process of reversal’ is emerging as a common attribute amongst some of the world’s most significant carbon players. “In this process, old assumptions become quickly outdated, as climate leadership emerges from unlikely corners,” he says.

“With UNFCCC progress effectively stalled until 2020, the drive towards global carbon pricing rests increasingly within the realm of localised initiatives, be they market-based emission trading schemes (ETS), offsets, new market mechanisms NMMs or non-market in nature such as a carbon tax. Numerous carbon pricing initiatives are at various stages of implementation across the globe and many have the potential to inter-link and generate additional benefits.”

Louw says the increasing role of “bottom-up” carbon pricing is a highly visible development on the global economic horizon. Aside from the world’s largest emissions trading scheme, the EU ETS, national or sub-national schemes are already in operation in Australia, Japan, New Zealand, the US, Switzerland, China and Canada, and are planned in South Korea and Brazil.

Further initiatives such as efficiency certificate trading, fossil fuel subsidy removal and renewable energy support structures are similarly multiplying from the ground level up.

“Beyond a reversal of the top-down UNFCCC-led approach to climate change, we are also witnessing a policy reversal among key players in the carbon space on a macro level. More and more, former climate sceptics across the spectrum of nations, corporations and institutions are reinventing themselves as like-minded contributors to the carbon pricing infrastructure of the future,” he says.

Louw says that by the first quarter of 2013, only 30% of global emissions came from jurisdictions that in one form or another have failed to take steps towards carbon pricing. “As such, although the international carbon market remains in a weak state of repair, at least three quarters of global GDP will, by 2015, be generated within an economic framework that places a price on carbon.”

“Distortion of international trade is resulting from the increasing weight of carbon as a recognised global liability. Developments in carbon pricing therefore implies a complex mixture of risks and opportunities that form the basis of new climate leadership and cooperation amongst unexpected allies.”

Louw says that the EU and Australia have agreed on full harmonisation of emissions trading by 2018. The target date for this has now been moved forward to July 2014.  Also of significance is the forthcoming carbon pricing link in California and Quebec by 2014.

Whereas Korea does not currently have plans to link its scheme in the immediate term, key design features of its ETS are drawn up in line with European standards to enable future linking.

Sectoral-specific exclusions in the design features of carbon schemes, such as in the case of the RGGI, can address concerns of industry within the scope of regulation. Conversely, certain sectoral-specific inclusions in carbon pricing, such as international aviation in the EU ETS, can produce consequences that go beyond carbon pricing and create an unintended domino effect.

National actors have been seen to rely on tax exemption as a means to protect trade- exposed sectors, particularly in the case of Norway and South Africa. However, such initiatives are often criticised to the extent that they reduce the utility of pricing carbon in the first place.

As dissatisfaction with the level of ambition and achievement of international climate negotiations continues, new leaders are emerging from amongst previously unlikely candidates. This dimension reflects a process of reversal evident throughout the spectrum of carbon pricing development, says Louw.

The US and China are increasingly seen as playing a leading role in addressing climate change despite US failure to ratify the Kyoto Protocol, and the rapid development of coal-fired power plants in China.

Cumulatively, the two countries contribute approximately 37% of total global emissions, yet both nations are not only on track to meet their climate commitments, but have also entered a bilateral agreement to cooperate on tackling climate change, and intend to strengthen emission reductions targets, he says.

The focus of Chinese and US climate ambition rests largely with emissions trading and renewable energy investment. In 2011, the two countries were joint world leaders in renewable energy investment. In 2012, China only narrowly overtook the US as the world’s largest contributor to investment in renewables with a 22% rise in commitment equating to a $67-billion investment.

The Major Economies Forum on Energy and Climate (MEF) was launched in 2009 with the intent to advance climate and energy dialogue among 17 major Annex I & II countries. During COP18 it was reported that the US may seek to move elements of UNFCCC negotiations to the MEF as an alternative forum.

To date, a number of MEF meetings have recognised the growing acceptance and applicability of a bottom up approach to carbon pricing, the ambitious nature of a top-down approach and the need to develop a hybrid of the two. The forum will continue to act as a platform enabling experience sharing and design feature alignment of carbon pricing mechanisms.

Q&A with Robbie Louw,

Q. How does the carbon credit system work?

A. A carbon credit is verified proof of the removal of one ton of CO2 from the atmosphere or the prevention of a ton from entering the atmosphere.  Carbon credits can be used in some regulatory frameworks to offset actual emissions.  Carbon trading is therefore a mechanism to allow emitters with emission reduction obligation to access least-cost mitigation options.

Q. Carbon tax is going to be introduced in 2015 – how will this work?

A. Companies will pay R120 per ton CO2 for 40% of their direct emissions, with some relief mechanisms for exposed sectors.  These mechanisms include relief for process emission from industries that cannot reduce their emissions and the protection of industries exposed to international trade.  Provision is also made to use carbon credits to offset the carbon tax obligation of companies.

Q. Is Promethium Carbon seeing an increase in interest from business towards sustainability?

A. Yes.  Sustainibility simply means that businesses manage all of the capitals they rely on to do business rather that the historic focus on financial capital alone.  Businesses are increasingly recognising the fact that sustainability, namely the maintenance of all the capitals, is a prerequisite to long term survival.

Q. What can businesses do to improve sustainability?

A. They should analyse risks and opportunities and then act on the analyses.

Q. What should South Africa be doing to improve sustainability in the climate change sphere?

A. Mitigate the emissions of greenhouse gases and adapt to the impact of climate change.  Communities must become more resilient to change, create awareness on the key issues and implement policies to address those issues.  Measurement and evaluation will be crucial in managing this process.

Q. The possible use of offsets to help meet carbon tax obligations potentially provides a new source of demand for CERs as well as other types of carbon credits. Do you know if the intention is to restrict credits to projects in South Africa?

A. There is no indication in the current documentation of the geographic origin of the credits that can be used.  A policy paper on this issue is expected soon and the question will hopefully be clarified. Promethium does however think it is highly unlikely that SA will allow projects from outside the country to be used.  Given the current low carbon prices, such a move will be counterproductive in the efforts to price carbon into the economy.

Q. Do you have any estimates on potential offset demand from South African companies if the carbon price is implemented as outlined in the latest paper?

A. We estimated the potential volumes in a report you can download from

Q. The plans also envisage setting up a new offset mechanism in South Africa, but is there a danger that because of the current low price of CERs there will be little interest in such a mechanism?

A. The low price will only affect the plans if credits from other countries are allowed.  We do not think this will happen.

Q. In relation to the above, do you think potential project developers will have any interest in the new mechanism, if credits can still be used from CDM, VCS etc? Why would they “learn” how to do a project under a new process if “old” ones are still eligible?

A. The purpose of the new mechanism would probably be to simplify the highly complex CDM process to account for local conditions in SA.  This will be in line with best practice in reducing costs while maintaining credibility to develop positive lists and standardised baselines.

Q. Carbon tax has been chosen over cap-and-trade mainly because nearly all electricity comes from one source. But the paper says an ETS could complement the tax or replace it at a later date. How likely is this, or is too far into the future to say?

A. The intention of the offset trading scheme is not to replace the tax.  It is simply a mechanism to give tax payers access to least-cost mitigation options.

Q. Can Eskom pass on the full cost of the carbon tax to consumers? If that is the case, is there a danger that under the tax proposals it has little incentive to actually reduce emissions?

A. It is Promethium’s opinion, under the current proposals, that Eskom has little or no incentive to mitigate its emissions.  One possible solution to the problem would be to extend access that electricity users have to the proposed relief mechanisms to include their Scope 2 emissions.   Such a move will make it possible for users of electricity to offset the emissions associated with the generation of that electricity.

Q. The plan seems to be a tax on fuel inputs based on various emissions factors. How difficult is this going to be to calculate this for each sector. Is it likely to lead to disputes over the emissions factor levels?

A. The emission factors will be set by the Department of Environmental Affairs.  The problem with this approach lies in the calculation of process emissions and fugitive emissions.  As part of the ongoing Greenhouse Gas inventory of South Africa, the Department of Environmental Affairs is addressing this issue.

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