Kathryn A. Walker
Research Project Placement for NdevrEnvironmental Consulting
3rd February 2014
Ndevr Pty Ltd
Suite 6, Level 3,
499 St Kilda Rd
Melbourne, VIC 3004
P +61 3 9865 1400
W
E
A.B.N 72 084 281 836
1
Page
Table of Contents
List of Abbreviations...... 3
Executive Summary...... 4
Climate Change Policy and Carbon Trading...... 6
Climate and Carbon Policy……………..…………………………………………………….6
Table 1. Current carbon emission reduction policies.…………………………….…….…6
Table 2. Complimentary schemes in climate change policy..………………………….…7
Emissions Trading Schemes…………………………………………………………………7
Drivers for Carbon Trading in China...... 8
Development of Carbon Markets……………………………………………………………..8
Drivers of China's Climate Change Policy...... …9
Implications...... 10
Services Offered...... 10
Current ETS projects...... 12
Who will the policy target?...……………………………..……………………………...…..12
Table 3. Summary of pilot schemecomponents………………………..……………...…13
Scheme Intricacies……………………………………………………………………….…..16
Controlled Market…………..…………………………………………..………………...…..17
Uncertainties………………..………………………………………………..…………...…..18
Table 4. Summary of China's emissions reduction targets…………………..……..…....18
Future Directions………....…………………………………………………..……….……...19
Market Entry and Future Directions...... 20
Needs analysis...... 20
Table 5. Disciplines required for carbon market function…………………………………20
Future Directions...... 21
Figure 1. Timeline of expected international ETS commencement…………….……….21
Barriers to Entry...... 21
Table 6. Barriers to carbon market entry…………………………………………………...21
Funding Opportunities...... 23
Australian links with Chinese policy………………………………………………………...23
India's climate change policy…………………………………………………………...……24
Conclusion...... 25
References...... 26
1
Page
Research Project: International Carbon Markets /List of Abbreviations
Abbreviation / Full nameABE / The Asian Business Engagement Plan
CCER / Chinese Certified Emissions Reduction
CDM / Clean Development Mechanism
CER / Certified Emissions Reduction
CFI / Carbon Farming Initiative
CO2 / Carbon dioxide
CO2e / Carbon dioxide equivalent
EPs / Equator Principles
EU / European Union
ETS / Emissions Trading Scheme
FYP / Five-Year Plan for Economic and Social Development
GDP / Gross Domestic Product
GHG / Greenhouse gas
MEP / Ministry of Environmental Protection
MRV / Monitoring, reporting, verification
NDRC / National Development and Reform Commission
UNFCCC / United Nations Framework Convention on Climate Change
US / United States
Executive Summary
This report was conducted as part of a research placement on behalf of Ndver Environmental Consulting. It is intended to provide an informative summary, for internal purposes, on the state of carbon markets with particular examination into the Chinese Emission Trading Scheme.
The development of emissions reduction schemes, including the Emissions Trading Scheme (ETS), has increased globally in response to predicted threats to the economy and environment associated with anthropogenic warming of the climate. In an attempt to combat rising greenhouse gas emissions, climate change mitigation policies are being adopted by many countries. Carbon trading markets have developed over the last decade and are being increasingly undertaken as part of climate change policy.
China has developed their own climate change policy: they want to avoid the economic, environmental and social consequences of climate change and reduce their dependency on fossil fuels. The country is attempting to convert to a ‘low carbon economy’, using a number of strategies, including the ETS. The recent adoption of the Chinese carbon market, developed through positive experiences with the Clean Development Mechanism.
China is currently trialling the ETSdomestically, through seven pilot schemes. If successful, they intend to develop a national scheme, by 2020. The pilots vary in design characteristics, such as emissions budgets and sectors encompassed. The regions chosen also vary in terms of economic status. The reason for this is to assess how the ETS is likely to run under different conditions and economic contexts. The most successful design features will be selected to develop the national system, and any weaknesses abandoned.
Companies will have to comply to set emissions caps or will face a hefty fine. They also may not be allocated a share of their permits the following year. It is likely that some administrative measures will also be employed, to reach set targets on emissions intensity reduction.
There are a number of uncertainties and risks associated with the Chinese scheme and carbon markets generally, which will need to be managed through time. Risks include;
- Volatile market prices, where permit prices have the potential to crash
- Lack in behavioural change if prices are too low
- ETS related crime
It is uncertain whether quickly-approaching emissions targets will be met using the pilot schemes, and whether regulatory measures will continue to be used now and into the future. Transparency is also an issue, with some governments withholding information on permit pricing and allocation, and methodologies used to calculate emissions levels.
Despite the risks, carbon markets provide a lot of opportunities and services to local economies, communities and the environment. Not only do these markets create a large number of jobs, across a broad range of areas, they also help fund offset programs and energy efficiency research. The reduction in emissions levels will aid air pollution mitigation and be beneficial to health. There is also the potential for carbon markets to expand and operate on a global scale. If the Chinese scheme is successful, it may encourage other countries to adopt the ETS and help develop the global climate change policy.
Based on a needs analysis, a number of essential skills and professionals are needed to create and maintain a carbon trading market. Among these, important disciplines include, financial advisors, lawyers and auditors. In order for Australia to develop an ETS and link to the Chinese system, it is quite likely they would need to employ Chinese professionals or employ a team of climate policy experts at the Australian embassy in Beijing.
Market entry is currently challenging - a number of barriers to entry exist and need to be managed as the market develops. Some examples include;
- Existing knowledge gaps on pricing mechanisms and other methodologies
- Methods of funding
- Bipartisan political agreement
- Lack of transparent mechanisms to monitor and verify emissions levels
The Chinese and the European ETSs are employing a ‘learning-by-doing’ approach to their schemes; they will working through problems and learn from mistakes as they arise.
A potential funding opportunity for carbon market development in Australia is Austrade’s Asian Business Engagement Plan, and internationally, the Equator Principles are encouraging financial institutions to invest in green projects, including emissions reductions schemes. Carbon markets are yet to become wholly cost-efficient and creating funding to combat climate change will remain one of the greatest financial challenges of our time.
In the upcoming UNFCCC convention in Paris, 2015, the progress of a global agreement on climate change mitigation is anticipated, to be in force by 2020. It is likely the conference will influence the execution and timing of international strategies, including the development of the global carbon market. The timing and direction of Australia’s climate policy is likely to be influenced by this conference.The EU, US and China will be major players in international negotiations.
China has managed to relatively quickly implement their own ETS, which in comparison took Europe and Australia years of debate and arranging to pursue. If China manages to successfully run a carbon market and implement a national scheme, there is potential to lower global emissions levels, trigger innovations in clean energy technology and encourage other countries to adopt similar emissions reductions mechanisms.
Climate Change Policy and Carbon Trading
Climate and Carbon Policy
The potential environmental and socio-economic impacts associated with anthropogenic greenhouse gas (GHG) production, have been cause for international concern. The current rate of climatic change is not sustainable and will pose a number of threats not only to the environment, but also the functioning of modern economies.
Mitigating GHG emissions will affect a range of industries, such as agriculture and materials production,as well asinfluencing electricity consumption, fuel use and heating. If not managed, likely changes to natural systems will include a rise in temperature extremes, sea level rise and exacerbated biodiversity loss.
Carbon dioxide (CO2) is the largest GHG contributing to climate change: it represents approximately two thirds of human-produced GHGs (DSE 2013). A single, standard unit for measuring the combined impacts of all GHGs is the carbon dioxide equivalent, CO2e. This is a measure of the equivalent amount of warming each GHG would cause, in terms of CO2(a calculation of each gas’ ‘global warming potential’).
Carbon emissions are hence generally used as the ‘target’ GHG, and the terms can be used interchangeably. They are also generally more readily measureable - CO2emissions sources can be identified directly (US EPA 2012). The development of emissions mitigation strategies, is a core component of climate change policy. Various carbon emission reduction strategies have been trialled and implemented globally, as summarised by Tables 1 and 2.
Table 1.Current general carbon emission reduction policies.
Scheme / DescriptionCarbon Tax / The government sets a price polluters will pay per tonne CO2 released to the atmosphere – known as permits. The price per tonne increases annually to promote a reduction in carbon emissions (Energy Action 2013).
Pro: permit price is controlled. Con: amount of emissions reduced is uncertain.
Examples: many exist worldwide, including in India, Japan and local taxes in the US.
Emissions Trading Scheme (ETS)/ Cap and Trade / Market-based approach to CO2 emissions reduction. Permit price is floating (affected by market fluctuations) however a cap on the total amount of emissions is set by the government. Unused permits can be traded on the market; hence it is in business’ best interests to reduce carbon emissions.
Pro: emissions reductions are controlled. Con: price of permits is uncertain.
Examples: mandatory EU ETS, the Australian Carbon Pollution Reduction Scheme (the proposed ETSunder the Labour government).
Direct Intervention (including ‘command-and-control’ policy) / Government-implemented activities that directly target companies to reduce emissions. Can include financial incentives to implement emissions-reducing projects or forced compliance of national emissions targets.
Pro: less uncertainty involved. Con: can be costly to local economies, e.g.may force closure of companies.
Examples: China’s top-down administrative measures to reach targets during the 11th Five-Year Plan. The Emissions Reduction Fund of Australia’s current climate change policy, the Direct Action Plan.
Table 2.Complimentary schemes for climate change policy.
Scheme / DescriptionOffset Schemes / Projects that reduce GHG emissions, such as sequestering CO2 from the atmosphere. They are designed to compensate for emissions produced. Offsets should be used in conjunction with a policy designed to reduce GHG emissions at the source (Greenfleet Australia). Offsetting may be required as part of another schemeor can be voluntary.
Examples:Certified Emissions Reductions issued by the Clean Development Mechanism (an offset strategy in the EU ETS). In Australia; the Carbon Farming Initiative – where abatement activities (e.g. revegetation) can generate offset credits (Department of Environment 2013). Both strategies generate tradeable carbon credits.
Energy efficiency research and development programs / Involves research into energy efficiency improvement. Includes research into new and existing clean energy projects. Can promote investment into new technologies, including renewables.
The Chinese government has funded extensive research into energy efficiency improvement.
Investment in clean energy and energy efficiency targets / Government or private sectors may choose to voluntarily invest in clean energy technologies. ‘Clean energy’ includes renewables and non-fossil fuels such as nuclear power. A growing industry, particularly in China. Various countries within the EU have adopted these technologies.
Energy efficiency targets can be set by local governments to encourage energy-saving activities. Subsidies can be provided to incentivise the uptake of projects. Examples include the Victorian Energy Efficiency Target and the Energy Savings Scheme of NSW.
A holistic approach may be needed (i.e. multiple policy use) in climate change mitigation, as policies can fail. Climate change policies will differ between countries and their circumstances.
Emissions Trading Schemes
Of particular interest, is the Emissions Trading Scheme (ETS).The ETS is a market-based approach to lowering GHG emissions. It involves the commodificationof carbon, where emissions are turned into tradeable units that can be transferred or sold.
The schemes vary in size and scope. Some are mandatory (e.g. EU ETS) whilst others are voluntary and may be conducted in countries that have not ratified the Kyoto protocol. The goal of the ETS is to reduce GHG emissions at the lowest possible cost to the economy (PerdanAzapagic 2011).
The typical ‘cap and trade’ system is a market-based instrument, where the selling and trading of emissions allowances is conducted. There is potential to create a larger, international market for emissions trading, which makes this scheme appealing.
Recently, China has implemented a number of pilot ETSs with the eventual target of a national ETS. China is the world’s largest emitter of GHGs - the implementation of a carbon reduction scheme will contribute to global emissions reductions. If successful, the Chinese ETS could pave the way towards a global strategy.
Chinais committed to becoming a ‘low-carbon economy’. As well as the development of carbon markets, the country is adopting a range of strategies to reduce emissions, including projects to improve energy efficiency andincrease the use and research into renewable energy.
If a national Chinese ETS is established, there is a prospect of linking it with other markets in the Asia-Pacific region, including Australia.
Drivers for Carbon Trading in China
As part of China’s climate change policy, the nation is committed to becoming a ‘low-carbon economy’ and are attempting to achieve this by developing a national carbon market. The idea of this strategy is for China to reduce their GHG emissions at least cost –whilst still allowing economic development.
There are two ways of setting emissions caps; absolute caps or intensity targets. Notably, China has chosen to target the growth of emissions, rather than net quantity of emissions produced. This type focuses on reducing energy intensity (carbon emissions produced per unit GDP). Although this type of cap may not result in a reduction in total emissions produced, the trajectory will be below what it would have been if left unmitigated.
Development of Carbon Markets
Historically, the domestic carbon trading market developed as a result of positive experiences with the Clean Development Mechanism (CDM) in overseas markets. The CDM is a means of implementing emissions-reducing projects in Annex 2 countries (includes China) of the Kyoto Protocol (UNFCC 2014). These projects can earn saleable Certified Emissions Reductions (CERs) – which equate to offsetting one tonne of CO2e – the level in a regular carbon permit(UNFCCC 2014). CERs can be traded and sold to parties bound to the Kyoto Protocol, and can count towards their emission reduction targets(UNFCCC 2014).
The CDM is a standardised emissions offset instrument, meaning projects must meet strict rules to qualify for CERs (UNFCCC 2014). There are three types of projects:
- Renewable energy projects
- Energy efficiency improvement projects
- Other projects that reduce sources of anthropogenic emissions
The stringent requirements the CDM meant China developed a capacity to manage robust carbon markets. Through the CDM process, the National Development and Reform Commission (NDRC) devisedvaluable pricing tools, which aidedthe development of an ETS (e.g. baseline emissions calculations).
Of the 4,200 projects registered under the CDM, over 2,000 are based in China (UNEP Riso Centre 2012). The revenue generated from CERs funds CDM projects, of which have been so successful in China they have created a thriving renewables export industry. The positive experiences of the CDM endorsed the opportunities carbon markets can create, inspiring authorities and encouraging banks to invest a domestic carbon market (Scotneyet al. 2012).
Currently, the price of CERs in the EU ETS is very low and carbon permit prices are volatile, resulting in little funding for CDM projects. The use of CDMs in higher-level emissions reductions is hence limited. If China is to reach its target of reducing emissions intensity by 40-45% by 2020, they need to involve an alternative strategy, such as a carbon market. By developing their own ETS, China can potentially curb its emissions by encouraging businesses to improve energy efficiency, and not rely on funding from CERs alone.
Drivers of China’s Climate Change Policy
China’s main policy planning document, the Five Year Plan for Economic and Social Development (FYP) is a periodic document that states national agendas and provides guidelines on how to meet objectives. Local governments and major administrative units use these guidelines to produce their own FYPs (Lo 2013).
The 12th FYP (covering 2011-2015), describes the initiation of environmentally-aware economic growth through ‘low-carbon development’(Department of Industry). It setsenergy and emissions targets, and commits to trialling mechanisms to reduce energy and carbon use, including a domestic carbon trade market (Department of Industry). Key targets of the 12th FYP include:
- A 16% reduction in energy intensity (consumption per unit GDP)
- A 17% reduction in carbon intensity (emissions per unit GDP)
- An increase of renewable and non-fossil fuel energy to 11.4% of total energy use (currently 8.3%) (Lewis 2011)
Although absolute emissions are not likely tobe reduced in the near future, the emissions trajectory will be below what it would have been if left unmitigated.
China’s climate change policy is a macroeconomic-based means of addressing energy security and conservation (Lo 2010a, 2010b, Qi et al 2007, Richerzhagen and Scholz, 2008). It is largely a result of addressing socio-economic concerns associated with future climate change, including risks to food security, reductions to regional economic growth and involuntary migration (and associated social impacts) (Lewis 2009).
International competition and collaboration, most notably in the research and production of green technologies, is also a driver.Renewable energy technologies have relatively recently created a major export market in China; the country is the world’s largest manufacturer of wind turbines and solar panels (Schreurs 2012, Bradsher 2010). The economic profits and jobs creation associated with the export trade offers a great service,but also important, is the reduction in dependency on fossil fuels. In a global sense, it is in China’s best interests to adopt a climate change policy, as it strengthens China’s position in UNFCCC international climate negotiations.