Emissions Trading
Worldwide
International Carbon Action Partnership (ICAP)
Status Report 2017
Emissions Trading
Worldwide
International Carbon Action Partnership (ICAP)
Status Report 2017
Editorial Team
Marissa Santikarn, Alexander Eden, Lina Li, Johannes Ackva,
William Acworth, Martina Kehrer, Oliver Lübker, Julia Melnikova,
Mariza Montes de Oca, Kateryna Stelmakh, Charlotte Unger,
Kristian Wilkening and Constanze Haug.
Cite as
ICAP. (2017). Emissions Trading Worldwide: Status Report 2017.
Berlin: ICAP.
The ICAP Secretariat expresses its gratitude to policymakers from
the ICAP membership and further collaborators from the emis-
sions trading field, who provided insightful, written contributions
and carefully reviewed the report:
Marco Aurélio dos Santos Araujo (Brazil), Jean-Yves Benoit
(Québec), Chen Zhibin (Sinocarbon), Mary Jane Coombs
(California), Matthew Cowie (New Zealand), Lynda Danquah
(Canada), Sean Donavan (Mexico), Johannes Enzmann (European
Commission), Victor Escalona (Mexico), Jason Hollett (Nova
Scotia), Huang Xiaochen (Sinocarbon), Cécile Goubet (France),
Huang Dayue (Chonqging Low Carbon Consulting), Ai Kaibu
(Japan), Sun-Yeong Kim (Republic of Korea), Marat Latypov
(Russia), Stéphane Legros (Québec), Pongvipa Lohsomboon
(Thailand), Vivian Vieira de Macedo (Brazil), Anas Maillet (France),
Akiko Miura (Tokyo Metropolitan Government), Antje Mosler
(Switzerland), Nicolas Muller (UNFCCC), Sachiko Nakamura
(Tokyo Metropolitan Government), Il-Young Oh (Republic of
Korea), Megan O’Toole (Vermont), Heather Pearson (Ontario),
Saul Pereyra (Mexico), QianGuoqiang (Sinocarbon), Huy
Luong Quang (Vietnam), Kathleen Rich (Canada), Juan Pedro
Searle (Chile), Gulmira Sergazina (Kazkahstan), William Space
(Massachusetts), SophieWenger (Switzerland), Tony Usibelli
(Washington State), Zeren Erik Yasar (Turkey), Alfred Alexandre
Yameogo (Québec), Olga Yukhymchuk (Ukraine)
The ICAP Secretariat is grateful to the German Federal Ministry
for Environment, Nature Conservation, Building and Nuclear
Safety (BMUB) for funding this report. adelphi consult GmbH
lends scientific and technical support to the ICAP Secretariat
and coordinated the compilation and production of the report.Foreword
Over the last year, policymakers working with Emissions Trading
Systems (ETS) have been steadily consolidating and improving
their systems, adapting policy to their political and economic real-
ity. At the same time, emerging systems have built upon other’s
experiences and are taking a learning-by-doing approach to build
a new generation of ETS.
Afer the international success of Paris in 2015, and the ratification
of the Paris Agreement in September 2016, climate policymakers
around the world are adjusting to the reality of the new interna-
tional climate regime. The essence of the Paris Agreement is that
Parties determine their own contribution to fight climate change,
with the overall objective of keeping global warming below 2
degrees Celsius. Paris is thus not a blueprint for success, but rather
a commitment to act and to ratchet up ambition over time. Now
that the agreement is in force, it requires implementation at home.
With this in mind, governments at all levels need tools they can
trust to drive real and verifiable emissions reductions in their own
national contexts.
One proven and cost-efficient instrument is putting a price on
carbon. Economists have long championed carbon pricing as a
simple and elegant solution to climate change as it encourages
polluters to internalize the cost of fossil fuels on the environment,
economy and wider community. In this context, the attraction of
carbon pricing through an ETS is clear: put a limit on your emis-
sions and let market forces find the most cost-efective means of
reduction. Over time, economists predicted that a unified global
carbon market would emerge, triggering the necessary invest-
ments to transition to a low-carbon economy.
However, the real world is somewhat different to textbook
assumptions. Experience has shown us the challenges of imple-
mentation in an imperfect world of unexpected political and eco-
nomic fluctuations. Policymakers have pragmatically faced these
challenges, working with stakeholders to design, test, implement
and improve measures to drive long-term change. The pioneering
EU ETS stands out in this regard, as over the last decade it has con-
tinued to evolve in response to lessons learned and new circum-
stances. With a system-wide review now underway to prepare for
its fourth phase of operation post-2020, the EU ETS continues to
set the tone for the progressive evolution of ETS policy in Europe
and around the world. Indeed, with a decade of experience and
a track record of implementation in 21 distinct systems covering
35 countries, emissions trading has now graduated from theory to
practice. In the process, a body of practical knowledge and know-
how has been gathered, which is in turn guiding the evolution of
these systems. Here are five key lessons from current practice:
1.Emissions trading needs to be integrated into
a broader climate policy mix
The cap in an ETS ensures that climate targets are met. This makes
a well-designed system highly efective in driving emissions reduc-
tions. However, experience has also shown that in order to reach
long-term climate goals, the reduction trajectory needs to be
designed to work in concert with other policies. A smart policy mix
is necessary to realize ambitious climate action. ETS can be the
central pillar of a government’s climate change framework, reduc-
ing emissions at the lowest cost. And yet, goals like leveraging
energy eficiency potentials and fostering low-carbon technologies
will require a suite of complementary policy instruments operat-
ing alongside the ETS. A well-designed ETS can work together with
these measures to drive innovation and transform energy systems.
Even where ETS is not intended to do the ‘heavy lifing’ in terms of
reducing emissions, it can also be a reliable backstop as it guaran-
tees emissions are capped at a given level. This is the case in Tokyo,
for example, where policy encouraging energy eficiency improve-
ments plays a more prominent role in driving mitigation eforts.
2.Market stability can be managed
Lower than expected carbon prices in some systems have sparked
discussions about appropriate price levels and policy goals of an
ETS — a conversation we have also taken up at ICAP last year. A
challenge that each jurisdiction must face is how to deliver policy
predictability while retaining enough flexibility to let the system
respond to changing circumstances. Tools to manage the allow-
ance market have now become good practice in ETS design, and
different systems have chosen different approaches. In the EU,
interventions such as the Market Stability Reserve target the sup-
ply of allowances, whereas North American systems have rather
focused on mechanisms controlling the allowance price. However,
in Europe there is an ongoing debate on the long term efective-
ness of the supply-based measures, and the potential benefits
of introducing a price floor are once again being examined. In a
diferent approach, the Korean ETS was designed from the outset
to have an allocation committee with considerable flexibility to
intervene to stabilize the market. Afer the first eighteen months of
operation, prices there have settled around the upper spectrum of
ETS prices. Looking ahead, the lessons these approaches yield will
also support other jurisdictions navigating this issue.
3.Auctioning revenues can amplify the benefits
of emissions trading
By the end of 2016, ETS worldwide had generated close to USD30
billion in public revenue by auctioning a share of their allowances.
Existing systems have used this revenue to amplify the mitigation
effect of the ETS by funding additional climate and energy pro-
grams, such as investing in public transport or renewable energy.
Others systems have used the money to allay concerns about
higher prices on households and broader environmental justice
3international carbon action partnership
Jean-Yves Benoit
Co-Chair of the International Carbon Action
Partnership, Steering Committee Director,
Carbon Markets Division, Québec Ministry of
Sustainable Development, Environment and
the Fight Against Climate Change
Marc Allessie
Co-Chair of the International Carbon Action
Partnership, Steering Committee
Director, Dutch Emissions Authority (NEa)
issues by helping those communities most affected by climate
change. Auctioning revenue gives governments an additional tool
to respond to the concerns and priorities of their constituents. The
visible signs of these benefits, from a new railway system to lower
energy bills, can also help build public support for ETS.
4.ETS is evolving to meet the needs of emerging economies
Possibly the most exciting developments in ETS are currently
taking place in emerging economies in Asia and Latin America.
Innovative systems are being designed that can reduce emis-
sions, limit local pollution, and transform energy systems against
the background of a growing economy. In 2017, all eyes will be
on China as it launches the world’s single largest carbon market.
China has not only learned from the international experiences of
other systems but also generated local lessons through its pilot
systems. Mexican policymakers are also considering launching a
system as early as 2018, building on an existing national carbon
tax, GHG emissions registry and a recently launched ETS simula-
tion. By adapting ETS to new circumstances, these systems will
continue to drive the evolution of ETS design in the coming years.
5.Connecting and collaborating are key
As systems continue to evolve and a new generation of ETS
emerges, international cooperation will be crucial to the carbon
pricing — and climate policy — success story. Article 6 of the Paris
Agreement sends a strong signal to carbon markets and encour-
ages Parties to cooperate to achieve their NDC targets. However, a
clear accounting framework with quantifiable targets will be cru-
cial to the success of these cooperative ventures. Progress on ETS
linking is also being made. California and Québec have operated
a common market since 2014, and the newly launched system in
Ontario intends to join this market in 2018. Saitama and Tokyo
have linked their systems, and the EU has continued to expand
its ETS membership since its inception in 2005, recently conclud-
ing linking negotiations at a technical level with Switzerland. New
regional networks are also beginning to form, such as the trilat-
eral carbon pricing dialogue among China, Korea and Japan that
involves ETS policymakers from all levels of government including
the city of Tokyo.
International dialogue and collaboration are crucial in stimulat-
ing mutual understanding and the gradual convergence of diverse
systems. In support of this process, ICAP continues to foster the
constructive exchange of ETS experience and knowledge, enabling
policymakers to benefit from the valuable lessons learned by oth-
ers, and contributing to the common understanding of emerging
ETS best practices.
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