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Joint EU-China conference “Tackling Greenhouse Gas Emissions From pilots to nation-wide emission trading in China”, Beijing, 4 February 2015 1 | P a g e Briefing paper for Workshop 2 “Low carbon, high value growth the longer term role of carbon markets” Introduction Good policy design and frameworks will be essential in achieving a low carbon transition. Authorities will need to work in conjunction with industry and society to achieve a low carbon transition and it is increasingly becoming clear that businesses planning future investments welcome clear signals, incentives and stability for the transition. A market based framework establishing a clear carbon price – a price that is low at first but expected to rise in the longer term – can provide this framework and encourage innovation and rapid acceleration of investment in low-carbon technologies, if carefully designed. This briefing paper is aiming to provide context and insights to trigger discussions on the potential role of carbon markets for low carbon, high-value growth. It provides the political context for both Europe and China and, based on experience with the EU ETS, is identifying some important lessons learned for enhancing low carbon action in regulated industries through emissions trading. It concludes with questions for discussion and an outline of key literature on the subject. EU Policy background EU leaders have committed to transing Europe into a highly energy-efficient, low carbon economy. The EU has set itself targets for reducing its greenhouse gas emissions progressively up to 2050 by at least 80 compared to 1990 and is working successfully towards meeting them. For 2020, the EU has committed to cutting its emissions to 20 below 1990 levels. This commitment is one of the headline targets of the Europe 2020 growth strategy and is being implemented through a package of binding legislation. In the Climate and Energy Policy Framework for 2030, EU leaders committed to a domestic 2030 greenhouse gas reduction target of at least 40 compared to 1990. This aims to make the European Union s economy and energy system more competitive, secure and sustainable and also sets a target of at least 27 for renewable energy and energy savings by 2030. For 2050, EU leaders have endorsed the objective of reducing Europe s greenhouse gas emissions by 80-95 compared to 1990 levels. The European Commission has published a roadmap for building the low-carbon European economy that this will require1. The EU Emissions Trading System EU ETS is a cornerstone of the European Union s policy to combat climate change and its key tool for reducing industrial greenhouse gas emissions cost-effectively. The first - and still by far the biggest - international system for trading greenhouse gas emission GHG allowances, the EU ETS covers more than 11,000 power stations and industrial plants in 31 countries, as well as airlines2. The installations regulated by the EU ETS are collectively responsible for close to half of the EU s emissions of CO2 and 45 of its total greenhouse gas emissions3. 1 http//ec.europa.eu/clima/policies/roadmap/index_en.htm 2 http//ec.europa.eu/clima/policies/ets/index_en.htm 3 Ibid. Joint EU-China conference “Tackling Greenhouse Gas Emissions From pilots to nation-wide emission trading in China”, Beijing, 4 February 2015 2 | P a g e For the European Union not only the carbon pricing element is of key importance. With the introduction of large-scale auctions from 2013 onwards the targeted recycling of revenues from auctions play a significant role for Europe’s climate and energy objectives. A certain share of auctioning revenues is channeled directly to technology support e.g. the NER 300, furthermore the member states shall direct at least 50of the auctioning revenues to climate policy purposes in the national and international framework. China policy background In recent years, rapid industrialisation, intensified agricultural production and urbanisation in the People s Republic of China has brought greater prosperity and higher living standards to many, but it has also created high demand for energy and raw materials, increased pressure on ecosystems and affected health outcomes. China is committed to achieving a green economy. In the 12th Five-Year Plan 2011-2015, the seven major targets for 2015 are reducing pollutant emissions; improving drinking water sources and quality; controlling pollution caused by hazardous chemicals and dangerous wastes; improving urban environmental infrastructure operations; reversing ecological deterioration; improving nuclear safety; and enhancing environmental regulatory institutions. Climate related goals include reducing carbon emissions per unit of GDP by 17 and energy consumption per unit of GDP by 164. China is also going to realize its 40-45 carbon intensity reduction commitment by the end of the next Five-Year Plan 2016-2020. The Chinese government is addressing climate change as an important chance for transation to green and low carbon economy. China has recently announced that it intends to peak CO2 emissions by 2030 and to increase the share of non-fossil fuels in primary energy consumption to around 20 by 20305. China sees the introduction of a national emissions trading system ETS from 2016 onwards as an efficient and lower-cost approach for addressing climate change. The implementation of the seven emissions trading pilots in China that started operation from 2013 is providing the ground for a national system, relying on markets to deliver emission reductions at scale. These pilots cover a population of 230 million, 25 percent of the national GDP, and 10 percent of total GHG emissions about 800 million tCO2e per year6. With the plan of building a national ETS China supports the idea that emission reductions at such a large scale require a market mechanism if they are to be achieved efficiently. The potential role of carbon markets in the low carbon transition Given China’s and Europe’s political commitment to the decarbonisation of their economies and the use of carbon markets to help achieving the latter, it is important to understand how carbon markets can influence longer term investment and innovation decisions of companies and can trigger strategic change on the board level to make business competitive on the global market. 4 http//www.oecd.org/china/greengrowthinactionchina.htm 5 http//www.whitehouse.gov/the-press-office/2014/11/11/us-china-joint-announcement-climate-change 6 http//blogs.worldbank.org/climatechange/racing-competitive-economy-china-pursues-high-gdp-low-carbon-growth Joint EU-China conference “Tackling Greenhouse Gas Emissions From pilots to nation-wide emission trading in China”, Beijing, 4 February 2015 3 | P a g e Based on the economic theory behind a cap-and-trade approach, emission reduction benefits of an ETS extend beyond the individual facility and can encourage low carbon high-value growth domestically and internationally if thoughtfully designed. Some of the key issues relevant here include Effects on low carbon, high growth due to carbon price o An economy wide cap determines the carbon price which incentivizes low carbon intensity production in directly affected sectors and indirectly affected sectors this could e.g. include consumers of energy and products from directly affected sectors, if costs are passed through. It is hence important to keep a tight cap and to enable flexibility in adjusting the cap to deal appropriately with foreseeable changes in economic growth. o Long term price expectations are important for business decision making. Businesses require predictability to transition their production modes and products to low carbon. This can be achieved, among other things, through relatively long trading periods, but also through credible, long-term emission targets. In a macroeconomic and policy environment that is characterised by significant and increasing uncertainties, other provisions of an ETS might be also important e.g. the Market Stability Reserve of the EU ETS o Allocation of allowances determines which enterprises are incentivized. Under free allocation, benchmark based allocation rewards enterprises that took early action to reduce carbon emissions, whereas the grandfathering allocation does not. Support for new and low carbon technologies o Support to low carbon development in industry, low carbon energy systems, renewable energy and longer term climate mitigation technologies e.g. CCS can come through the use of revenues from allowances. An example for such a fund is the EU ETS NER 300 Scheme. Revenues from selling the 300 million emission allowances from the new entrants reserve NER from Phase III of the EU ETS, which is approximately 5 of the total allowances in Phase III, are used to fund the EU programme on clean and innovative technologies - NER300. NER300 is one of the world s largest funding programmes for innovative low-carbon energy demonstration projects. The programme is designed to demonstrate the best possible carbon capture and storage CCS and innovative renewable energy RES technology projects on a commercial scale within the European Union. It is planned to further expand this programme in Phase IV of the Scheme. o Also, a New Entrants Reserve, a set aside of EU allowances reserved for new operators or existing operators who have significantly increased capacity, can encourage new entrants, which are typically operating on lower emissions levels than existing installations Achieving low carbon, high-value growth in the long term o Regular uation and refinement of the ETS Building in review stages for the scheme development to allow for reflection on perance and opportunities for improvement are crucial to target low carbon growth and investment were possible. o Linking setting up ETSs so they are suitable for linking with other schemes in the future e.g. via adoption of international best practice will support longer term development of a global carbon Joint EU-China conference “Tackling Greenhouse Gas Emissions From pilots to nation-wide emission trading in China”, Beijing, 4 February 2015 4 | P a g e market so that more cost effective abatement solutions and a more level playing field will be created. Lessons from the EU ETS A recent review of the existing literature suggests that the ETS has resulted in emission abatement but did not show a major impact on firms’ innovation and investment behaviour towards low-carbon technologies, due to its low carbon price in recent years, triggered by the economic crisis of 2008/097 8 9 10. Instead, the main impetus for investments and innovation into low carbon solutions came from the need for companies to reduce energy and raw material costs and their broader strategic turns toward sustainable production, based on increasing environmental awareness of stakeholders and consumer markets. Nevertheless, a closer look at the company level indicates the ETS playing a supportive role in many companies’ considerations to move to lower carbon production processes. A recent study conducted by ICF and partners11 on the impact of the EU ETS on investment and operational decisions of companies regulated under the scheme highlights the positive incentives the EU ETS has provided12. A summary of company case studies these is provided below. Box 1.1 EU ETS benefits for enhancing low carbon action Benefits of the EU ETS in enhancing low carbon action – a company perspective ETS benefits highlighted by companies can be summarised as follows ■ The EU ETS offers compliance flexibility and emissions can be managed and reduced at a fairly modest cost. ■ Tighter emission caps, and in particular the new allocation rules within the ETS taking into account sectoral benchmarks, provide a direct competitive advantage to more efficient operators, and thus, represent an additional driver to improve energy efficiency in their operations. ■ Some companies that were driven by the ETS in its early years took decisions to invest in low carbon processes which now provide them with a competitive advantage on the global markets. ■ New GHG emissions reductions mechanisms e.g. such as CDM, NAMAs and new trading markets are perceived as an opportunity by some to minimise costs and to spur innovation on the global market. 7 Assessing the effectiveness of the EU Emissions Trading System - http//www.cccep.ac.uk/Publications/Working-papers/Papers/120-129/WP126-effectiveness-eu-emissions-trading-system.pdf 8 Laing, T; Sato, M; Grubb M, Comberti C 2013 Assessing the effectiveness of the EU Emissions Trading Scheme, Centre for Climate Change Economics and Policy 9 Working Paper No. 126; Neuhoff K 2011 “Carbon Pricing for Low carbon Investment cutive Summary” Climate Policy Initiative and Climate Strategies 10 Rogge, K. S., J. Schleich, et al. 2011 The role of the regulatory framework for innovation activities the EU ETS and the German paper industry. International Journal of Technology, Policy Management 113/4 250-273 11 SQ Consult, CE Delft and the Centre for European Economic Research ZEW 12 Study on the Impacts on Low carbon Actions and Investments of the Installations Falling Under the EU Emission Trading System EU ETS, European Commission, DG Clima Joint EU-China conference “Tackling Greenhouse Gas Emissions From pilots to nation-wide emission trading in China”, Beijing, 4 February 2015 5 | P a g e ■ EU ETS has played an important role in making low carbon investments more financially viable. In most cases, the need for the investments has been instigated by other drivers such as cost reductions or sustainability objectives but the EU ETS through valuing of carbon provided the additional income source to make the investments feasible. ■ Similarly the EU ETS is seen as a supporting factor in companies’ considerations to turn to more energy efficient production routes and has created attention for those concerns in company boardrooms. ■ Furthermore many companies mention the fact that obligations under the EU ETS lead to investments in additional capacities for monitoring, reporting and verification MRV of emissions and hence to more understanding on the issues and potentials for emissions reductions. Conclusions The above considerations and insights point to some important lessons learned for enhancing low carbon action via emissions trading schemes Companies and financial intermediaries need a sufficiently tight cap and longer term perspective and planning security regarding carbon pricing and the design and implementation of the scheme to invest in low carbon technologies and to support innovation in this field. It will be important for governments to provide this stability, insofar as is possible, and to set a sufficiently tight cap for companies to maintain and enhanc
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