ICAP-PMR_ETS_Handbook.pdf

A EMISSIONS TRADING IN PRACTICE EMISSIONS TRADING IN PRACTICE A HANDBOOK ON DESIGN AND IMPLEMENTATION© 2016 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW, Washington, DC 20433 Telephone 202-473-1000; Internet www.worldbank.org Some rights reserved 1 2 3 4 19 18 17 16 This work is a joint product of the staff of The World Bank and adelphi, representing the International Carbon Action Partnership ICAP, with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of cutive Directors, or the governments they represent, nor of ICAP and its members. The World Bank and adelphi do not guarantee the accuracy of the data included in this work. 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Design Corporate Visions, Inc.EMISSIONS TRADING IN PRACTICE A HANDBOOK ON DESIGN AND IMPLEMENTATION In collaboration with MotuEMISSIONS TRADING IN PRACTICE ii ACKNOWLEDGMENTS This Handbook was prepared jointly by a team of experts from Motu Economic and Public Policy Research and Environmental Defense Fund, with significant contribution from Vivid Economics. Suzi Kerr and Ruben Lubowski led the teams from Motu Economic and Public Policy Research and Environmental Defense Fund, respec- tively, which also consisted of Catherine Leining and Leah Murphy Motu and Gernot Wagner and Katherine Rittenhouse EDF. The Vivid Economics team was led by John Ward, and also included Cor Marijs and Paul Sammon. Michael Mehling Massachusetts Institute of Technology, Felix Matthes Öko-Institut, and Duan Maosheng Tsinghua University edited the Handbook, and also devoted their time and expertise to provide project guidance. Pierre Guigon World Bank, Constanze Haug and William Acworth ICAP Secretariat provided substantive s and managed the project. We also wish to acknowledge the following contributing authors Rob Fowler Essential Change Advisory Services, Jürg Füssler INFRAS, Alex Hanafi EDF, Tang Jin SinoCarbon, Joojin Kim EDF, USA, Joshua Margolis EDF, USA, Juan-Pablo Montero Pontificia Universidad Católica de Chile, Erica Morehouse EDF, Annie Petsonk EDF, and Luca Taschini London School of Economics. We sincerely thank representatives from ETS jurisdictions who shared their practical insights and knowledge related to designing and implementing ETS through meetings, interviews, and review of the Handbook. These include John Storey-Bishoff Alberta; Nicole Steinweg Australia; Edie Chang, Mary-Jane Coombs, Sean Donovan, Jason Gray, Ray Olsson, Rajinder Sahota and Mark Wenzel California; Wang Shu China; Maja Dittel, Johannes Enzmann, Hana Huzjak and Dalwon Kim European Commission; Matti Kahra Finland; Cécile Goubet, Yue Dong, Maxime Durande, Anais Maillet and Dimitar Nikov France; Maria Martin Ireland; Giulia Dramis Italy; Gulmira Sergazina Kazakhstan; Hyungsup Lee Korea; William Lamkin and Will Space Massachusetts; Erik van Andel the Netherlands; Lois New New York; Peter Gorman, Amelia Guy-Meakin, Ted Jamieson, Eva Murray, Matt Paterson, Kate Ryan and Nigel Searles New Zealand; Dag Svarstad Norway; Jonathan Beaulieu, Jean-Yves Benoit and Claude Côté Québec; Hanna-Mari Ahonen Sweden; Laurence Mortier, Reto Schafer and Sophie Wenger Switzerland; Masahiro Kimura, Sachiko Nakamura and Yuko Nishida Tokyo; Ben Rattenbury United Kingdom; and represen- tatives of the German Federal Ministry for the Environment, Nature Conservation, Building, and Nuclear Safety BMUB, the German Emissions Trading Authority DEHSt and the Spanish Office of Climate Change. We wish to acknowledge additional and peer review provided by Soffia Alarcón Diaz Mexico, Emilie Alberola Institute for Climate Economics – I4CE, Danira Baigunakova Alexander von Humboldt Foundation, Juan Carlos Belausteguigoitia Centro Mario Molina, Nicolas Bianco EDF, Hendrik Derik Broekhoff Stockholm Environment Institute, Chris Bush Energy Innovation, Yong-Sung Cho Korea University, Suh-Yong Chung Korea University, Brent Cloete DNA Economics, Brett Cohen The Green House, Frank Convery EDF, Margaret Cress EDF, Antoine Dechezleprêtre London School of Economics, Kristin Eberhard Sightline Institute, Zeren Erik Yasar Turkey, Carolyn Fischer Resources for the Future, Hubert Fallmann Umweltbundesamt, Dirk Forrister IETA, Meredith Fowlie University of California, Berkeley, Alexander Golub EDF and American University, Quentin Grafton Australian National University, Sonia Hamel Hamel Environmental Consulting, Anthea Harris Victorian Government, Australia, Takashi Hongo Mitsui Global Strategic Studies, Max Horstink SouthSouthNorth, Yu-Shim Jeong Korean Foundation for Quality, Republic of Korea, Cui Jing Baosteel, Nathaniel Keohane EDF, Seong-il Kim Seoul National University, Yong-Gun Kim Korea Environment Institute, Xavier Labandeira University of Vigo, Sang Youp Lee Korea Environment Institute, Franz Litz Great Plains Institute, Andreas Löschel University of Muenster, Diptiranjan Mahapatra Adani Institute of Infrastructure Management, Claudio Marcantonini European University Institute, Andrei Marcu Centre for European Policy Studies, Ralf Martin London School of Economics, Brian Murray Duke University, Michael O’Brien EDF, Hyungna Oh Kyung Hee University, Robert Parkhurst EDF, Billy Pizer Duke University, Misato Sato London School of Economics, Jonathan Schrag EDF, PR Shukla Indian Institute of Management, Thomas Sterner EDF, Collège de France and University of Gothenburg, Jan-Willem van de Ven European Bank for Reconstruction and Development, Stacy VanDeveer University of New Hampshire, Derek Walker EDF, Bryony Worthington EDF, Libo Wu Fudan University, Matthew Zaragoza-Watkins EDF, Xiliang Zhang Tsinghua University. We wish to thank the following for research assistance Margaret Cress, Rafael Grillo, Michael O’Brien, and Nicolas Taconet EDF, USA and Iurii Banshchikov ICAP Secretariat. We wish to thank the follow- ing for additional editorial assistance Anna Brinsmade, Daniel Francis, Dana Miller, and Elizabeth Petykowski EDF, Stephanie Gleissner and Charlotte Unger ICAP Secretariat, and Inge Pakulski. We thank our colleagues from the World Bank Group and the ICAP Secretariat who reviewed the report and provided helpful and feedback Adrien de Bassompierre, Pauline Maree Kennedy, Tom Kerr, Michael McCormick, Maja Murisic, Grzegorz Peszko, and Bianca Ingrid Sylvester World Bank, and Alexander Eden, Michel Frerk, Aki Kachi, Lina Li, Marissa Santikarn, Camille Serre, Kateryna Stelmakh, and Kristian Wilkening ICAP Secretariat. ICAP staff also provided significant research and illustrations. ICAP would also like to thank the BMUB for their financial contribu- tion to this report.iii CONTENTS CONTENTS SYNTHESiS – Emissions Trading Bringing It All Together 1 Why Emissions Trading ____________________________________________________________________ 2 Emissions Trading or Carbon Tax ____________________________________________________________ 3 How Does an ETS Work ____________________________________________________________________ 3 Laying the Foundation for an ETS ____________________________________________________________ 4 Setting ETS objectives __________________________________________________________________ 4 Tailoring an ETS to local circumstances ____________________________________________________ 4 Managing policy interactions ____________________________________________________________ 4 ETS Design in 10 Steps ______________________________________________________________________ 5 Step 1 Decide the scope ________________________________________________________________ 6 Step 2 Set the cap _____________________________________________________________________ 7 Step 3 Distribute allowances ____________________________________________________________ 7 Step 4 Consider the use of offsets _______________________________________________________ 8 Step 5 Decide on temporal flexibility _____________________________________________________ 9 Step 6 Address price predictability and cost containment ___________________________________ 9 Step 7 Ensure compliance and oversight _________________________________________________ 10 Step 8 Engage stakeholders, communicate, and build capacities ____________________________ 10 Step 9 Consider linking ________________________________________________________________ 11 Step 10 Implement, uate, and improve _______________________________________________ 12 Applying the 10 Steps of ETS Design in Practice _______________________________________________ 12 Shaping the Future of ETS Design ___________________________________________________________ 13 BEFORE YOU BEGiN 15 Understanding Emissions Trading ___________________________________________________________ 16 Why emissions trading ________________________________________________________________ 16 How does an ETS work _______________________________________________________________ 16 ETS design in 10 steps _________________________________________________________________ 16 Extensive experience with emissions trading ______________________________________________ 17 Determining Objectives for the ETS __________________________________________________________ 18 Reducing GHG emissions at low cost _____________________________________________________ 18 Driving economic transation and sustainable development _____________________________ 19 Reducing air pollution, improving health, and providing other co-benefits _____________________ 20 Raising revenue _______________________________________________________________________ 20 Keys to Effective ETS Design ________________________________________________________________ 21 Considering Interactions between an ETS and Other Policies ____________________________________ 22 Positioning the ETS relative to other policies ______________________________________________ 22 Understanding policy interactions that will affect the outcomes achieved by the ETS ___________ 22 Understanding how the ETS may influence the attainment of other policy objectives ___________ 23 Understanding where complementary policies might be needed _____________________________ 24 Maintaining policy alignment over time __________________________________________________ 25 Emissions Trading and Economics A Primer___________________________________________________ 25 Increasing marginal abatement cost curves _______________________________________________ 25 A two-company example _______________________________________________________________ 25 Regulating prices versus quantities ______________________________________________________ 26 Quick Quiz _______________________________________________________________________________ 28EMISSIONS TRADING IN PRACTICE iv STEP 1 Decide the Scope 29 At a Glance_______________________________________________________________________________ 30 1. Introduction ___________________________________________________________________________ 31 2. Scope Design __________________________________________________________________________ 31 2.1 Sector and gas coverage ___________________________________________________________ 32 2.2 Point of regulation ________________________________________________________________ 33 2.3 Thresholds _______________________________________________________________________ 35 2.4 Level of reporting obligation ________________________________________________________ 36 2.5 Summary ________________________________________________________________________ 36 3. Scope Considerations in Practice __________________________________________________________ 37 3.1 Electricity generation ______________________________________________________________ 37 3.2 Industry _________________________________________________________________________ 38 3.3 Transport ________________________________________________________________________ 38 3.4 Waste ___________________________________________________________________________ 40 3.5 Land use-related activities _________________________________________________________ 40 Quick Quiz ________________________________________________________________________