The ICAP Status Report 2018 clearly shows that emissions trading systems (ETS) have established themselves worldwide as a core instrument of climate protection. More and more countries are using ETS in order to meet their goals under the Paris Climate Agreement. New important carbon markets were created in 2017 while many of the already established systems were reformed and linked with one another.
In our interview, Constanze Haug, Senior Project Manager at adelphi and Head of the Secretariat of the International Carbon Action Partnership (ICAP), reveals the highlights in emissions trading in the first year that the Paris Agreement has come into effect and points us to the future of emissions trading.
On Tuesday, EU Environment Ministers gave the go-ahead for the reform of European emissions trading. How do you rate the reform of the EU-ETS?
Constanze Haug: With the EU ETS reform, the EU has decided on a path to a binding reduction by the industry and energy sectors by 2030. At the same time, it addressed the problem of the backlog of certificates in the market. This sends an important signal, to which the market has already reacted with rising prices - the result being that the price per tonne of CO2 has reached its highest level in six years, at more than ten Euros.
The chances have increased significantly that emissions trading in the European Union can once again have a real steering effect. At the same time, discussion continues on whether the adopted reforms go far enough or whether further measures, such as a minimum price for carbon, are needed. At EU level, a minimum price is unlikely to be approved, but a "coalition of the willing" from several progressive EU member states, including Germany, could possibly lead the way here.
In the medium term, the logic of the Paris Climate Agreement also requires that the goals of climate policy be consistently topped over the next few years. Emissions trading will also have to make its contribution here. That is the great challenge of the next years!
What were the main developments in the field of emissions trading in 2017?
Constanze Haug: Important new emission trading systems were introduced in 2017 while existing systems were further developed. Over the last year; Europe, systems in California and the US East Coast, and New Zealand implemented fundamental reforms to make their ETS ready to meet the 2020 climate goals.
One of the key lessons learned from more than ten years of emissions trading was, among other things, that instruments such as minimum prices or certificate reserves are needed to ensure a stable CO2 price signal in the face of considerable uncertainties in the development of emissions. In all systems, CO2 prices rose following the reform decisions – perhaps not to the extent that climate protectors would like, but the direction is the right one.
"If the world's largest CO2 emitter bets on emissions trading, that's an important vote of confidence"
At the same time, the introduction of new carbon markets has led to a proliferation of CO2 pricing worldwide. Thanks to the Paris Agreement, which requires binding commitments on climate policy from its signatories, interest in emissions trading has risen sharply, even in developing and emerging countries. The most important new player is probably China. The announcement by the Chinese government to introduce an emissions trading system for the electricity sector sends out an important message: if the world's largest CO2 emitter will place its bet on emissions trading, this is an important vote of confidence in the instrument.
In Latin America, efforts to develop CO2 trading systems are also making progress. Mexico is planning to launch an ETS in 2018. In the long term, the country aims to develop a regional carbon market on the American continent. This would mean that Latin America would follow a broader trend: larger markets are more efficient, and as a result more and more links are being created between different systems.
The Canadian province of Ontario has already linked its ETS to California and Quebec. In addition, negotiations between the EU and Switzerland on a common carbon market were completed in 2017. The creation of common markets not only contributes significantly to the stabilization of CO2 trading, but is above all a strong political symbol.
What does this mean for the future of global emissions trading?
Constanze Haug: Recent developments in the global emissions market clearly show that emissions trading systems are a key element to fulfilling the objectives of the Paris Agreement. We can expect that more and more national and subnational governments will introduce carbon markets in the future and link their systems more closely to other countries' ETS. In the long run, regional ETS hubs could emerge on the different continents - which in turn would form the basis for a global carbon market.
What are the success factors for a functioning emissions trading system?
Constanze Haug: On the one hand, setting an ambitious emissions cap and creating a long-term reduction path will create a real incentive for emission reductions in addition to a long-term effective investment signal. At the same time, however, a system must also allow flexibility in order to be able to readjust if necessary.
Regular reviews provide the opportunity to adapt an ETS to new developments. Last but not least, the implementation of the system must be robust, with independently verified emissions reporting, a functioning trading centre, and consistent penalties against violations.
The latter is likely to pose significant challenges for the next generation of emissions trading systems. ETS pioneers in the EU and North America, as well as organizations such as the World Bank are in demand as they can help build local capacity. Forums such as ICAP can also make a significant contribution to exchanging experiences and, ultimately, to international policy learning.
What is adelphis role at ICAP?
Constanze Haug: adelphi has supported ICAP since its founding in 2007. We are the institutional backbone of ICAP and have contributed significantly to the further development of this international forum. We provide the staff for the Secretariat and shape its strategic direction, facilitate the dialogue between the international government representatives, and analyse current developments in the carbon market. Over the years, ICAP has established itself as a knowledge hub around the issue of emissions trading. Our role has changed accordingly from a facilitator role to an expert one with a broad overview of worldwide emissions trading.
The ICAP Status Report is published annually and features contributions from policymakers and carbon market experts on recent trends and perspectives on worldwide emissions trading. The report, as well as abstracts in Chinese, English and Spanish, info graphics and a short video, can be found on our website: https://icapcarbonaction.com/en/status-report-2018
ICAP is a multilateral coalition, currently with 35 national and sub-national governments and agencies, where government representatives exchange comprehensive knowledge and experience on the establishment and operation of emissions trading systems (ETS).
The ICAP-ETS Handbook, published in collaboration with the World Bank, provides a practical guide to implementing ETS based on a decade of experience in worldwide emissions trading.