This week, the European Commission released new data on the number and origin of carbon offsets used in 2014 by companies in the EU’s carbon market. Despite new eligibility criteria to incentivize investments in poor countries, the majority of offsets come from China, Ukraine and Russia. Moreover, lack of transparency gives a carte blanche to companies to choose projects with negative environmental and social impacts. As policies for large scale mitigation investments are currently being designed, these findings can provide valuable lessons.
As the EU and Switzerland are about to conclude the technical negotiations to link the EU and Swiss carbon markets in the coming months, a new policy brief and report by Carbon Market Watch show that the EU must increase its climate target to avoid diluting domestic emission reduction obligations with foreign allowances from the Swiss carbon market.
6 May 2015, Brussels. European policymakers provisionally agreed to start implementing the reform of the EU’s Emissions Trading System on 1 January 2019 and put the pollution permits that were due to come back to the market by 2020 directly into the new Market Stability Reserve. Carbon Market Watch welcomes this first step to fix the EU’s carbon market but cautions that the upcoming revision of the EU ETS will need to permanently tackle the glut of pollution permits.
5 May 2015, Brussels. As the EU and Switzerland are about to conclude negotiations to link the EU and the Swiss carbon markets, a new report shows that benefits of linking carbon markets may be outweighed by the risks, such as reduced overall emissions abatement, lower domestic investments and co-benefits as well as a loss of public funds. The report also finds concerns about public participation and transparency provisions and provides recommendations for the EU ETS revision.
The number of regions and countries that are putting a price on carbon pollution is vastly increasing. Nearly 40 countries already price carbon or plan to do so, including China that will roll out a national carbon market from 2016 onwards. Linking these different carbon markets is being envisaged by several European policymakers.
Jurisdictions with carbon markets currently account for about 40% of global economic activity (GDP)[1]. Linking these different carbon markets with the ultimate goal of establishing a global carbon market is seen as an integral part of the future climate regime, since it can increase the pool of mitigation options available, thereby reducing costs and allowing countries to increase their climate ambition. These benefits however only materialize if the linked carbon markets have a similar level of ambition and a similar design of a number of key features, such as price controls, quantitative and qualitative restrictions on carbon offsets, and the type of allocation method used. Paradoxically, while lower abatement costs are an important economic motive for linking two emission trading systems, they can also constitute a significant political barrier, since citizens of the higher cost system might be reluctant to pay for emission reductions in the other jurisdiction.
The number of regions and countries that are putting a price on carbon pollution is vastly increasing. China, for example, announced that it will roll-out a national carbon market from 2016 onwards, South-Korea’s national cap-and-trade system started early 2015 and South Africa will implement a carbon tax from 2016.
The role carbon markets will play in a future climate treaty to be adopted by the end of this year is still unclear. Yet, several countries and regions, such as Japan and the European Union (EU), see an important role for international carbon markets.
The EU’s carbon market desperately needs to get rid of excess weight if it is to perform as an effective climate change fighting tool in the future. The task of providing a way to do this – for example by permanently cancelling the current oversupply of more than two billions tonnes of CO2 – is now up to the European Commission when presenting its plans to revise the EU’s emissions trading system (ETS) by mid-2015.
On 24 October 2014, the European Council agreed on the 2030 framework for climate and energy [1], including a binding domestic target for reducing greenhouse gas (GHG) emissions of at least 40% in 2030 as compared to 1990. To meet this target, the European Council agreed that the emissions in the EU Emission Trading System should be reduced, compared to 2005, by 43%. A reformed EU ETS remains the main instrument to achieve the emission reduction target. The cap will decline based on an annual linear reduction factor of 2.2% (instead of the current 1.74%) from 2021 onwards, to achieve the necessary emission reductions in the EU ETS. The European Council furthermore gave strategic guidance on several issues regarding the implementation of the emission reduction target, namely free allocation to industry, the establishment of a modernisation and an innovation fund, optional free allocation of allowances to modernise electricity generation in some Member States.
