Carbon Market 2.1? Networks and the riddle of fair and ambitious climate cooperation (Alan D. Lee, Feb 2016)

Carbon Markets 2.1?Networks and the riddle of fair and ambitious climate cooperation

Alan D. Lee 李云书Presentation to the Beijing Energy Network 2016.02.03

Title of Presentation 2

The slides are made available for the reference of those who attended the presentation, and are not intended as a stand alone document.

The slides contain findings of various studies which are best considered in context. See the last slide for a bibliography.

The information in these slides does not necessarily represent the views of the World Bank Group or any other organization.

Overview


Networks…1. Good reasons to link carbon policies ($+)2. Linking is limited by diversity and by design3. Consider different ways to build and manage links

…and the riddle of fair and ambitious climate change4. Assessing relative contributions is key to linking5. Assessments face technical and social constraints6. Consider how to build transparency and trust


Why the interest in carbon markets?“Immediate pro-poor, emissions-reduction

policies can drastically limit long-term climate change impacts”

5

International cooperation can reduce overall costs of achieving climate stabilization goal by 10–70%

Source: Kossoy et al. 2015 based on Hof et al. 2012

Explicit carbon pricing instruments are proliferating

Source: Kossoy et al. 2015

With China’s national ETS, pricing policies will extend to one-fifth of global emissions



Overview




Instruments vary widely in type and scope


10

Linkage faces many challenges

• Technical differences• Policy and political differences

• How many offsets are OK? e.g. 8%• How many allowances are OK? e.g. no ‘hot air’• What kind of offsets? HFCs, N20, CCS• Other criteria: ‘sustainable development’




Many lessons from linkage experience to date

Source: Prag, Briner and Hood, 2012

Paris Agreement: Article 6 on cooperation

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6.1Recognizes all kinds of NDC cooperation

6.2-6.3Any internationally transferred mitigation outcome

(ITMO) must be consistent with central guidance

6.4-6.7Central authority supervises mechanism to mitigate GHGs and support sustainable development (SDM)

6.8-6.9Framework for non-market approaches

NDC = Nationally Determined Contribution. ‘SDM’’ is one possible acronym for the 6.4 mechanism.

16

Kyoto 1997 to Paris 2015: three key differences

Kyoto Protocol Paris AgreementWho has to contribute to mitigation?

Higher-income countries (but US not a party)

All countries (according to principles of fairness)

How do countries cooperate to mitigate?

Centrally-defined markets, with mechanism for offsets from lower income countries (CDM)

No mention of ‘market’, but Article 6 provides a hook for existing and new markets to count, with more or less light role for central body.

What happenes if targets are not met?

Penalty units supposed to carry to future commitment. (Canada withdrew)

No particular penalty. Facilitate committee of experts (name and shame?)

Overview




Cooperation takes many forms

Offsets Tax

Trade scheme

Trade scheme

Tax

eg. Assigned allocations among EU member states in Kyoto Protocol

e.g. Certified Emissions Reductions under the Kyoto Protocol Trading allowances used for compliance

in place of tax payments, and vice versa.

Offsets used in place of tax payments (e.g. CERs in Mexico)

Cross-border tax harmonization

19

Bridges and gates to build and manage links• Entry criteria (scheme-level) e.g. ‘Trading ready’ plans

under US Clean Power Plan -> see spare slides• Full linking• Qualitative limits (what kind of units)• Quantitative limits (how many units)

• Absolute # or relative %• Entity or scheme-level

• Discounting• Risk-based• Mitigation value

‘Networking’: Accept differences in design and ambition of instruments. Seek to facilitate trade by assigning a value to these differences.

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Innovating and building readiness for carbon pricing

Enabling scale-up of carbon pricing efforts for a meaningful price on carbon

Enabling connectivity of carbon pricing efforts for a long-term, stable price on carbon

Partnership for Market Readiness; Pilot Auction Facility

Carbon Partnership Facility; Pilot Auction Facility, Partnership for Market Readiness; TCAF

Promoting the case and evidence base for carbon pricinge.g., Carbon Pricing Leadership Coalition; State and Trends of Carbon Pricing reports

Planning, design, pilots

Implementation, scale-up

Connectivity, global trade

Networked Carbon Markets

The Networked Carbon Markets initiative is a key component of the WBG’s long term carbon pricing efforts

Key components of Networked Carbon Markets

1

3

2

Independent assessment framework to determine the climate change mitigation value of different climate actions and enable their fungibility in the international market.

International Carbon Asset Reserve to support and facilitate carbon market related functions.

International Settlement Platform to track cross-border trades and possible clearing house function.

Key components of Networked Carbon Markets

The Networked Carbon Markets initiative is collaborating with a wide range of partners to progress its technical and analytical work plan

Networked Carbon Markets

– PARTNERS

Independent Assessment FrameworkPartners:

DNV, IISD, New Climate Institute,

Climate Transparency

General Principles to guide carbon asset

assessmentPartners: Observer to ISO Climate Change

Standards Committee.

International Carbon Asset Reserve

Partners: INFRAS, Grantham Institute.

Concept DevelopmentPartners:

* ‘NCM and its compatibility with a future

UNFCCC regime’ (Marcu)

* ‘Comparison and Linkage of Climate

Mitigation Efforts in a New Paris Regime’

(Harvard/IETA) * Achieving compatibility and synergy between the

NCM initiative and Climate Clubs (Climate

Strategies)* ‘A model for NCM based on the key

elements and principles of Comparative Markets’

(Macinante)* ‘Options for

Operationalizing a Carbon Trading Ratio Mechanism’ (Austin)

* ‘Enabling Comparability of heterogeneous Emissions Trading

Systems – Caps, MRV frameworks and non-compliance penalties’

(Munnings)

Private sector outreachPartners: Climate

Markets and Investment Association (CMIA).

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Objectives of the Assessment Framework

Develop a mechanism for comprehensive

assessment of GHG mitigation actions

Establish a common framework to screen, evaluate and compare

different mitigation programs

Provide confidence to donors/investors on

viability and level of risk of different mitigation

programs

Facilitate benchmarking and identify areas for

continuous improvement

Three different ways to value a carbon asset(equivalent to one ‘ton’)

Compliance value

Financial value

Mitigation value

• Refers to relative value of a carbon asset in context of associated programs, policies, pledges

• Does not refer to atmospheric impact of physical tons of CO2

Perspective 1 of MV: Fairness of mitigation effort

• Defined as the value society attaches to the effort to reduce a unit in terms of what society thinks the jurisdiction should do to address climate change

• In this case, MV can be a function of a number of factors:

• The level of effort that is promised and undertaken• Characteristics of the economy • Characteristics of the emission reduction program or

activity• Resources available to dedicate to mitigation efforts• Capacity to undertake mitigation efforts

Perspective 2 of MV: Risk of mitigation effort

Mitigation value

PROGRAM LEVEL: Risk relating to the

characteristics of a specific program

POLICY LEVEL: Risk relating to the

characteristics of a jurisdiction’s

collective low-carbon policies

PLEDGE LEVEL:Risk relating to the characteristics of a

jurisdiction’s contribution to

addressing global climate change

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Mitigation Actions Assessment ProtocolModules and module areas

Mitigation Action Program

Definition & Scope

Objectives & Targets

Planning

Roles, Responsibilities & Authorities

Barriers

Emissions reduction from

InterventionMonitoring and

Reporting

Mitigation Action Management Entity

Management Framework

Financial and Investment

Capacity Framework

Climate Change

Programs Management

Investment Environment

Economic and political environment

Climate Change Capacity

Ambition Index(jurisdiction level)

Level of ambition

Alignment and focus

Development Benefits

Sustainable Development Objectives &

Targets

Planning & Participation

Monitoring of Sustainable

Development

Environmental Integrity

Mitigation Value

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Module Rating Area Weight # Key Indicators

1. Mitigation Action Program

Definition & Scope 14% 5Objectives & Targets 20% 4Planning 22% 7Roles, Responsibilities & Authorities 7% 5

Barriers 7% 1Emissions Reductions from Interventions 20% 7Monitoring & Reporting 10% 3

2. Mitigation Action Management Entity

Management Framework 30% 2

Financial & Investment Capacity Framework 33% 3Climate Change Program Management 37% 3

3. Investment Environment

Internationally Recognized Country Ratings 45% 4Climate change infrastructure: program level 55% 4

4. Development Benefits

Sustainable Dev. Objectives & Targets 35% 7Planning and Participation 45% 8Monitoring of Sustainable Development 20% 6

Mitigation Actions Assessment ProtocolExample: Weighting of Rating AreasPilot in Peru

Mitigation Actions Assessment ProtocolExample: Module – Evaluation Areas

Definition & Scope

Objectives and Targets

Planning

Roles, Responsibilities and AuthoritiesBarriers

Emissions Reductions from Interventions

Monitoring and Reporting

0

20

40

Mitigation Action Program Module

max scorescore

Overview




Source: Kossoy et al. 2015 based on LIMIT database

Distribution of effort affects finance flowsin size and direction, for some regions

Distribution of effort affects finance flowsin size and direction, for some regions

Source: Kossoy et al. 2015 based on LIMIT database

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Who assesses asset value for linkage?

• Unilateral (complete bottom-up)• Bilateral (pairs) e.g. California & Quebec• Plurilateral (clubs) e.g. EU; RGGI in US• Multilateral (top-down)

• Guidance -> Paris Agreement 6.2 ITMO• Control -> Paris Agreement 6.4 SDM

• Third party (or parties)?• Independent• Multi-stakeholder governance

Transparency, legitimacy, credibility all important

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NDC assessment: key approaches and examples

Collective adequacy

• UNFCCC INDC Synthesis Report

• UNEP Emissions Gap Report

Individual adequacy

• Climate Action Tracker• ‘Mitigation Contribution'• PwC’s Low Carbon Energy Index

NDC assessment approaches

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How to calibrate contributions to the global goal and to each other?

Paris Agreement provides for: • 2: Temperature goal• 4: Stronger NDCs every five years• 13: Transparency framework• 14: Stocktake every five years• 15: Compliance committee

Overview




What is fair?

World Development 2015:Mind, Society and Behavior

Would a veil of ignorance change individuals’ beliefs

on the fair distributional

burden of mitigating climate

change?

Carnegie Mellon University, Pittsburgh

Renmin University, Beijing

An experiment• One party is richer but growing reasonably

slowly• The other party is poorer, but growing

quite quickly• In order to solve a common environmental

problem, each party must take actions that lower their income growth

• How much of a burden should each party take on?

Country A

(1)

(2) Country B

An experiment

Percent of burden on China?

(1)

42 percent

26 percent

Country A(2) Country B

Percent of burden on China?

34 percent

34 percent

How much does this affect agreement?

When veil is removed Under "veil of ignorance"0

0.2

0.4

0.6

0.8

1

0.54

0.95

Overview

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China and US: unprecedented ‘pairing’

Hart et al. 2015

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49

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Five equity scenarios

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Equity-based assessment tools test sensitivity of different fair share scenarios

CHINA

USA

(Source: mitigation-contribution.org, 2015)

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If all countries were to follow

China, with some 35% increase of emisisons until 2030 over 2010,

then global emissions would

increase by a third. (Source: mitigation-contribution.org, 2015)

Self-selection of preferred allocation approach

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China would have to reduce its

emissions by about a third, rather than increase by a third,

in order to be a 'leading example'

for other countries and put the world

on a 2°C track.

‘Diversity-Aware Leadership’

(Source: mitigation-contribution.org, 2015)

Country US(2025)

EU(2030)

China(2030)

Australia(2030)

INDC(announced)

-26 to -28% (on 2005 levels)

40% (on 1990 levels) Peak by 2030 -26 to -28%

(on 2005 levels)

INDC(on 2010 levels) -22 to -24% -27% +35%

(estimate) -23 to -25%

Towards Distributive

justice-29% -41% -32% -30%

Corrective justice -51% -49% -4% -65%

Leadership(on 2010 levels) -52% -61% -32% -66%

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www.mitigation-contributions.org

Implied targets with different approaches to fairness

Climate Transparency

is a consortium of Climate

Action Indices

Partnering Climate Action Indices:

Supporting Organizations:

Carbon Transparency Index

Secretariat

Climate Transparency initiative: Toward a Climate Action ‘Composite Index’Mitigation value assessment at the policy and pledge level:the Climate Transparency consortium

* Design of robust climate actions

* Benchmarking* Climate finance

Comparability and linkage of climate actions: * within a country* between countries on a bilateral basis

Comparability and linkage of climate actions between countries on a regional or multilateral basis.

Short term

Medium term

Long term

The Networked Carbon Markets initiative – Facilitating transparency in the short, medium and long term

Next steps in 2016 and beyond

• Blueprints for ‘institutional infrastructure’• Supporting development of composite assessments• Simulating linkages• Pilot the Mitigation Action Assessment Protocol in

countries, sub-nationals and cities• Study with Edinburgh, Tsinghua and CBEEX on

Networked Carbon Markets for China

联合的猴子们祝大家春年快乐！

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Bibliography• www.worldbank.org/en/topic/climatechange/brief/globally-networked-car

bon-markets• www.climate-transparency.org • Hart, Zhu, Ying (2015) Mapping China's Climate Policy Formation

Process. www.chinacarbon.info • Kossoy, Peszko, Oppermann, Prytz, Klein, Blok, Lam, Wong, Borkent

(2015) State and Trends of Carbon Pricing 2015 (September). World Bank. doi: 10.1596/ 978-1-4648-0725-1

• Prag, Briner and Hood (2012) Making markets: unpacking design and governance of carbon market mechanisms. www.oecd.org/env/cc/ccxg

• Paris Agreement FCCC/CP/2015/L.9/Rev.1 unfccc.int http://unfccc.int/documentation/documents/advanced_search/items/6911.php?priref=600008831

• World Bank (2015) World Development Report 2015: Mind, Society, and Behavior. doi: 10.1596/978-1-4648-0342-0

http://www.worldbank.org/en/topic/climatechange/brief/globally-networked-carbon-markets

http://www.worldbank.org/en/topic/climatechange/brief/globally-networked-carbon-markets

http://www.climate-transparency.org/

http://www.chinacarbon.info/

http://www.oecd.org/env/cc/ccxg

http://unfccc.int/documentation/documents/advanced_search/items/6911.php?priref=600008831




CO2/MWh

t CO2
