Carbon trading market
One of China's earliest mentors was Dan Dudek, an carbon trading market economist and vice president of the Environmental Defense Fund EDF who, early in his career, got into an argument with its president, Fred Krupp, over whether China might be a big piece of the puzzle the group was exploring: Was there a way to use economics, rather than politics and regulations, to shift the world's businesses away from polluting the environment toward protecting it and to reward low-cost innovations that do that?
Dudek wanted to introduce a market-based system to protect scarce resources that he'd seen debated in California, where for decades disputes over water rights were settled by carbon trading market and political fights.
The winners were usually farmers and ranchers who lobbied the government to dam the state's remaining wild rivers to irrigate more crops on dry land. Once they'd won the fight, Dudek recalled, it was "use it or lose it.
InDudek, who had watched this battle as carbon trading market U. Department of Agriculture economist and later as a professor at the University of Massachusetts, Amherst, joined EDF, the one group he felt might listen to his grand scheme to protect the environment. The best place to do it was carbon trading market China, Dudek urged Krupp, and the resource in the most trouble there was not water, but air.
Dudek noted that China's economy was exploding, and air pollution in its major cities was going to become a major health problem. He told Krupp he wanted to go China to get the government to explore using economic markets to provide incentives to reduce air carbon trading market. Krupp, a lawyer, was interested in economics, but he found the idea of sending his chief economist to China to be mind-boggling.
China ran its economy on five-year plans, not Western-style economics. But Dudek kept pushing and eventually managed to wear his boss down. He made his first trip carbon trading market China for EDF in He found government experts carbon trading market curious about a new U.
That had started with an EDF project. Since then, Dudek has made over trips to Carbon trading market. He hired a staff of Chinese nationals to run Beijing's EDF office and has worked with Chinese experts in every province. Some of those who worked with him in the early days have helped China navigate enormous shifts in its environmental planning. They include Xie Zhenhua, currently China's top climate change negotiator and one of the architects of China's national climate change mitigation system, based on economic incentives, which is slated to be unveiled next year.
China has announced that init will launch a national cap-and-trade program involving six of its largest carbon-emitting industrial sectors, beginning with coal-fired power generation.
The effort borrows ideas from the U. Some of China's lessons have come from pilot programs where governments and companies have tinkered with cap and trade in two provinces and five cities. In the West, cap and trade has required governments to locate the major sources of emissions, measure their output and issue allowances that amount to a right to pollute a certain level of greenhouse gases. Companies that innovate and reduce their emissions below the government cap can sell their excess allowances to companies that don't.
In the East, particularly in China's planning-driven economy, innovators have had to confront some fundamental obstacles that don't exist in the West. They include a deep-seated bureaucratic skepticism about using markets and a lack of basic data to measure and track pollution. Denny Ellerman, a retired Massachusetts Institute of Technology economist who has followed both Carbon trading market and China's programs, companies in China's command-based economy had established no measure of the heating efficiency of various types of coal.
As it shifted its main environmental focus to climate change, China also generated some spectacular homegrown mistakes to learn from. It trained a large number of emissions trading consultants, who quickly figured out that there was big money to be had from a lack of data, loose market rules and the United Nations' "flexible mechanism" intended to help draw developing countries, like China, India and Brazil, into emissions trading.
It was called carbon trading market Clean Development Mechanism CDMintroduced into the United Nations' Kyoto Protocol by carbon trading market Clinton administration, and it allowed industrial nations to buy and use credits from poorer nations that had found ways to radically reduce emissions.
ByChina was raking in billions of dollars by selling credits from one of these schemes, launched by carbon trading market that incinerated a gas called HFC The gas—over 11, times more powerful as a global warmer than carbon dioxide—was a byproduct of making a refrigerant called HCFC HFC, normally vented into the atmosphere, could be quickly and cheaply destroyed by incineration. Interestingly, the normally predictable market growth for the refrigerant in China suddenly shot up.
Eleven Chinese companies emerged as the world's most aggressive HFC incinerators, and, under the Kyoto treaty, they could be used to offset the need for more expensive allowances needed to meet carbon trading market imposed by carbon trading market European Union on their companies.
So Europe's leading power and steel plants soon became addicted to buying them. The practice diluted the waning power of market forces in Europe to clean up local emissions problems. Environmental groups complained that the Chinese companies were manufacturing a dangerous pollutant to solve a pollution problem. After the United Nations rejected the idea that fraud might be involved, the European Union banned such carbon trading market in Carbon trading market The result was financial chaos among China's thousands of "matchmakers," consultants who linked HFC carbon trading market with European buyers.
Bythe Europeans were breaking their contracts, sending some Chinese firms into bankruptcy. Before the HFC trades collapsed, China used them to dominate over half of the lucrative international CDM trades, involving hundreds of billions of dollars. China's leaders valiantly defended them carbon trading market January carbon trading market, when a more urgent political cause intervened.
China's most severe carbon trading market pollution episode, later dubbed carbon trading market darkened the skies over Beijing and other major cities, provoking a huge public health outrage.
One upshot was a new system of measuring carbon trading market dangers culminating in a "red alert. More serious efforts to build a national cap-and-trade program got underway, with China pushing its carbon traders to refocus their efforts on cleaning up pollution at home.
Karplus thinks the incident helped China learn some valuable lessons about the power and weaknesses of running markets. The new national trading system that is expected to emerge along with a national emissions cap as early as next year will include tighter controls on traders and speculators.
But some of China's basic data problems remain. It burns more coal than it reports, and local authorities keep approving new carbon trading market power plants, despite the downturn in the nation's economy, because they provide jobs. Karplus, who began her visits to China infound that old command-and-control systems were having trouble figuring out why companies in some parts of China could reduce emissions cheaply and companies in other provinces couldn't.
If some companies were breaking the rules, it was becoming increasingly expensive for central planners to spot them.
But she also found cadres of younger scientists who had earlier worked with EDF and U. EPA in setting up China's acid rain program who saw this as a problem that could be resolved by markets that crossed provincial borders.
Now they're into the nitty-gritty," she explained. New measurements were implemented that exposed the moisture content of coal. That helped the market-watchers track which companies were being efficient and carbon trading market ones weren't. Henry Jacoby, a professor of applied economics at MIT, warns outsiders not to expect miracles, but he thinks central planners are beginning to ask the right questions.
Running their economy is no longer just a matter of maintaining control. You need to know how things actually work in the provinces," he said. One of the reasons for using more market tools, Jacoby thinks, is that "they're trying to use this to get under control some of the big old rust-bucket industries they've got.
Dudek of EDF, who has devoted a major part of his career to encouraging China to use markets to find ways to reduce energy needs, remains optimistic that it has become painfully aware of the limits of regulations.
Dudek thinks it would take some 20, planners, a virtual army of government engineers, to sit down and "figure out, 'OK, what's the best control technology for every [greenhouse gas] source carbon trading market He says there is now "a lot of design work" underway to structure markets to reveal that.
There is also a lot of local tinkering going on so Chinese companies can find the answers themselves. Local governments have begun to look at major energy waste by small businesses, carbon trading market as companies in China's sprawling textile industry. That inspired Gan Weiming, the head of a small factory in the city of Shaoxing, to buy a machine to capture the heat from wastewater and recycle it into the dyeing process.
It sharply cut the need for steam, paying for itself in one year. Then Gan enrolled in a government course in energy efficiency and sent company engineers to find more carbon trading market to energy savings ClimateWireMarch That day, Dudek enjoyed a moment of quiet satisfaction. When it comes to learning about emissions trading, China has had a leg up. As Dudek sometimes puts it, "the status quo is a vicious competitor.
Data drought a handicap for some, a boon for others China has announced that init will launch a national cap-and-trade program involving six of its largest carbon-emitting industrial carbon trading market, beginning with coal-fired power generation. Creating order out of HFC trading chaos Carbon trading market Chinese companies emerged as the world's most aggressive HFC incinerators, and, under the Kyoto treaty, they could be used to offset the need for more expensive allowances needed to meet caps imposed by the European Union on their companies.
China turns the tables on Congress Henry Jacoby, a professor of applied economics at MIT, warns outsiders not to expect miracles, carbon trading market he thinks central planners are beginning to ask the right questions. Sign up for our email newsletter.
Trading enables entities that can reduce emissions at lower cost carbon trading market be paid to do so by higher-cost emitters, thus lowering the economic cost of reducing emissions. Climate change, greenhouse gases; GHGs; carbon pricing: By putting a price on carbon emissions, carbon market mechanisms, as well as other carbon pricing mechanisms such as carbon taxes, help to internalize the environmental and social costs of carbon pollution, encouraging investors and carbon trading market to choose lower-carbon paths.
There are two main categories of carbon markets: This entry will focus on the working modalities and establishment of ETSs. An ETSalso known as a cap-and-trade mechanism, sets a mandatory limit or cap on GHG emissions on a predefined set of emission sources.
Tradable allowances tradable emissions permits issued, representing the right to generate a metric tonne of carbon dioxide equivalent Carbon trading marketare allocated to the emitters covered under the cap. At the end of a specified reporting period, the covered entities must surrender allowances equivalent to the GHG emissions carbon trading market produced during the period. Entities whose emissions exceed their allocations may purchase excess allowances or other eligible instruments to fill the gap, or pay a fine.
Caps can be tightened over time to promote further emission reductions. ETSs exist at regional, national and sub-national levels:. In an ETStradable allowances are issued to covered entities i. Limits are cumulative across Phase II and Phase III of the EU ETSand, broadly, allow covered entities to carbon trading market international credits for up to the greater of 11 per cent of their allocation during the period from toor 4.
To date, covered installations have used 1. These contracts further improve price predictability and enable carbon trading market participants to plan and finance lower-carbon investment better. Emission Reduction Purchase Agreements ERPAs -where terms are determined by the parties over are long-term, fixed-price provisions-can be standardized as a means of specifying the terms and conditions for the purchase and sale of emission reductions between a specific buyer and seller.
For allowances to have value, however, the cap must be binding because demand from covered entities carbon trading market what creates value for allowances. This was demonstrated in the trial phase of the EU ETSwhere the cap was set somewhat higher than actual emissions levels due principally to over-reporting of baseline emissions.
Adjustments were made so that, in the second phase, the cap was binding and an increasing share of EU allowances were auctioned—4 per cent in phase 2about carbon trading market per cent inand at least 80 per cent expected by Voluntary deals related to carbon offsets in showed a 10 per cent increase fromled by private carbon trading market companies taking proactive steps to reduce emissions.
RGGI, for example, has allocated about 6 per cent of its auction proceeds to administrative and corporate expenses. Donor financing may be tapped to defray some of these costs. The Partnership for Market Readinessfor example, provides funding to help countries prepare and implement climate change mitigation policies, and provides a platform to share experience. Given this complexity and the availability of alternatives, only industrialized and large-emitters among emerging countries e.
Small-scale programmes would face significant challenges. Experience underscores the importance of:. Carbon markets primarily promote investments that reduce GHG emissions.
The latter is bigger than the impact of most other individual comparable policy instruments. Tightening the cap is the key tool for enhancing the economic and environmental impact of an ETS. The tighter the cap, the fewer allowances and hence the higher their price and the greater the incentive to reduce emissions.
It also establishes a voluntary mechanism for emissions trading, with rules to be established Article 6. This entry does not provide a review of the vast literature that explain why halting climate change is good for the economy and the people, but it rather focuses on ETS specifics and measurable impacts. In all, these negative impacts-when confirmed-were for the most carbon trading market considered large in the EU. In relation to the possible impact carbon trading market developing countries beyond the carbon trading market of carbon trading marketcarbon offset instruments have been criticized over their negative social impact on local communities land grabs, social conflicts, the displacement of indigenous people.
While evidence is limited, the potential negative social impact of offsetting instruments should never be underplayed and strict safeguards should be rigorously applied. However, in light of scarce evidence over social impact, additional research and evidence is required to derive recommendations.
We should reach a consensus on the fact that macroeconomic policies in low-income economies need to also jettison the conventional wisdom of undue restrictiveness. Home Solutions Carbon Markets.
How does it work? ETSs exist at regional, national and sub-national levels: QuebecChina e. Guangdong and the USA e. Establishing carbon trading market governing authority or other administrative body as a central secretariat for implementing and operating the mechanism, and enacting legislation and regulations mandating participation by covered entities, empowering the governing authority, and specifying the programme rules, including monitoring, reporting and verification MRV requirements.
Implementing a credible GHG reporting systemwith detailed carbon trading market for quantifying and reporting emissions. Legally-mandated emissions reporting programmes are fundamental to the functioning of an ETS. Benchmarking, or determining baseline emissions, based on an ex ante GHG emissions inventory of the covered entities in accordance with MRV rules.
ETSs generally cover large, industrial emitters, particularly large-scale fossil-fuel carbon trading market facilities, given the level of administrative cost.
Some programmes have expanded their scope over time: Specifying the length of each reporting period, and whether banking or borrowing of allowances from one year or period to another is allowed. Reporting periods can be as short as a year RGGI but are typically longer to offer covered entities some flexibility in compliance. No banking or borrowing was permitted between the pilot and second trading periods, but inter-period banking is allowed from the second period onward. Given tighter caps from phase 2 onward, banking is allowed in carbon trading market to smooth out prices across trading periods and to facilitate investment planning.
Typically, in the pilot phase of an ETSthe cap is set close to current emissions, and allowances are distributed for free based on reported baseline emissions.
Given that in this situation supply would, by definition, be close to demand, prices in these pilot phases tend to be low. RGGI, for example, initially gave out allowances to covered entities.
It started tightening the cap and auctioning allowances. The cap set for declines by 2. RGGI charges a penalty for non-compliance of three times the market price. Each country determines how its EU allowances will be distributed; carbon trading market UK, for examplehas decided to auction at least 50 per cent of its Phase III allowances.
Linking carbon trading market flexibility in meeting obligations, helps stabilize prices, and can lower compliance costs. Establishing other mechanisms to limit price volatility. Predictability of carbon prices is carbon trading market in making informed investment decisions and in securing financing—but market prices, by definition, fluctuate.
Banking of allowances and linking to other carbon markets help to reduce price volatility. Developing an MRV system related to carbon trading market initial inventory noted above as well as processes for registering, trading and tracking allowances; Establishing, or engaging the private sector to establish, electronic trading platforms i.
Registers all entities participating in the California Cap-and-Trade Program; Issues allowances and compliance offsets; Tracks the ownership of compliance instruments; Enables and record compliance instrument transfers; Facilitates emissions compliance; and Supports market oversight. Functions include establishing the parameters for the market and its regulation, including defining the scope of the market and the rules for creating and distributing emission units, establishing registries, issuing credits, and setting rules for enforcement, trading, and accrediting certain types of market participants such as auditors.
The regulatory role includes: Sellers must demonstrate legal ownership, which they transfer carbon trading market the buyers. This can be for compliance, market-making, carbon trading market, or voluntary purposes. When is it feasible? Experience underscores the importance of: What are the main risks and challenges? Carbon markets can complement other policy instruments such as carbon taxes and energy-efficiency standards.
Countries can build on existing approaches for ETS s, carbon trading market than carbon trading market the wheel. Using broadly-recognized standards also facilitates linking to other ETS swhich could increase prices for local allowances. Concessional finance and other support are available to support carbon market development see above. Allowances have little or no value until emission caps are lowered substantially below baseline levels.
Moreover, allowance prices are market-based and therefore unpredictable; as such, they form a poor basis for decisions on investing in emission-reducing technologies. Price volatility also makes these investments difficult to finance, as lenders require credible financial carbon trading market. Allocating allowances for free confers windfall gains on covered entities if their emissions are below the cap. Coverage may not be comprehensive: Other mechanisms such as fuel-economy standards and fuel taxes may be used to constrain emissions in these sectors.
As opposed to carbon taxes whose prices are stable, carbon prices are affected by many rather unpredictable factors, notably the level of commitment to reducing GHG emissionsand carbon trading market cycles, which can cause spikes or drops in demand for allowances. Other approaches such as carbon taxes can provide longer-term clarity about carbon prices, which can facilitate the financing of low-carbon investments.
These other carbon trading market can be used in combination with carbon markets, as in many EU countries.
Risks Price volatility increases risk. Given the long lead time of low-carbon investments, this volatility makes it difficult for project sponsors to secure financing. Lack of long-term contracts carbon trading market are available from some buyers, but typically at a carbon trading market discount to market prices. In an ETScovered entities have an incentive to overestimate baseline emissions.
Accurate emissions inventories and rigorous reporting requirements help mitigate this risk, but they take time to implement. The cap was tightened for subsequent periods. How can carbon trading market design be ameliorated to improve the impact?
Partnership for Market Readiness repository of guidance and good practices. Emissions Trading Worldwide Carbon prices: