Amongst many research and analysis tasks during the past few weeks, I’ve been asked to develop a high-level overview on the future of carbon trading for the CEO in the company I’m interning at. The assignment seemed somewhat easy and straightforward; However I soon discovered that I’ve been tasked to find the answer for the on million dollar question. After reaching out to some experts in the area and researching available literature. I have developed a 3 pages report that later had to be condensed into just four bullet points summary for the CEO 🙁 Of course that’s what a high-level overview for a CEO means 😉
Anyhow, I have refined my findings and developed below narrative to share with you the highlights of my research.. Hope you find it useful.
IN A NUTSHELL
- The overarching message is that carbon markets are sizable; they are bouncing back and expanding
- At the early stages, from now to 2025, markets will develop nationally and at the sector level. At the international level, an accounting system will be developed to ensure the integrity of carbon reductions. It will also avoid double counting
- After 2025 and up to 2050, the markets will be developed and connected at the international level
- As we move gradually to 2050, a more centralized market will be developed on the basis of knowledge gained and practical experience gained as national and regional markets mature
THE GLOBAL OUTLOOK
EUROPEAN UNION: Stumbling with stability in the offing, but structural reform is needed
- Price for Phase III of the EU Emissions Trading System (ETS)will probably continue downward, but will eventually stabilize (expected average price is above €10)
- The EU (ETS) cap-and-trade system fixed ‘supply’ of allowances resulted in a significant surplus that could remain available for years to come; thus, hampering low- carbon investment across Europe
- The 2014 backloading’ amendment delayed the auction of 900 million EUAs, including a 400 million reduction in auctioned permits in 2014 with the aim of temporarily rebalancing supply and demand. However, the longer term prospects are still not clear.
- The EU Commission has proposed a Market Stability Reserve that would allow the quantity of EUAs auctioned to be reduced when there is a large surplus of EUAs in circulation.
- Market participants think the EU ETS’s proposed Market stability reserve is a step in the right direction, but without other reforms like setting a tighter 2030 targets, it want help in stimulating significant low-carbon investment
CHINA: Rapid evolution and powerful force
- The “next generation” of carbon trading is shifting the power towards China
- Chinese officials view market based instruments as the most cost effective way for addressing climate change
- As part of its 2030 national climate and energy framework, China launched six new emissions trading ‘pilots’
- Despite of China’s support for carbon base solutions, market expert’s cautioned that much remains uncertain about what the government intends to do and at what pace
- California is successfully implementing the most rigorous cap-and-trade program in the world
- In January 2014, California and Quebec linked their carbon markets under the Western Climate Initiative
- However, experts are divided as to wither the US will implement a national carbon emissions policy under a federal action by 2020
New forms of globally interconnected markets are emerging
- New and emerging markets are forming where the UNFCCC top-down approach for carbon market is being replaced/enhanced by bottom-up trends for market
- International talks through the UN will still have value for keeping the climate ch
ange present on national agendas and harmonizing accounting and reporting methods
New carbon pricing landscape is informed by lessons learned from the past
- Both private and public sectors involved in carbon markets are learning form the 1st generations of carbon pricing schemes; the lessons learned from the EU ETS, the Australian Carbon Pricing Mechanism (CPM) and the Western Climate Initiative are being used to develop new market based instruments for carbon trading in the developing carbon markets.
- The upcoming COP talks in Paris and its anticipated climate deal (Nov 30-Dec 11,15) will build the foundation for the next 20 years of carbon trading and climate investment
THE ROLE OF BUSINESS
- Between now and Paris, businesses need play an active role in in shaping the way of structuring an international agreement that enables the private sector participation.
- At the same time, businesses at domestic levels need to engage with governments to enact policies that not only create an incentivizing market, but also regulate carbon pricing in the supply chain
Sources and References
Eng. Khalid M. Abuleif, Sr. Advisor to the Minster and the Chief Negotiator for the Climate Agreements at the Ministry of Petroleum and Mineral Resources in Saudi Arabia
*All pictures are form google image.