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WELLINGTON/LONDON (Reuters): The goal of a global carbon market to tackle climate change, once touted to reach $2 trillion by 2020, received a major setback when Australia last week scrapped its planned carbon trading scheme, which would have been the world’s third biggest.
Australia’s Emissions Trading Scheme (ETS) was to have started in 2015 and linked with the world’s biggest market in Europe – the first direct connection between major emissions trading schemes and a test case for possible links between schemes emerging in China and planned in Japan and the United States.
“There’s a realisation that linking... is not going to happen within the 2020 timeframe,” said Andrei Marcu, head of the Carbon Market Forum at the Centre for European Studies in Brussels, referring to when a new global treaty on emissions reduction is expected to begin.
Another looming setback to connecting markets and eventually setting a global price on polluting carbon is the possibility that New Zealand’s ETS, small but one of the first to be established, will be scrapped after a September election.
No universal carbon price
Currently there is no universal carbon price, each ETS operates under different rules and sets individual prices, ranging from around 20 U.S. cents to $45 a ton, yet a ton of polluting carbon in each country is the same.
In 2008 when Australia, one of the world’s biggest carbon emitters on a per capita basis, announced plans for an ETS it was hoped it might be the impetus for global CO2 trading, starting with Europe, Australia and New Zealand.
It would have seen Australian polluters buying European permits, providing a solution to the massive glut of permits in the European Union’s Emissions Trading System (EU ETS), which drove prices down to record lows below three euros a ton last year.
“Linking the Australian to the European ETS could have been a catalyst for linking systems together,” said Ingvild Sorhus, an Oslo-based senior analyst at Point Carbon, which is owned by Thomson Reuters. “The repeal of the Australian scheme has to be considered as being one step backwards in this regard.”
Carbon markets allow polluters to buy and emit CO2, blamed for global warming. Under such “cap-and-trade” schemes, companies or countries face a carbon limit. If they exceed that limit they can buy permits to emit from others in the scheme.
Around 40 countries and over 20 states, regions or cities have either set up or are planning to set up emissions trading schemes or carbon taxes. Together, they account for more than 22% of global emissions.
The world’s carbon market was estimated at $53 billion last year as prices slid in the main EU and U.N. schemes and trade was limited in new programs, Thomson Reuters Point Carbon estimated in January.
UN negotiations on a 2015 pact to tackle climate change, to come into force from 2020, are not aiming to agree on a new global market but proponents hope it will offer guidance on how the growing patchwork of national and regional markets will fit into an international framework.
But carbon experts seem resigned to the currently fragmented emissions market, hoping national and regional schemes will in at least in the short-term develop the world’s carbon market.
“A new global (climate) agreement is highly unlikely to be reached any year in the future. I’d rather see more room for national or regional mechanisms spreading all around in the short-term,” said Matteo Mazzoni, carbon analyst at Italy’s Nomisma Energia.
NZ carbon trading also facing axe
Abolition of Australia’s carbon tax and planned emissions trading was a centrepiece policy of Prime Minister Tony Abbott’s 2013 election and on Thursday he secured enough Senate votes to scrap the policy.
Abbott, once a climate-change sceptic, argues the tax and emissions trading are burdens on industry and consumers and do little to cut polluting CO2 emissions.
“The policy world seems to be struggling to implement carbon pricing and more importantly, getting it to stick and remain effective,” David Hone, climate change advisor for Shell, said in a blog last month.
“Part of the reason for this is a concern by business that it will somehow penalise them, prejudice them competitively or distort their markets,” he added.
Last month, China launched the seventh and final regional pilot carbon market, but plans to set up a national trading scheme remain fraught with uncertainty.
Many including the United States and Japan, are designing programs to eventually use foreign credits, but most remain stuck in the planning stages given the difficulty of aligning reduction targets, sector coverage and other issues.
As a result, linking remains limited. The EU ETS includes non-EU members Norway, Iceland and Liechtenstein, while California and the Canadian province of Quebec linked their regional trading schemes earlier this year.
The future of New Zealand’s ETS, the world’s second oldest market which started in 2008, is also facing a political axe, depending on the outcome of general elections in September.
A win by the opposition Labour Party would likely result in a partnership with the Green Party, which has proposed scrapping the scheme in favour of an emissions tax.
“The reality is that it’s a political football in every country and so the rule setting tends to be set by domestic politics, and the characteristics of the domestic industry,” said Stuart Frazer, director of emissions trading consultancy Frazer Lindstrom in Wellington.
But even if the NZ carbon market survives the election, its impact in the international marketplace is diminishing.
After opting out of a second phase of the Kyoto Protocol, the globally agreed climate change treaty that ran from 2008-2012, it will now lose access to international carbon permits from 2015, a key source of liquidity for its market.
FACTBOX: Carbon trading schemes around the world
Reuters: The goal of a global carbon market to tackle climate change hit turbulence last week when Australia scrapped its planned carbon trading scheme.
Such schemes have been emerging all over the world as governments try to meet greenhouse gas emission reduction targets.
Around 40 countries and over 20 states, regions or cities have started or plan to begin emissions trading schemes or carbon taxes to put a price on emissions.
Under cap-and-trade schemes, companies or countries face a carbon limit. If they exceed the limit they can buy allowances from others. They can also purchase carbon offsets from outside projects that avoid emissions, often from developing countries.
Eight new carbon markets have opened since 2013 in countries including the world’s top emitters China and the United States.
But efforts to put a global price on greenhouse gases have been hampered as countries such as Japan, New Zealand, Russia and Canada look to weaken some of the measures they are taking to combat climate change.
Following is a list of established and emerging schemes:
Established schemes
1. Kyoto Protocol: Mandatory for 37 developed nations, excluding the United States which never ratified the pact. Launched: 2005. Covers: All six main greenhouse gases. How it works: Rich countries cut greenhouse gases at home or buy emissions rights from one other - if one country stays within its target it can sell the difference to another emitting too much. Or they can buy carbon offsets from projects in developing countries under Kyoto’s Clean Development Mechanism and developed countries under Joint Implementation. The CDM channelled around $400 billion in investment but since 2012 this has slowed to a trickle amid a lack of demand from industrialised nations.
2. European Union Emissions Trading Scheme. Launched: 2005 Covers: Nearly half of all EU CO2 emissions, 40% of greenhouse gas emissions. Mandatory for all 28 EU members, plus Iceland, Liechtenstein and Norway. Target: 21% emissions cut below 2005 levels by 2020. How it works: About half of permits are auctioned but heavy industries receive almost all of their requirement for free. More than 3,000 airline operators joined the scheme in 2012 to cover all flights using EU airports, but lawmakers restricted coverage to domestic flights after other nations complained that this infringed on their sovereignty. Firms can buy a limited number of U.N.-backed carbon emission offsets if that works out cheaper than cutting their own emissions.
3. New Zealand emissions trading scheme: Launched: 2010. Electricity generators, manufacturers and the transport sector hand over to the government a carbon permit for every second tonne of greenhouse gases they emit. Some forest owners are given free permits, others can voluntarily join the scheme. Originally no limit on use of U.N.-backed offsets but access blocked from 2015 due to New Zealand’s withdrawal from Kyoto. Target: The government has pledged to cut emissions 5% below 1990 levels by 2020.
4. Northeast U.S. states’ Regional Greenhouse Gas Initiative (RGGI). Launched: 2009. Covers: Carbon from power plants in nine northeast states. Target: In January the emission cap was reduced by 45% from previous levels. It will decline a further 2.5% a year over 2015-2020.
5. California: Launch: 2013, linked with Quebec’s scheme, which launched in 2014. Covers: Emissions from power plants, manufacturing and, in 2015, transportation fuels. Target: Cut the state’s emissions to 1990 levels by 2020. How it works: Polluters receive 90% of permits they need to cover emissions for free at the outset and remaining permits to be offered at quarterly auctions.
6. China: Pilot carbon trading schemes in seven provinces and cities - Beijing, Chongqing, Guangdong, Hunan, Shanghai, Shenzhen and Tianjin. Launch: 2013/4. They cover energy production and various energy-intensive industries. Officials have said a national scheme may emerge later this decade. Target: Cut CO2 emissions per unit of GDP to 40-45% below 2005 levels by 2020.
7. Mexican carbon tax. Launch: 2014. Levy of $1-4 per tonne of CO2 on fossil fuel sales relative to additional emissions versus natural gas. Companies can opt to pay the tax with CDM credits from Mexican projects. Target: Mexico aims to cut emissions by 30% from business-as-usual levels by 2020.
8. South Korea emissions trading scheme. Launch: 2015. Covers: Around 500 companies, collectively responsible for 60% of the country’s annual emissions. Target: Government has set a 2020 emissions reduction target of 30% below forecast “business as usual” levels.
Source: Reuters, World Bank.
