carbon trading_2012 market survey

7/29/2019 Carbon Trading_2012 Market Survey

1/36

Volume 01

Issue 10

Dec 12/Jan 13

carbon-tradingmagazine.com

EU ETSCards on the table

Special report: UNNegotiations

Action stations

2012 Market SurveyThe results service

What impact will lawsuits have onCalifornia's cap-and-trade system?

ComING,REaDyoR Not


2/36

Taking green to the next level.

The European and North American emissions products formerly traded

on GreenX are now listed for trading on NYMEX, part of CME Group. These

emissions products complement existing NYMEX energy futures and options

contracts. They can be traded on the CME Globex electronic platform and may

be submitted to CME Globex via the CME Direct application. They also are

available for clearing through CME ClearPort centralized clearing services.

These avenues provide customers with real-time, global access to the worlds

leading derivatives marketplace. For more information, and to view our complete

product slate, visit cmegroup.com/emissions.

CME Group is a trademark of CME Group Inc. The globe logo, CME, Chicago Mercantile Exchange, Globex, CME Direct and GreenX are trademarks of Chicago Mercantile Exchange. NYMEX, New York Mercantile Exchange and

ClearPort are trademarks of the New York Mercantile Exchange. All other trademarks are the property of their respective owners. Copyright 2012 CME Group. All rights reserved.


3/36

Comment

EditorialRobin LancasterThe latest high-level round of UN climate change negotiations is almost upon us

once again. This is the rst such meeting since Durbans talks in December last

year agreed on a process that aims to achieve a new climate deal by 2015 that

has legal force.

That is still three years away and will be 18 years since the Kyoto Protocol, the only legally-

binding international treaty to cut greenhouse gas (GHG) emissions, was negotiated. For an

issue that is more urgent than ever to address if the scientic evidence is to be believed

that sense of urgency never seems to be much in evidence among many of the negotiators at

COP/MOPs.Yes, the nal 2448 hours of these meetings always resorts to frantic horse trading into

the early hours and beyond. But, more often than not, that activity aims to get a consensus

on some minor achievements so that there is at least something to show for the previous

two weeks.

I have attended the last nine COPs, and will probably be in Doha. In that time, I have

seen timetables come and go for new agreements to tackle global warming and countries

step away from mandatory targets to reduce GHG emissions. Over the same period, GHG

emissions have continued to grow at an alarming rate.

One of the problems with the current UN climate set up is that, for the part, delegations are

made up of environment ministries that have little clout at home. And, a lot of the money they

do have to spend probably goes on attending the COP for two weeks every year.

If climate change really is the urgent problem for politicians to deal with, we should also be

seeing delegations from nance and economy ministries in large numbers. There should more

efforts made to hear from entrepreneurs and companies that are willing to invest time and

money in developing new technologies to cut GHG emissions at scale.

Theres little or no public sector money available beyond what is already pledged. It is

focussed on keeping ailing economies aoat. But the UN process is not a lost cause yet.

The timetable has been set for achieving a new deal and so it is hoped that Doha can

show progress and send signals that 2015 will have a positive outcome. l

carbon-tradingmagazine.com Dec 2012/Jan 2013 | Carbon Trading | 01

Editor and Publisher Robin Lancaster

Art director Matt Hadfeld

Editorial enquiries

T +44 (0)1943 605279

T +44 (0)7841 979407

E [email protected]

Sales

T +44 (0)1943 605279

E [email protected]

Cover illustration David Lyttleton

ISSN 2049-565X

Olicana Publishing Ltd 2012. No part ofthis publication may be reproduced in any

format whatsoever without the permission

of the publisher

>


4/36

Features

14 EU ETS

Cards on the table

The European Commission has put forward six options for

reforming the EU Emissions Trading Scheme. Robin Lancaster

reports.

16 2012 carbon market surveyThe results service

Robin Lancaster outlines the results of Carbon Trading

magazines 2012 market survey.

18 Linking

The only game in town?

What is required to link Californias and Europes cap-and-trade

systems, ask Daniel Engstrm and Lars Zetterberg.

22 Special report: UN negotiations

Action stations

Robin Lancaster looks at what is up for discussion at the UN

climate change talks in Doha.

A new approach for business

Would a bigger role for the private sector at the UN climate

change discussions lead to a more progressive outcome? Asks

Robin Lancaster.

26 Namas

The time for action

LauraWrtenbergerlooksatoptionsfornancingsupported

nationally appropriate mitigation actions in developing countries.

30 Opinion

Delivering change fast enough?

Sven Harmeling considers the progress or lack of it, so far, withthe UNs Green Climate Fund.

Contents

02|Carbon Trading | Dec 2012/Jan 2013

Regulars

01 Editorial

02 Contents

04 News

09 People changes

10 Cover Story: North America

Coming, ready or not

California and Quebec will start cap-

and-trade programmes in January. But

one faces legal challenges and the other

stillneedstonaliseitsrules.

Robin Lancaster reports.

32 Data


5/36

Inside

carbon-tradingmagazine.com Dec 2012/Jan 2013 | Carbon Trading | 03


6/36

The European Commission proposed

on 12 November to withhold 900 million

allowances scheduled for auction from the

early years of phase III (20132020) of the

EU Emissions Trading Scheme (ETS) and

backload them into the system during 2019

and 2020.

The idea is the commissions long-

awaited set-aside proposal, which aims to

boost the price of carbon. The December

2012 carbon price has traded at less than

10 ($12.7) a tonne of carbon dioxide (tCO2)

all year, compared with more than 17/t in

the rst half of 2011, because of oversupply

in the EU cap-and-trade system.

The growing overhang of allowances

predicted by most analysts to last beyond

2020 is the result of the economic

downturn, which has led to less carbon

emissions than expected. Adding to the

problem is a glut of carbon offsets coming

into the market this year, as a result of

regulatory changes coming into effect

next year that will ban much of this supply

thereafter.

The commissions proposal, if approved,

could give a short-term boost to Europeancarbon prices, but would only have a longer

term impact if the withheld allowances

(EUAs) are cancelled permanently, analysts

said.

This could push prompt EUA prices

back towards 15/t or higher over the 1218

months following the formal adoption of this

proposal, said analysts at Deutsche Bank in

a 13 November research note.

However, we remain of the view that

a structural solution to the problem of EU

oversupply is necessary, otherwise prices

would only fall again later during phase III

owing to the reintroduction of the EUAs

withheld over 20132015, the bank said.

Paolo Coghe, a European power, coal

News

and carbon analyst at France-based

investment bank Socit Gnrale, said the

market had been assuming the measure

would be signicant and prices had

increased accordingly from 7.0/t on

average in Q2, to 8.0/t on average in Q4 to

date (+14%).

Thus, we expect the effect of this release

of information to have a limited additional

absolute impact on prices. Moreover,

between now and the end of the year there

will be a very substantial amount of auctions

to keep the market well supplied, he said in

a 13 November research note.

He added that the banks current price

forecasts remain unchanged while we wait

to learn what the commission has in store

for structural long-term ETS options (read

permanent set-aside). Those forecasts are

9.3/t in 2013, 10.9 in 2014, 12.6 in 2015

and 14/t in 2020.

According to analysts at Thomson

Reuters Point Carbon in Oslo, if there is no

cancellation, the overall 20132020 market

balance will not change and EUA prices

will remain between 8/t and 10/t for the

20132015 period and then collapse to 6/tin 2020 when the volume is reinjected.

The set-aside idea, which would

involve amending the EU

ETS auctioning regulation,

has been sent to the EU

Climate Change Committee

for consideration. However,

even if the committee is

favourable to backloading

allowances, the formal

adoption would still

require the approval by

the European Council and

Allowance set-aside needs to bepermanent for lasting impact: analysts


Parliament of a separate amendment to the

EU ETS Directive.

The commission has sought the change

to the ETS Directive in order to provide

legal clarity on the alteration to the auction

regulation (see Carbon Trading, September

2012, pages 1014).

According to Deutsche Bank, a best

case scenario which would see all the

commissions necessary approvals made

on time would mean full legal authority

to make this back-end loading amendment

will not be nalised until mid-late Q2 at the

earliest.

But, it cautions, given the opposition to

the proposal Poland has been particularly

vocal against it the risk is that this

timeframe is over-optimistic, and the 900

million number proposed by the commission

may be subject to revision in the negotiations

that will now follow.

The backloading proposal is further

complicated by the commissions report

released on 14 November that includes a

set of options for more structural measures

to deal with the oversupply problems (see

pages 1415).Analysts at TRPC are more optimistic that

the commission will get its way on a set-

aside and a permanent cancellation

could be achieved.

We think that member

states will vote positively

on the backloading of

900 [million t], said

Marcus Ferdinand,

senior market analyst at

the company. We think

it likely that some 700

[million] allowances will be

cancelled permanently, with

just 200 [million] reinjected in

2019 and 2020, he added.

Marcus Ferdinand, TRPC: 700

million EUAs could be cancelled


7/36


8/36


News

The European Commission

proposed on 12 November to

suspend EU Emissions Trading

Scheme (ETS) coverage for all

international ights to and from

Europe. However, the cap-and-

trade regulations will remain in

place for all intra-EU ights, the

commission said.

The suspension will continue

until after the next general

assembly of the International

Civil Aviation Authority

(Icao) the UN body taskedwith responsibility for global

aviation in October 2013, the

commission said.

The proposal comes a week

after, what the commission

described as very positive

discussions, at an Icao meeting

on a global market-based

mechanism to tackle aviation

emissions that coud be created

under the auspices of the UN

organisation.

The commissions decision

would mean that all international

ights beyond EU borders

will not have to surrender

allowances in April to meet

compliance obligations. Airlines

affected by the decision would

also no longer have to monitor

and report emissions during the

period.

The EU has always been

very clear: nobody wants an

international framework tackling

CO2 [carbon dioxide] emissions

from aviation more than wedo. Our EU legislation is not

standing in the way of this, said

Connie Hedegaard, European

commissioner for Climate

Action.

On the contrary, our

regulatory scheme was adopted

after having waited many years

for Icao to progress. Now it

seems that because of some

countries dislike of our scheme

many countries are prepared

to move in Icao, and even to

move towards a market-based

mechanism at global level, she

said.

EU to defer international aviation from ETS

But, Hedegaard added, If

[the Icao] exercise does not

deliver and I hope it does then needless to say we are

back to where we are today with

the EU ETS. Automatically.

According to analysts at

Thomson Reuters Point Carbon

(TRPC) in Oslo, the decision

will reduce aviations EU ETS

coverage by about 60%. But

the cut in airlines falling under

the scheme will only have a

small impact on demand for

allowances. This is because

the sector has been allocated

20 million tonnes more than it

needs this year, TRPC said.

That said, this decision

will keep airlines from buying

permits for 2013, and it casts

doubts on demand of EUAsthrough 2020 since it increases

the likelihood the aviation

sector will be taken out of

the ETS all together, placing

further downside risks to our

previous estimate of EUA

demand from the aviation

sector of 278 [million tonnes]

between 2012 and 2020, said

Emil Dimantchev, an analyst at

TRPC.

Aviation emissions were

not included in the 1997 Kyoto

Protocol. Instead, Icao was

tasked with dealing with the

sectors carbon footprint.

However, because of the lack of

progress at Icao on the issue,

the EU decided to include

aircraft carbon emissions in its

ETS from the start of this year.

Many countries have been

opposed to the EU move, such

as China, India and the US.

The former two countries had

previously said that their airlines

should ignore the ETS and laws

are in the process of being

enacted in the US to try and

circumvent the legislation.The commissions decision

was welcomed by some

industry groups, but attracted

the ire of green groups.

Commissioner Connie

Hedegaards announcement

that she has stopped the

clock on the imposition

of the EU ETS on ights to

and from non-EU countries

represents a signicant step

in the right direction and

creates an opportunity for the

international community, said

Tony Tyler, director general

and chief executive ofcer of

the International Air Transport

Associat ion.

The Commissions pragmatic

decision clearly recognises the

progress that has been made

towards a global solution for

managing aviations carbon

emissions by Icao, he said.

But Bill Hemmings,

programme manager for

international transport atBrussels-based NGO Transport

& Environment, said, the

commission has moved further

than necessary given the little

progress made, so far, at Icao

level. There is no excuse for

inaction left.

Opponents of the inclusion

of international ights in the

EU ETS have always said that

a global solution under Icao is

the way to go. Now it is time for

them to stop blaming the EU for

blocking a worldwide approach

and put their money where their

mouth is, he said.


9/36

NewsNews

Companies in Australia covered by the

countrys carbon price mechanism could

face 93% higher costs, if European

Commission proposals to

change the auction prole

of the EU Emissions

Trading Scheme (ETS)

come to fruition,

according to carbon

analytics company

RepuTex.

On 12 November,

the commission

formally proposedremoving 900 million

allowances (EUAs)

from the rst three years

of phase III (20132020) of

the EU ETS. The EUAs would

come back into the market in 2019 and

2020. The so-called backloading plan is a

temporary measure to try to prop up carbon

prices in the wake of a huge oversupply of

allowances, which has resulted from the

economic downturn, and caused prices to fall.

Australian carbon price could be 93% higherThe proposal could affect Australia

because in September the government

and the commission announced

plans to link their ETSs from

2015, when the formers

xed price becomes a

cap-and-trade system.

The link will be one

way initially EUAs

and UN carbon

credits allowed into

Australia to cover up

37.5% and 12.5%

respectively of anentitys compliance

obligation and two-

way no later than 2018.

With the European

Commissions proposal to

remove 900 million carbon units from

the European market being towards the

upper end of market expectations, it will

materially impact Australian prices, said

Paul Bourke (pictured), an associate director

at RepuTex.

The effect of this would be an

immediate spike in European prices, owing

through to Australia from the end of our

xed-price period, but with prices falling to

around present levels when those permits

come back in, he said.

The company forecasts that Australian

carbon prices would be, on average, more

than 93% higher for the years 2016 through

2019 than if no European policy changes

were made. It said the Australian carbon

price would more than double from the

companys previous business-as-usual

forecast for 2018 of over A$18 (US$18.6) atonne of carbon dioxide. However, the price

would drop in 2020 to about A$9/t, when

the 900 million EUAs come back into the

market, the company said.

On 14 November, the commission also

outlined possible options for structural

reform of the EU ETS (see pages 1415).

One suggestion was for the permanent

cancellation of a portion of allowances. If

this was to occur, prices are likely to remain

high, RepuTex said.

Thank you.We would like to thank everyone who voted

ClimateCare:

n Best Trader in the voluntary carbon market

n Best Project Developer in the voluntary

carbon market

n Best Advisory Firm in the voluntary carbon

market

To fnd out how our integrated approach can

help your business, call +44 (0)1865 591000.

ClimateCare at the forefront of climate and

development since 1997.

www.climatecare.org Innovation, experience, results


10/36

News


Delaying action on climate change is a

false economy, according to a new

report by the International Energy Agency

(IEA).

In the IEAs World Energy Outlook 2012

report, released on 12 November, the Paris-

based organisation said that for every dollar

of investment in clean energy that doesnt

take place before 2020, there will be an

additional $4.30 required to maintain the

UNs goal of keeping global temperature

increase to no more than a 2 Celsius abovepre-industrial levels.

The analysis fall under what the IEA

calls its 450 scenario in reference to

the atmospheric concentration of GHGs

scientists say should not be exceeded to

avoid dangerous global warming (450 parts

per million).

The report noted that four-fths of

total energy-related emissions allowed to

2035 are already locked-in by existing

capital stock. And, unless further action is

taken before 2017 to tackle growing GHG

emissions, the energy-related infrastructure

then in place would generate all the CO2

[carbon dioxide] emissions allowed in the

450 scenario up to 2035, the IEA said.

But, in the IEAs efcient world

scenario, the rapid deployment of energy-

efcient technologies is envisaged. This

approach would postpone the 2017

lock-in to 2022, which would buy time

to secure a much needed international

agreement to cut GHG emissions, the report

added.

Delaying action on climate change will cost

more in the long term: IEAGovernments need to introduce

stronger measures to drive investment in

efcient and low-carbon technologies,

said Maria van der Hoeven, IEA executive

director. The Fukushima nuclear accident,

the turmoil in parts of the Middle East

and North Africa and a sharp rebound in

energy demand in 2010, which pushed CO2

emissions to a record high, highlight the

urgency and the scale of the challenge,

she said.

However, in another IEA scenario newpolicies cumulative CO2 emissions over

the next 25 years amount to three-quarters

of the total from the past 110 years, leading

to a long-term average temperature rise

of 3.5C, the report said. And, it added,

Chinas per-capita emissions match the

OECD average in 2035. But were new

policies not implemented, we are on an

even more dangerous track, to an increase

of 6C, the IEA warned.

As each year passes without clear

signals to drive investment in clean energy,

the lock-in of high-carbon infrastructure

is making it harder and more expensive to

meet our energy security and climate goals,

said Fatih Birol, IEA chief economist.

The report said that to meet the 2C

challenge a carbon price as high as $120

a tonne of CO2 would be needed by 2035.

Current and new policies aimed at curbing

GHG emissions would mean a carbon price

in the range of $30 to $40/t in 2035, the

IEA said.

The report also said that no more than

one-third of proven fossil fuel reserves

could be used before 2050, if the 2C target is

to be met. This necessity could be overcome

if there is widespread deployment of carbon

capture and storage (CCS) technology, the

World Energy Outlook 2012 said.

Almost two-thirds of these carbon

reserves are related to coal, 22% to oil and

15% to gas. Geographically, two-thirds are

held by North America, the Middle East,

China and Russia, it added.

These ndings underline the importance

of CCS as a key option to mitigate CO2

emissions, but its pace of deployment

remains highly uncertain, with only a handful

of commercial-scale projects currently in

operation, the report continued (see Carbon

Trading, November 2012, page 4).

The city of Shenzhen, near

Hong Kong, has passed a law

that aims to cut greenhouse

gas (GHG) emissions, Reuters

reported on 12 November local

media sources as saying.

The bill was passed on 30

October, Reuters reported the

Shenzhen Special Zone Daily

as saying, and is expected to

establish a carbon emissions

trading scheme (ETS) some time

in 2013.

The ETS is one of seven

Chinas Shenzhen passes carbon trading law: Reuterspilots planned for four more

cities Beijing, Chongqing,

Shanghai and Tianjin and

two regions (Guangdong and

Hubei) in China, which is the

worlds largest emitter of GHG

emissions.

The pilot schemes are to help

China meet its pledge to cut its

carbon dioxide emissions per

unit of GDP by between 40%

and 45% by 2020 below 2005

levels.

The pilot programmes could

eventually become part of a

national ETS some time after

2015, the government has said

in the past.

The Shenzhen ETS will cap

emissions from about 800

companies covering 54% of

the citys GHG emissions, the

Reuters report said.

No information is available

about the size of the carbon

cap or the actual rms that will

fall under the scheme, Reuters

added.

.


11/36

People changes

Dec 2012/Jan 2013 | Carbon Trading | 09

News/changes

Action on climate change and

jobs are not mutually exclusive,

said President Barack

Obama in his rst press

conference since re-

election of 6 November.

I am a rm believer

that climate change is

real, that it is impacted

by human behaviour

and carbon emissions.And as a consequence, I

think we've got an obligation

to future generations to do

something about it, he said on 14

November.

Theres no doubt that for us to take

on climate change in a serious way would

involve making some tough political choices.

And understandably, I think the American

people right now have been so focused, and

will continue to be focused on our economy

and jobs and growth, that if the message

is somehow were going to ignore jobs and

growth simply to address climate change, I

don't think anybody is going to go

for that. I wont go for that,

Obama said.

If, on the other

hand, we can shape

an agenda that says

we can create jobs,

advance growth, and

make a serious dent in

climate change and be

an international leader, Ithink thats something that

the American people would

support, he added.

President Obama beat his

presidential rival Mitt Romney in the 6

November election. This means he will serve

four more years as US president.

The results of the Congressional elections,

which also took place on 6 November, left the

make up of the House of Represenatives and

Senate close to how it was previously. The

Republicans hold the balance in the House

and Democrats with an advantage in the

Senate.

Tackling climate change

can stimulate jobs: Obama

The world is on track for global

temperature rises of 6 Celsius by 2100 at

current greenhouse gas (GHG) emissions

growth rates, according to a report by PwC

released on 5 November.

The PwC Low Carbon EconomyIndex, which measures

industrialised and emerging

economies progress

towards reducing emissions

linked to economic output,

said that the UN target

to limit global warming

to 2C would now require

an unprecedented rate of

emissions reduction.

The annual rate of

Global warming will be 6C at current emissionsgrowth levels: report

reduction of carbon emissions per unit of

GDP needed to limit global warming to 2C,

has passed a critical threshold ... The rate

of reduction now required has never been

achieved before, said PwC.

The report noted that GHG emissionsintensity had been reduced in 2010 by

0.7%. But the rate would need to

be 5.1% a year on average from

now until 2050. A performance

never achieved since 1950,

when these records began,

PwC said.

The report added that

governments and businesses

can no longer assume that a

2C warming world is the default

scenario.

The risk to business is that it

faces more unpredictable and

extreme weather, and

disruptions to

market and supply chains. Resilience will

become a watch word in the boardroom

to policy responses as well as to the

climate. More radical and disruptive policy

reactions in the medium term could lead to

high carbon assets being stranded, saidJonathan Grant, director, sustainability and

climate change at PwC.

The new reality is a much more

challenging future in terms of planning,

nancing and predictability. Even doubling

our current annual rates of decarbonisation

globally every year to 2050, would still lead

to 6C, making governments ambitions

to limit warming to 2C appear highly

unrealistic, he said.

The challenge now is to implement

gigatonne scale reductions across the

economy, in power generation, energy

efciency, transport and industry, as well as

Redd+ [avoided deforestation] in forested

nations, Grant added.

Jean-PhilippeJP Brisson has joined

the law rm Latham & Watkins in its

New York ofce as partner in the

environment, land and resources

department. He is also vice chair of

the rms air quality and climate

change practice group. He was

previously head of the US

environmental and climate change

practice at law rm Linklaters also in

New York. Bob Wyman, global chair ofthe environment, land and resources

department, at Latham & Watkins

said, Brisson is widely recognised as

the foremost expert in carbon credit

transactions in the US. He is regularly

called upon to advise industry groups

and develop rules for the markets. His

comprehensive knowledge of the

myriad legal, business and regulatory

structures for carbon emissions, as

well as aspects of the CFTC

[Commodity Futures Trading

Commission] regulatory regime, will

be invaluable to clients.

People

changes

Jonathan Grant, PwC: a more

challenging future


12/36

The start of Californias and Quebecs cap-and-trade systems isjust a few weeks away, but the threat of litigation hangs over theformer and, for the latter, covered entities still await the nal rules

Words: Robin Lancaster

The long wait for the start of Californias and

Quebecs cap-and-trade programmes is

nearly over (see box). The two systems are

ofcially scheduled to begin on 1 January, a

postponement of one year from the original date set for

the US state, and almost six years since the establishment

of the Western Climate Initiative (WCI) to which both

jurisdictions are members.

California conducted its rst auction of allowances on

14 November, which offered 2013 and 2015 vintages for

sale. The results of the auction had not been released as

Carbon Trading went to press, but observers said it went

smoothly.

The event, delayed from August, is seen by many

people as a kick start for the programme. Yet, the threat

of legal action against aspects of the trading scheme has

led many people to project an under-subscription to the

allowances on offer in the auction.

The concern is, say experts, that companies are

worried about spending money in the auction

particularly on the longer-dated 2015 allowances

while there is uncertainty over the programme.

The worry is whether they will get money back if the

scheme or parts of it are invalidated in the courts.

One lawsuit regarding offset use in the

California scheme is ongoing since March. A

second was led on 13 November. The California

Chamber of Commerce launched an action that

seeks to invalidate the auction. It argues that the Air

Resources Board (ARB) the regulator has exceeded

the authority granted to it by the states climate change

law by establishing a revenue raising programme. It is

unlikely to be the last litigation against the system.

We know lawsuits are being prepared against the

programme that could eviscerate major components of

the system if they are successful, said Kevin Poloncarz,

a partner in the environmental and energy practice at law

rm Paul Hastings in San Francisco.

In the next six weeks or so, we expect to see litigation

from any number of plaintiffs, said Robert Wyman, a

partner and head of the environment practice at law rm

Latham & Watkins in Los Angeles.

The expected actions will focus on the cap-and-trade

programmes coverage of imported electricity in relation

to the dormant commerce clause and the federal power

act. Another possible source is so-called Proposition 26,

which refers to a successful vote in the 2010 elections

that requires any new tax in California to have the support

of a two-thirds majority vote in the states legislature. Theargument being that the cap-and-trade schemes auction

constitutes a new tax and so there cannot be a charge for

allowances unless it is backed by a so-called

super majority vote in the legislature.

Even if a judge agreed with a

plaintiff that the auction is effectively

a tax, it wouldnt necessarily mean

that the cap-and-trade scheme

is doomed. The programme can

go forward without an auction,

because ARB can use other

mechanisms, for example, direct

allocations, to get the allowances

to market. Only a small percentage

of allowances are included [in the

auction], said Wyman.

North America

10|Cb T | Dec 2012/Jan 2013

"Lawsuits are being prepared thatcould eviscerate components of theprogramme if they are successful"Kevin Poloncarz, Paul Hastings

>

Coming,readyor noT


13/36

North America


Cover story

Dec 2012/Jan 2013 | Cb T | 11


14/36

Many covered entities will receive most of their

allowances for free, a process designed to try and avoid

what is known as carbon leakage companies moving

production out of state to where there is no carbon

constraint.

The political landscape could come into play on this

issue, if a plaintiff was successful. California already had a

Democratic party governor in Jerry Brown and, following

Novembers elections in the US, both chambers of the

legislature are now controlled by the party with a super

majority. In theory, therefore, the Democrats have the votes

to pass a new tax, if the courts decided that is what the

auction is. In practice, the legislature is likely to be more

circumspect, said Wyman. Whether they would want

[the auction as a tax] to be the rst action is a separate

question, he said.

But, according to Paul Hastings Poloncarz, any claim

by a plaintiff on this issue is weak. It only constitutes a

tax if revenues generated are not used for greenhouse

North America

12|Cb T | Dec 2012/Jan 2013

gas mitigations purposes. Although [the auction revenue]

has a variety of purposes, above all else it must go to

greenhouse gas mitigation, he said.

Expected challenges on the coverage of imported

power could be more problematic for Californias

programme. It is worrisome for ARB; there is a signicant

risk, said Poloncarz. It had to ensure against leakage,

but had hoped that the WCI would have developed a

regional scheme that would have included all the power in

the region, he said.

When the WCI was established in 2007, Arizona,

New Mexico, Oregon and Washington state, as well

as California, signed the agreement to cap GHG

emissions, including developing and using market-based

mechanisms. By 2008, the Canadian provinces of British

Columbia (BC), Manitoba, Ontario and Quebec, and

two more US states Montana and Utah had joined.

In 2012, only California and Quebec remain committed

to the WCIs market-based ideals although BC andOntario could still set up cap-and-trade while the other

members have stepped away from their commitment to

the initiative.

California imports about 30% of its power needs and

in order to ensure there wasnt any carbon leakage, ARB

cap-and-trade rules cover power importers as so-called

rst deliverers of electricity. It also aims to stop so-

called resource shufing, whereby out of state power

generators have to show that they are not diverting more

In Quebec, covered entities still have no idea when

the rst allowance auction will take place. It had been

hoped to hold one jointly with California in November,

but changes to the criteria for linking the two systems

requiring the signature of the US states governor

meant California will go it alone to start with (see

Carbon Trading, July/August 2012, pages 1820).

Work is ongoing to try and nalise a link between the

programmes that could see a joint auction in the

new year.

The market is also awaiting approval of

amendments to the provinces cap-and-trade

regulations ostensibly to incorporate rules on the

eligibility of carbon offsets. Three protocols have beenproposed the destruction of methane from manure

storage and small land lls in the province and ozone

depleting substances from foam appliances in the US

and Canada.

The regulation could be different to the draft based

on the public consultation, but there is no feedback

until it comes out. The government is being very

tight lipped and not saying when it will be out, said

Douglas Clarke, a lawyer at law rm Therrien Couture in

Brossard, Quebec.

And, as a new Parti Quebecois government was

elected in September replacing Parti Liberal

questions are being asked as to whether or not it may

want to make some changes to the cap-and-trade

regulation approved at the end of last year.

The question in peoples minds is do they want to

re-tweak things. Theres been no conrmation of that,

said Clarke.

We are not seeing the amount of traction out

of Quebec one would expect or need to see for a

programme about to kick off on 1 January, said

Jonathan Burnston, carbon manager at environmental

markets brokerage and advisory rm Karbone in New

York. Quebec is lagging [behind California], he said.

Also in danger of falling behind are many of the

companies to be covered by the Quebec scheme,

said Clarke at Therrien Couture. General sentiment

is that there are two groups [of companies]. One is

highly informed, planning and ready. The other includesa signicant number of businesses that are not well

informed and [for whom] it is not high on their radar

screen, he said.

Many have delegated management of the cap-

and-trade programme to the environment department.

They are all over the reporting requirements, but it

hasnt gone to the nance function [of the business] in

terms of having a strategy for buying allowances and

what compliance options are available. Generally,

there is little expert discussion about a futures

market, he added.

For example, he said one company he had spoken

to covered by the scheme has a futures contract for

delivery of emissions reduction units, but has no idea

what that means, he said.

Where is Quebec?

"Generally, there is little expertdiscussion about a futures marketin Quebec"Douglas Clarke, Therrien Couture


15/36

Cover story

carbon-intensive power away from California to

avoid the cap-and-trade rules.

A plausible theory can be developed

that the regulations electricity importer

and resource shufing provisions

are an attempt to regulate beyond

Californias jurisdiction in violation

of the dormant commerce clause. If

a law discriminates against out-of-

state entities, or attempts to regulate

beyond a states jurisdiction, then the

court applies a strict scrutiny standard,

said Poloncarz in an October paper to the

American Bar Association (ABA).

The clause is part of the US constitution that puts

the power to regulate interstate commerce in the hands

of Congress. And, if the dormant commerce clause was

raised in objection to the regulation of imported power,

it would not be the rst time the clause has been usedagainst California climate change laws. The states Low

Carbon Fuel Standard (LCFS) which aims to reduce

carbon intensity of transportation fuel in California fell

foul of the clause in a court ruling last December (see

Carbon Trading, March 2012, pages 1416). An ARB

appeal is ongoing over the decision.

Under pressure from the Federal Energy Regulatory

Commission (Ferc) an independent agency that regulates

interstate transmission of gas, oil and electricity ARB

has already decided to postpone for 18 months (since 16

August) the enforcement of the resource shufing rules

on the grounds that they are not well dened. At the time,

ARB chair Mary Nicholls said, additional rulemaking

is appropriate in order to dene the types of conduct that

would trigger a case of resource shufing.

The suspension of the rules on resource shufing

may not negate legal action on the issue, but ARB could

argue it is attempting to address companies concerns

by providing more time to nd a solution. However, the

imported power regulations could also be targeted by

other lawsuits. This is because the rules could intrude on

Fercs exclusive jurisdiction over interstate electricity

commerce, which includes ensuring rates are just and

reasonable.

But ARBs regulation is designed precisely to raise

the cost of imported electricity by requiring entities to

procure allowances equivalent to their GHG emissions andapplying a default emissions rate for unspecied imports

Through the default emission rate, the regulation then

essentially imposes a price per MWh on imported power

from unspecied sources, said Poloncarz in the ABA

paper. For this reason, the cap-and-trade rules could be

claimed to cover issues that are governed by Ferc.

Given that the cap-and-trade regulations have been

nalised for some time, including those on imported

power, it is perhaps interesting that a lawsuit has not yet

been led. One reason, said Latham & Watkinss Wyman,

could be that potential litigants and ARB are trying to

sort out the concerns and not resort to the courts. All

parties have been struggling with the questions and the

possibility that litigation has not occurred is because there

has been an honest effort to work it out among all the

parties, he said.

The offset lawsuit was not brought by

companies, but by two green groups

Citizens Climate Lobby and Our Childrens

Earth. They claim offsets should not

be allowed for compliance because

it is not possible to ensure that they

are additional to what would have

happened anyway without the trading

system.

The oral arguments on the case

are to be heard on 7 December, said

Latham & Watkinss Wyman. Hopefully,

there will be a decision by the judge before

the start of the programme, because [offsets]

are a primary cost containment mechanism, he

said, adding that the stability of the market would benet

from knowing the offset regulation wont be impeded.

According to Jonathan Burnston, carbon manager

at environmental markets brokerage and advisory rmKarbone in New York, the green groups lawsuit is one of

the reasons for a recent slowing up in offset trade in the

California market. The impact on the offset market has

been stark, he said, compared with earlier in the year.

This is because the lawsuit threatens the fundamental

stability of the sub-market for offsets in the cap-and-trade

market, he said.

But it is not the only reason for offset trade drying

up, he added. The other reason is interplay with the

allowance market. Allowance prices have dropped in

recent weeks from the highs of a couple of months

ago. Offsets are [priced] at a fundamental discount to

allowances, but since allowances fell so low, offsets have

also fallen so little trade can be done as developers can

barely cover costs, Burnston said.

The price of California carbon allowances for December

2013 delivery was $12.45 a tonne of carbon dioxide on

12 November on the Intercontinental Exchange. The

same unit was trading as at about $19/t in July. Prices

for California compliant offsets were at about $9.75/t in

mid-November compared with more than $12/t a couple

of months ago, he said.

While the ongoing lawsuits and any impending legal

action will be problematic for Californias embryonic

cap-and-trade market, there is no indication, at the

moment, that the system will be completely blocked in

the near term. Our assumption, at this point, is that theprogramme will continue and none [of the lawsuits] will

fully disable the programme, said Latham & Watkinss

Wyman. But they are not trivial actions and may warrant

some action and programmatic adjustments by the state,

he added.

California may also need to address

programmatic issues, even if the auction

has gone well, and the offset lawsuit is

dismissed. At the market level, there are

things to be worked out, said Karbones

Burnston, particularly over the supply of

offsets. Carbon credits that are able to

be generated [by the four approved offset

protocols in California] are nowhere near

what is needed to ll the supply/demand gap,

he said. l

North America


We are notseeing the tractionout of Quebec one

would expect to see fora programme about tostart on 1 January"

Jonathan BurnstonKarbone

Robert Wyman,

Latham & Watkins:

Hopeful that a decision

will be made on

the offsets lawsuit

before the start of the

California scheme


16/36

mechanisms, such as a price oor for EUAs

scheduled to be auctioned.

Increasing the EUs 2020 reduction

target to 30% has already been

analysed by the commission in

2010. If it were to be agreed,

there would need to be either

a cancellation of some phase

III allowances or an increase in

the linear reduction factor, the

commission said.

The analysis estimates that

about 1.4 billion allowances would

need to be removed from phase III to

put the EU on track for a 30% 2020 target

and the blocs long-term aim to cut emissions

by between 80% and 95% below 1990 levels by 2050.

Taking this option would also impact the emissions

targets individual member states have taken on under

the so-called effort sharing decision for sectors not

covered by the EU ETS, the report said.

On 12 November, the commission put forward aformal proposal to withhold 900 million EUAs from the

rst three years of phase III and backload them into

the market in 2019 and 2020 (see page 4). This measure

will require a change to the auction regulation to be

agreed by the EU Climate Change Committee and an

amendment to the ETS Directive, which requires the

backing of the European Parliament and Council.

The proposal in the report to cancel permanently a

volume of phase III allowances would require primary

legislation and could be implemented by a separate

decision, to be taken by the European Parliament and

Council, rather than a fully-edged revision of the EU

ETS Directive, the commission said.

If allowances are to be cancelled, they would be

taken from what is to be auctioned. The decision would

not affect EUAs that are to be distributed for free to

The European Commission on

14 November released a

report that offered six

options for structural

reform of the EU Emissions Trading

Scheme (ETS). The aim is to

reduce the huge oversupply of

allowances in the market.

Analysts say the market is

oversupplied with allowances

(EUAs) and eligible carbon offsets

for the whole of phase III (2013

2020) and beyond. The overhang has

caused carbon prices to fall to levels

that will not inuence businesses away

from business-as-usual, say experts (see box).

The commissions six suggestions, which, it said, are

non-exhaustive, are as follows:

z increasing the EU greenhouse gas emission

reduction target to 30% below 1990 levels by 2020

from the current 20% cut;

z retiring a portion of allowances from phase III;z an early revision of the EU ETSs annual linear

reduction factor, which is currently 1.74%;

z increase the coverage of the EU ETS to other sectors it currently covers about 50% of the regions

economy;

z further limit access to international credits; andz introduce discretionary price management

Cardson thetable

The European Commission has outlined six options for structural

reform of the EU Emissions Trading SchemeWords: Robin Lancaster

EU ETS


"The decision to cancel allowanceswould not afect EUAs that are tobe distributed or ree to acilitiesdesignated as trade exposed"

>


17/36

EU ETS


Feature


facilities that have been designated as trade exposed

because of their inclusion in the scheme.

The 1.74% linear reduction factor whereby the EU

ETS cap tightens by that percentage each year of phase

III and beyond is scheduled to be reviewed in 2020

and any changes to it adopted by 2025. Therefore, this

review could be taken earlier than planned, the

commission said.

The EUs executive noted that the current factor

only puts the region on course for a 70% cut in GHG

emissions by 2050 compared with 1990 levels, short of

the target highlighted above.

Because adoption of this option would impact the

EU ETS beyond phase III, several other policy questions

would have to be addressed also, the commission said.

They include: how to increase the EUs competitiveness

on important low-carbon technologies; how it would link

with the regions post-2020 policy framework; how it

would t with the development of an international carbonmarket; and what are the risks of carbon leakage?

As noted above also, the EU ETS will only cover about

50% of the blocs economy from 2013. Other burgeoning

cap-and-trade programmes around the world, such as in

California (see pages 1013), already have plans for wider

coverage approximately 75%85%.

The report said the EU ETS could be expanded to

other energy-related carbon dioxide emissions power

generation is already covered such as fuel consumption

in other industry sectors.

A more comprehensive extension to all energy-

related emissions would substantially increase the

emissions coverage and can impact the overall ambition

level, depending on the level of the cap foreseen for the

sectors included, the commission said.

On whom the ETS obligation would fall would need

to be worked out either fuel producers, consumers or

a hybrid of the two, the report said. More work would

need to be done on this option, in particular, how it

would impact policies already in place in these areas, the

commission added.

The introduction of discretionary price management

mechanisms would have a big impact on the European

cap-and-trade system, because it would alter the very

nature of the current EU ETS being a quantity-based

market instrument, the paper said. That is to say, the

scheme currently promotes cost-effective emissionreductions through the allocation of a pre-dened

quantity of allowances.

The commission highlighted two possible

mechanisms a price oor for auctioned allowances and/

or a price management reserve that would release EUAs

into the market, if the price rises above a set level. It

would withdraw some allowances to be auctioned, if the

price falls below a certain level.

There would be a downside to this option, said the

commission, because the carbon price may become

primarily a product of administrative and political

decisions (or expectations about them), rather than a

result of the interplay of market supply and demand.

It also raises other potential problems. If EUAs

withdrawn because of low prices are not cancelled, there

is no additional environmental benet. A too high a price

would reduce exibility and increase costs, while a too

low a price would not effect changes to businesses

behaviour. Set prices could boost low-carbon

technologies, but at the expense of ETS participants

and society as a whole, if there are technological

breakthroughs, which substantially lower abatement

costs, the commission said.

A formal stakeholder consultation on the options

will be launched soon. Any future proposal would then

require another public consultation and full assessment

of its impacts, the report concluded. l

The publication of six options for reforming the EU Emissions Trading Scheme

(ETS) has come about mainly because of oversupply in the market. The report

was originally scheduled to be released in 2013, but has been brought forward

because of the overhang of allowances in the EU ETS.

The ongoing economic crisis has resulted in less output than anticipated

and, in turn, less greenhouse gas (GHG) emissions than expected. While less

carbon emissions is a good thing in terms of tackling climate change, theway the EU ETS works means that many installations covered by the scheme

have been allocated far more allowances (EUAs) than they now need for

compliance. These EUAs can be banked for future use.

The issue has been compounded by a glut of carbon offsets which can

be used to cover a percentage of an entitys obligation coming into the

market ahead of restrictions on their use next year.

As a consequence of the above events, analysts project the market is

oversupplied by between 1 billion and 2 billion tonnes of carbon dioxide,

which means the EU ETS will be in surplus for the whole of phase III (2013

2020) and some of the years beyond under a business-as-usual scenario.

If that were to continue, the carbon price would continue to be at levels

not high enough to instigate changes to how businesses behave in relation to

GHG emissions. A price on carbon is a key reason for establishing the scheme

and so, if it were to be too low to make a difference to behaviour, it would

render the scheme irrelevant ultimately.

Why is structural reform needed?

Summary of the various European Commission

options to revise the EU ETS

Option Effects supply or demand Speed ofdeployment Changesambition post-

2020

Impacts freeallocation

Increasing EU GHG

target to 30%

Supply Depends on the

mechanism*

Depends on the

mechanism*

Depends on the

mechanism*

Retiring a volume of

allowances

Supply Relatively fast No No

Early revision of the linear

reduction factor

Supply Slow Yes Yes

Extend the scope of EU

ETS sector coverage

Demand Slow Depends on

design

No

Restrict international

credits further

Supply Slow No No

Discretionary price

management

Supply Slow No** No

* This depends on and corresponds to features of the mechanism that would operationalise the increase,

that is to say, retiring allowances or a revision of the linear reduction factor

**Assuming that the mechanisms would not result in the cancellation of those allowances that are

temporarily not auctioned

Source: European Commission


18/36

2012 Carbon Market Survey


TheResultsServiceHere are the results of the rst Carbon Trading magazinemarket surveyWords: Robin Lancaster

EU Emissions Trading Scheme

Winner Runner up

Best trading company Vitol Barclays

Best brokerage rm Icap Evolution Markets

Best verication

companyDNV SGS

Best advisory rm ICF International Ecofys

Best law rm Baker & McKenzie Norton Rose

Best exchange IntercontinentalExchange (ICE)

European EnergyExchange

Clean Development Mechanism

Winner Runner up

Best trading company Vitol Orbeo

Best brokerage rm Evolution Markets Icap

Best project developer South Pole Carbon Tricorona

Best DesignatedOperational Entity

DNV TV Rheinland

Best advisory rm Climate Focus ICF International


Best exchange ICE BlueNext

There was a time when a survey of the worlds

carbon markets would focus almost wholly

on the EU Emissions Trading Scheme (ETS)

and the UNs Clean Development Mechanism

(CDM). But the times they are a changing.

This, the rst Carbon Trading market survey, goes

beyond those two markets to include North America,

Australia and New Zealand and the voluntary sector.

Future years could see further expansion to countries

and regions, such as China and Kazakhstan, while others

could perhaps fall away.

Market participants were invited to vote in the survey

over a three-week period in late October and early

November. Voters were asked to make judgements

based on efciency and quality of service, reliability

in the market and ability to adapt to changing market

conditions.

The response, given the short time period that the

survey was open, was better than anticipated by the

magazine. More than 400 people completed the online

voting questionnaire during the three-week period in

future, it is likely that more time will be given to complete

the survey.

The EU ETS categories polled well, as would probably

be expected of what is still the worlds largest carbon

market. Trading giant Vitol topped the best trading

company, with Barclays coming in as runner up. Vitol

also won the same category for the Clean Development

Mechanism (CDM) and was second in North America.

London-based broker Icap topped the best brokerage

EU ETS category, just ahead of energy and environmental

markets specialist Evolution Markets. Evolution was

prominent in the other broking categories. The US-based

company was the winner of best brokerage rm CDM,

North America and the voluntary carbon market.

In the voluntary market, another sector that polled well

overall, UK-based Climate Care stood out taking top spot

in two categories best trading company and best project

developer as well as joint winner of the best advisory rm

category.

Through the last 15 years of constant innovation, a

key driver for us has always been working with partners

>

WinnerMarket survey

2012

Runner-upMarket survey

2012


19/36

2012 Carbon Market SurveySurvey


Voluntary Carbon Market

Winner Runner up

Best trading company Climate Care Carbon NeutralCompany

Best brokerage rm Evolution Markets Armajaro

Best project developer Climate Care South Pole Carbon

Best validationcompany

Scientic Certication

SystemsSES Inc

Best verication

companyScientic Certication

SystemsSES Inc

Best advisorycompany

=Carbon NeutralCompany, Climate Care

-

Best law rm Baker & McKenzie Linklaters

Best standard Veried Carbon

Standard

The Gold Standard

Best registry Markit APX

Australia/New Zealand

Winner Runner up

Best trading company Westpac Macquarie Bank

Best brokerage rm OM Financial Carbon Match

Best project developer CO2 Australia Climate Friendly

Best advisory rm Climate Friendly CO2 Australia


North America

Winner Runner up

Best trading company CE2 Capital Partners Vitol

Best brokerage rm Evolution Markets Karbone

Best project developer Environmental CreditCorp

EOS Climate

Best validationcompany

First Environment Scientic CerticationSystems

Best verication

companyFirst Environment Scientic Certication

Systems

Best law rm Baker & McKenzie Van Ness Feldman

Best exchange ICE (No clear 2nd place)

towards a shared end goal of maximising impacts for

people, for the environment and for our corporate clients

and investors. Strong, enduring relationships, as well as

continual benchmarking are essential to this success

and for this reason, peer and industry voted awards are

particularly important to us, said Edward Hanrahan,

director of Climate Care.

The Carbon Neutral Company was the other winner

of the best advisory company voluntary market, in what

turned out to be the most contested title in the whole

survey. The company also came in second in the best

trading voluntary market poll.

Another voluntary market category that drew a lot of

votes was best registry. This was won by Markit, with

APX coming in second. The best law rm in the voluntary

market was Baker & McKenzie. The global rm was alsosuccessful in all of the other law rm categories. Norton

Rose was runner up in the others, apart from the voluntary

market where Linklaters came second, and North America

which saw Van Ness Feldman as runner up.

Other companies successful in the voluntary market

part of the survey were US-based Scientic Certication

Systems (SCS), which won both best validation and

verication categories. SCS was also runner up in the

same groups for North America, which were headed by

First Environment.

The best voluntary market standard went to the US-

based Veried Carbon Standard (VCS), with Switzerland-

headquartered Gold Standard coming a close second. The

VCS started out as the Voluntary Carbon Standard, but

the name change last year signies that its work is now

stretching well beyond just the voluntary sector.

The CDM category also polled well, just behind the EU

ETS and voluntary carbon market. It will be interesting to

see how well the sector polls next year, after restrictions

on the use of CDM credits in the EU cap-and-trade system

the largest source of demand come into play.

This year, South Pole Carbon was the winner of the

best project developer category, closely followed by

Sweden-based Tricorona. Norway-based DNV topped the

best Designated Operational Entity (DOE) category a

DOE carries out validation and verication services on a

project and was also the best verier in the EU ETS poll.

Tv Rheinland came in second in the CDM.

Netherlands-based Climate Focus came out winner

of the best advisory rm CDM, with ICF International in

second place. ICF did, however, win the same poll in the

EU ETS section. The last category for the CDM was best

exchange. This was won by the Intercontinental Exchange

(ICE), which also headed the same category in the EU ETS

and North America sections.BlueNext, which recently announced that it will close,

still polled in second place in the CDM category, while

Leipzig-based European Energy Exchange came in

second in the EU ETS poll. There was no clear second

place in the North America section.

The North America section may well need to be split

into separate categories in the future, with California and

Quebec starting cap-and-trade schemes from 1 January.

This year the continent was treated a whole and polled

CE2 Capital Partners as best trading company and

Environmental Credit Corp as best project developer.

Another section that may need to be split in the future

is Australia/New Zealand. This years saw Australia-based

bank Westpac win the best trading company, OM Financial

win the best brokerage rm. CO2 Australia was best

developer and came second in best advisory company,

which was won by Climate Friendly. The latter company

was also runner up in the best project developer section. l

Carbon Trading would like to express its congratulations to all the

winners and thanks all the people who took the time out to vote in

the magazines rst survey of this kind.


20/36

While international climate change

negotiations are characterised by slow

progress and frustration, regional emissions

trading systems (ETSs) are increasingly

gaining the attention of government leaders. Many

systems are springing up in various parts of the world,

including Europe, North America, Australia and China.

With the EU ETS the worlds largest carbon market

struggling with a huge surplus of allowances up to 2020

and beyond, increased attention is being given to the

possibility of linking the European system with these other

trading programmes.

Linking the EU ETS to other regional systems around

the world may prove an important stepping-stone to

reduce greenhouse gas (GHG) emissions and thus moving

the climate change regime forward. A rst step was taken

in August, when the European Commission and Australias

government declared the intention to link their respective

markets, partially by 2015 and fully by 2018 (see Carbon

Trading, October 2012, pages 1015).

In Europe, there has for several years been a clearly

stated ambition to establish a

transatlantic carbon market. When

a federal carbon cap-and-trade

programme was efciently dumped

by political deadlock in Washington,

Europe, instead, had to look to the

different regional initiatives in North

America. Californias cap-and-trade

system which ofcially starts on

1 January has drawn the most

The onlygamein Town?

There are technical obstacles to linking the EU and CaliforniaETSs, but political ambition will be the key to success

Words: Daniel Engstrm Stenson and Lars Zetterberg

attention given the size of the US states economy and its

emissions.

In 2011, EU Climate Commissioner Connie Hedegaard

met with the Californias Governor Jerry Brown and

conrmed plans to try and link the EU ETS with the

Californian system. Since, however, little has been heard

from respective politicians on the plans for linking.

A link between the two trading programmes, to a large

extent, depends on the political ambition and eagerness

of responsible decision makers. But it is crucial also to

discuss the technical conditions necessary for linkage

between the two markets to take place.

At a theoretical level, the benets of linking are well

known. It expands market size, increasing liquidity

and reducing the costs for reducing emissions in both

schemes. This is because more GHG reduction options

should be available in a larger system. Linking creates a

win-win situation with lower costs and higher efciency.

On the whole, both systems are better off, although

some actors could lose out for example, sellers

of allowances prior to linking might become buyers

afterwards. Some estimates of the impact of the Kyoto

Protocol have shown total costs savings of up to 50%

by creating a global carbon market with trade across all

countries, despite fears of imported price volatility andsellers taking advantage of linking to relax their cap in

order to sell more allowances.

Technical aspects o linking EU ETS and

Caliornia

Even if two systems could be a perfect match in

an economic sense, technical differences could

constitute a barrier to linking. The two systems

do not have to be identical. But a certain level of

compatibility is needed for linking to be possible.

In this respect, there are some features that are

more important than others.

The three technical features outlined below

represent the biggest challenges to a possible

link between the EU ETS and the Californian cap-

and-trade system.

Linking

18|Crb Trd | Dec 2012/Jan 2013

"A link between the two, to alarge extent, depends on thepolitical ambition and eagerness oresponsible decision makers"Lars Zetterberg

>


21/36

Linking


Feature

Dec 2012/Jan 2013 | Crb Trd | 19

Recognition o ofsets

Perhaps the most signicant of the technical barriers is

the use of offsets. It is crucial that both systems recognise

each others offset credits, since an offset credit from one

system should be available for compliance in the other

system after linking.

Currently, California accepts four domestic offset types

the destruction of ozone depleting substances, livestock

manure management, urban forestry and forestry that

can generate credits to meet no more than 8% of their

total compliance target. But the EU ETS does not currently

allow forestry credits to be used for compliance, because,

in its view, the sector has signicant faults in monitoring

and verication practices among other things.

The EU scheme also only recognises offsets created

under the Kyoto Protocols Joint Implementation system

and Clean Development Mechanism (CDM) to cover a

maximum of 11% of a covered facilitys total allowed

emissions. Californias cap-and-trade programme does

not recognise Kyoto credits and, in the US as a whole, the

protocol is viewed with scepticism.

Currently, the EU and California are far apart on offsets.

The issue will need to be dealt with before a linkage can

take place. The ongoing UN climate negotiations over new

market mechanisms could play a crucial role in convergingthe two systems view on offsets. A global agreement on a

new set of exible mechanisms and carbon credits could

change the dynamic of offsetting in all trading schemes

and force policymakers to take a new stand on which

offsets should be allowed for compliance.

Relative stringency o targets

The economic gain from linking depends on different GHG

reduction ambitions and costs in the various systems the

greater the price disparity and abatement costs between

the two systems, the greater the economic gain will be.

But different ambitions will prove challenging in many

ways, not least politically, when it comes to linking.

Linking to a system with signicantly looser reduction

targets will not only be perceived as undermining the

environmental integrity of the ambitious system, but it will

also lead to a ow of funds from the high-cost system

to the low-cost system. From the point of view of the

low-cost system, a link to a higher cost system will lead to

increases in the allowance price, which might prove to be

a domestic political challenge.

In percentage terms, the EU reduction target is more

ambitious than its Californian counterparts minus 21%

by 2020 compared with 2005 levels in Europe against

minus 9% for 2020 compared with 2005 for the US state.

But, when comparing targets, one needs also to consider

other aspects, such as population growth, economic

growth and available abatement options, which all have an

impact on allowance prices.Even if the EU has more stringent targets vis--vis

California in terms of the reduction percentage, the prices

of the two systems may more or less overlap due to the

higher costs of reducing emissions in California. This

higher cost depends partly on the fact that emissions from

the transport sector are included in the Californian ETS,

but not in the EU ETS.

However, the price uncertainty is signicant. Analysts

estimate allowance prices for 2020 at $17$37 a tonne of

carbon dioxide (tCO2) in the EU and between $15$75/t

of CO2 in California. Based on these gures, it is difcult

to conclude which system will have the highest allowance

price over the period 20132020 and, therefore, be the net

buyer of allowances.

The different levels of ambition should not be an

insurmountable barrier to a future linkage between the two

"It should be noted that the currenthuge surplus o carbon allowancesin the EU Emissions Trading Schemewould also impact the linkagediscussions"

Credits from reforestation are eligible in California, but not Europe


22/36

systems, despite the uncertainty over the exact carbon

price levels in each scheme

Price managementOne of the pillars of carbon trading is the cap, which is set

to regulate the quantity of GHG emissions an installation

can discharge. Under the cap, businesses trade

allowances among themselves according to the premise of

supply and demand. As such, differences in price control

mechanisms in ETSs could create a barrier to linkage.

One possible scenario arises if a system introduces

a carbon price ceiling. The other programme has no say

in the matter, but the ceiling would become available

in the that system as well, not only pressing down the

carbon price in both schemes, but ultimately leading to an

increase in the two systems total emissions.

California will adopt a price ceiling ranging from

$4050/t of CO2. If the price ceiling is reached, allowances

are made available to the market from a reserve. This

reserve is limited to 4% of the total allowance volume and

is populated by borrowing allowances from future years.

The limitation of allowances in the reserve means that

there is still an absolute cap on emissions in Californias

system, which is a requirement for linking according to the

EU ETS Directive. Therefore, the price ceiling in California

is not a serious threat to linking with the EU scheme

where there is no price cap.

It is premature at this stage to assess how the ongoing

discussions in Brussels to try and deal with the lower

than expected European carbon price that has resulted

from the large surplus of allowances will affect linking

discussions.

Some people have called for the EU to look into a

reserve price system for auctions. Others have argued

for a one-off permanent cancellation of allowances.

Both suggestions are options put forward by the

commission for structural reform of the EU ETS (see

pages 1415). Another proposal would see allowances

scheduled for auction in the early years of phase III(20132020) of the EU ETS set aside until later in the

period (see page 4).

Should the EU decide to move into some form of

additional price management this could well affect the

possibilities of linkage to California. But it should also

be noted that the current huge surplus of allowances in

Europe would also impact the linkage discussions.

At the moment, a link between the EU ETS and

California seems unlikely. EU ETS decision-makers are

busy trying to sort out the schemes problems, highlighted

above. There is also more attention being paid to the plans

for the link between the EU and Australian systems.

On the other side of the Atlantic, California has, for

the moment, turned its attention towards the Canadian

province of Quebec and will likely focus on other North-

American linkages before turning to Europe. This does not

mean that linking with Europe is not on the table. Media

reports state that initial discussions between California and

Australia are already taking place.

In addition, the many emerging carbon markets will

make linking a more and more topical issue. In particular,

in the absence of progress at the UN-led climate

negotiations, it is tempting to state that linking existing

and planned carbon markets is the only game in town.

One should, however, not jump to conclusions and

underestimate the many challenges ahead.

When it comes to a possible link between Europe andCalifornia, there are technical obstacles that make joining

unlikely in the short term. In the longer term, however,

the current barriers to linking could be solved, if the

political will is there. Whether or not the necessary political

leadership for linking will be shown, remains to be seen. l

This article is based on the October 2012 paper Linking

the Emissions Trading Systems in EU and California

available at http://www.ivl.se/download/18.50367b6c13a6f

da0152376/1350970297329/B2061.pdf

Lars Zetterberg is a researcher at the Swedish Environmental

Research Institute. Daniel Engstrm Stenson is programme

manager environmental policies at the Sweden-based think tank

Forum Fr Reformer Och Entreprenrskap (Fores)

E [email protected]

Linking

20|Crb Trd | Dec 2012/Jan 2013

"Diferent levels o ambition shouldnot be an insurmountable barrier toa uture linkage"Daniel Engstrm


23/36

Carbon Trading is the new magazinecovering greenhouse gas markets.

It was launched in January 2012 by

Olicana Publishing Ltd.

Published 10 times a year, Carbon

Trading is an essential inormation

source or anyone who wants to get a

better understanding o the wide-

ranging practices within carbon and

climate change-related industries.

The magazine is ree to online

subscribers. To secure yoursubscription now, please contact:

[email protected]

or call +44 (0)1943 605279

Carbon Trading covers a variety o

topics including corporate strategies,

technology proles, international

policy developments, opinion pieces,

risk and price analysis, as well as the

latest market innovations.

Upcoming issues in 2013 will look

at the outcome o Doha UN climate

talks, analysis o the EuropeanCommission proposals or reorm o

the EU ETS and a carbon market IT

survey.

For more inormation contact:

[email protected] or

call +44 (0)1943 605279

Carbon Trading also ofers

advertising opportunities. For more

details on our rates discounts are

available or bulk bookings contact:

[email protected] call +44 (0)1943 605279

www.carbon-tradingmagazine.com


24/36

The next high-level international climate

change negotiations are almost upon

us with parties to the UN Framework

Convention on Climate Change (UNFCCC)

meeting in Doha, Qatar from 26 November to

7 December.

This is the rst so-called COP and CMP since

decisions were made in Durban, South Africa last

December setting a new timetable for agreement

on a climate regime for the post-2020 world. That

agreement is set to be concluded in 2015 and so

the expectations of many people are slim

for major progress on climate change in

Doha.

But that does not mean nothing

will happen in Doha. The talks will

need to move forward on a range

of issues to avoid a backlog of

decisions in 2015. As well as COP

18 and CMP 8 meetings, Doha

will also see the next sessions of

various subsidiary bodies and ad

hoc working groups (AWGs) to the

UNFCCC. It is these latter talks where

the most interesting work takes place.Perhaps most attention will be on the second

part of the rst session of the AWG on the Durban

Platform for Enhanced Action (ADP). The group was

set up in Durban and held its rst session in Bonn in

May, as well as holding informal sessions in Bangkok

in August and September. The aim of the ADP is to

develop a protocol, another legal instrument or an

agreed outcome with legal force under the UNFCCC

by 2015.

The ADP is currently split into two so-called

workstreams. In workstream one, parties to the

UNFCCC have started to discuss broad visions

and aspirations for the ADP, such as the key

characteristics and features of the new agreement. The

second workstream is considering concrete options

for broad measures and specic actions to enhance

ActionstationsWhat is on the agenda at the Doha climate change talks inNovember and December?Words: Robin Lancaster

ambition to reduce emissions to a level that will keep

global temperature rise to below 2 or 1.5 Celsius.

From the discussions, so far, countries have

identied several issues in both streams that should

be debated further, according to documents on the

UNFCCC website (see table). In workstream one, they

include: how the principles of the UNFCCC will be

applied to the new agreement; how national country

circumstances and changes to those circumstances

should be accounted for; and how other work under the

UNFCCC will be taken into account in the ADP.

Workstream two, among other things,

will discuss how to: increase the level

of ambition of countries emission

reduction pledges and encourage

nations that have not made pledges;

develop and expand initiatives with

the largest mitigation potential; and

ensure stakeholder engagement

and involvement.

The same document says that

Doha should send a clear signal that

[the ADP] is making progress towards a

new protocol, another legal instrument or

an agreed outcome with legal force, as wellas towards increasing the level of ambition. The

aim will also be to set a calendar and timetable for further

talks in 2013.

Two other AWG sessions in Doha have relevance

to the ADP, particularly as these groups are scheduled

to conclude in Qatar. They are the AWG on Long-term

Cooperative Action (AWG-LCA) and the AWG on Further

Commitments for Annex I Parties under the Kyoto

Protocol (AWG-KP).

The AWG-LCA talks cover a range of issues,

including mitigation, adaptation and technology

development and transfer. The talks on enhanced

national or international mitigation action on climate

change cover measurement, reporting and verication

(MRV) issues, nationally appropriate mitigation actions

(Namas) by developing countries; policy approaches

UN Negotiations


>

"Dohashould send a

signal that the ADP

is progressing on a

new protocol, another

legal instrument or

an agreed outcome

with legal force"


25/36

UN Negotiations


Special report


and positive incentives for reducing emissions

from deforestation and forest degradation (Redd+);

cooperation on sectoral approaches to cut GHG

emissions; other opportunities including the use of

markets to mitigate climate change; and the economic

and social consequences of response measures.

The AWG-KPs main task will be to come up with

agreement on the second commitment period of the

Kyoto Protocol. Several countries, most notably those

that make up the EU, agreed in Durban to sign up to

a second period, after the rst concludes at the end

of this year. Although the number of industrialised

countries agreeing to emission cuts under Kyoto two

has fallen from those that ratied the original treaty,

there are still important issues to be discussed.

They include the future role in Kyoto two of the Clean

Development Mechanism (CDM) for example, will it

be restricted to countries that only agree new targets

under the protocol and when the second commitmentwill end. Currently, two dates are on the agenda the

31 December 2017 and 31 December 2020. The AWG-

KP talks will also need to agree on the caps countries/

regions will take on in the second commitment period.

The 37th session of the Subsidiary Body for

Scientic and Technological Advice (SBSTA) will meet in

Doha between 26 November and 1 December. SBSTA

has a wide range of topics on its agenda, with several

of them having possible relevance to participants in

carbon markets.

One area that SBSTA will discuss is Redd+ which

also includes the role of forest conservation, sustainable

management of forests and enhancement of forest

carbon stocks in developing countries. It is set to

complete in Doha its work on guidance for modalities

for forest MRV, further consider issues relating to the

drivers of deforestation, continue its work on safeguards

for local and indigenous peoples from Redd+

activities; and start working on guidance for assessing

forest reference emission levels.

SBSTA will also consider emissions from fuel used

for international aviation and maritime transport. While

emissions from

carbon trading_2012 market survey

Documents