Session on Integrating National and International Approaches to Carbon Pricing Policies: Developing a Global Framework

1. Session on Integrating National and International Approaches to Carbon Pricing Policies: Developing a Global Framework Warwick J McKibbin CAMA, ANU College of Business and Economics Presentation to ANU Climate Institute Copenhagen roundtable 14 April 2009

2. Outline • The goal of the session • The Debates • Global versus national • How to set a carbon price • Lessons learnt from • Clean Development Mechanism • European Emissions Trading System • Unintended consequences (biofuels and land clearing) • Global financial crisis • Implications for Linking Systems • Implications for the Copenhagen negotiations

3. Goals • Focus on issues related to building a global framework for climate policy • Linkage of national systems • Sustainability of the structure • Ability to achieve what is required (risk management) • Evidence of what has been tried so far

4. Key Conclusions • NO CONSENSUS • Most debates on system design are unresolved • Evidence so far on alternative approaches is mixed (some strong opinions on both sides) • There are many views on the best way to price carbon but a carbon tax or hybrid approach was mentioned favorably however some argued too much momentum in politics of cap and trade • the Titanic effect

5. Several Debates • Top down global policy framework fully integrated across countries • Coordination within UNFCCC of national policy frameworks around a common carbon price

6. Several Debates • A targets and timetable approach with binding national targets for emissions (one size fits all) • Permit trading across countries to equalize the carbon price • CDM and other mechanisms to mimic carbon trading before countries have a firm target • A carbon tax or a hybrid of taxes and permits around a common price taking into account national circumstances but without international trade in permits except in bilateral deals

7. Key points in the papers and discussion • Taxes or hybrids that fix a short term price are better systems under uncertainty than a traditional cap and trade permit trading system • Sense that the debate is shifting away from the European style emissions trading system • Economists mostly arguing for a tax or hybrid while acknowledging that the policy process had not moved in that direction (Nordhaus keynote)

8. Key points in the papers and discussion • European ETS • Some argued has a lot of flaws and needs to be modified post 2013 • Large price volatility • Unclear long term signals • time horizon too short • Others argues it has been a useful experiment and although many problem it will continue • Has reduced emissions • Has enlarged through more installations, more countries, allowing for CDM • Unlikely to survive if a new global agreement is not reached

9. Key points in the papers and discussion • CDM • Evidence is that the CDM has not reduced actual emissions globally (additionality) • Survey data shows that 75% of all projects already commenced before CDM approval given (evidence of no effect or evidence that expectations matter?) 67% in China – mostly hydro • Survey of CDM project developers show that they would have done the project anyway

10. Key points in the papers • Global Financial Crisis • Shows that the future is highly uncertain • Shows that the costs of commitments to targets over long period of time are almost impossible to predict with any accuracy • Shows that system design including institutions are critical to long term system survival

11. Key points in the papers • Land Use • Need to broaden linkages to include terrestrial carbon and a broader range of opportunities for emission reductions outside energy systems

12. Key points in the papers • Sustainability of the system politically and economically matters • Should not only focus on how a system reduced emissions but also how the climate policy framework affects the transmission of shocks between countries

13. Conclusions • The design of the global policy framework would not emerge from Copenhagen in 2009 • The issue of linkage is a very young debate driven by negotiating inertia and national implementation plans rather than practical system wide design • Countries are unlikely to make meaningful and credible commitments under the current negotiations until relative costs are taken into account explicitly • Pricing carbon (especially long term) is a necessary but not sufficient condition for addressing the climate problem