Sectoral Approaches and the Carbon Market

SectoralApproaches and the Carbon Market Barbara Buchner International Energy Agency Based on Baron, Buchner, Ellis (2009) www.oecd.org/env/cc/aixg.htm IEW 2009 – Venice , 17– 19 June 2009 barbara.buchner@iea.org

Sectoral market mechanisms • Motivation • Carbon market can drive significant emission reductions • Broaden mitigation from projects to sectors in developing countries • Use the carbon market price signal as incentive • Could generate significant revenues, but could also require significant host government commitment

Ways to link sectoral goals with the carbon market • Intensity goals – based on a GHG performance per unit of output • Fixed emission goals – an absolute total quantity of GHG emissions • as the basis for • crediting, with an ex post issuance of credits, based on a ‘no lose’ target (non-binding, i.e. no penalty) or • trading, with an ex ante allocation of allowances to country/sector • Technology-based sectoral objectives

Crediting under a “no lose” sectoral target Business as usual Global mitigation tCO2 or tCO2/unit of output No lose crediting baseline Offsets Actual performance Time

Issues of broadening CDM-type crediting • How to move beyond offsetting? • Ambitious baselines • Retirement/discounting of credits • Both at supply and demand side • Recognition rules of credits • Implications on carbon market • Demand/supply balance

Why supply-and-demand balance matters with no-lose crediting Business as usual Actual performance (low carbon price) Global mitigation tCO2 or tCO2/unit of output No lose crediting baseline Offsets Actual performance (high carbon price) Time • Effect on global mitigation via the carbon price

Potential supply and demand demand supply Mt CO2 Source: See Baron, Buchner, Ellis 2009

Domestic policy implications from broadening crediting • Intensity-based sectoral crediting • Possible non-cooperation among covered sources • Lack of compliance/sanction mechanisms in case of non-performance • Sectoral crediting based on fixed targets • More potential for direct carbon price signal to domestic entities, provided government is willing and able to allocate efforts • Sectoral trading • Ex ante allocation: reduces uncertainty on total quantity of credits, but requires government to take full liability

Sectoral crediting: who gets what? International carbon market Intensity (tCO2/MWh) Maximum revenues to Group A = 4.5 MtCO2 Credits sold = 4.5 IntensityB = 0.51 Domestic policy framework to beat the baseline? Baseline = 0.5 -0.5 Credits issued = 4.5 IntensityCountry = 0.455 5.0 IntensityA = 0.4 20.0 25.5 45.5 Group A Group B Country total

Incentives: who gets what? Depends on… • … international guidance, e.g. how baselines are set/approved • … national implementation: • allocation/incentives: do governments pass on 100% of the carbon market incentive? • liability (sectoral trading): who, if over-emissions?

Lessons from illustration • Getting the market signal to individual sectoral players may not be straightforward • Can the carbon finance effectively flow to trigger investments? • Sectoral objectives ought to be backed by clear options for domestic implementation – the ‘market’ won’t do it all. • How much could existing domestic CDM institutions help? • Sectoral crediting, to be effective, implies active development of domestic policy

Domestic policy implications from broadening crediting • Intensity-based sectoral crediting • Possible non-cooperation among covered sources • Lack of compliance/sanction mechanisms in case of non-performance • Sectoral crediting based on fixed targets • More potential for direct carbon price signal to domestic entities, provided government is willing and able to allocate efforts • Sectoral trading • Ex ante allocation: reduces uncertainty on total quantity of credits, but requires government to take full liability • Technology-based objective

Conclusions • Possible evolution of carbon market welcome from economic perspective, but… • demand/supply side • environmental imperatives • political realities • Ensure that price is not too low to induce innovation and avoid carbon lock-in • Relay price signal directly to entities

Bottom line • Critical – significant upfront efforts: • ambitious baselines; ensure MRV – require data, expertise, political negotiation • domestic policy framework • Uncertainties: scope, political acceptability & timing for possible introduction • Need to consider long-term aims and how SA fit

Sectoral Approaches and the Carbon Market