Emissions Trading Scheme in Taiwan and International Linkage

1. Emissions Trading Schemein Taiwan and International Linkage EU-Taiwan Climate Change Forum Dr. Hui-Chen Chien Deputy Director-General Department of Air Quality Protection and Noise Control Environmental Protection Administration 13 October 2010

2. 1. Existing and Emerging ETS Worldwide 2. Legal Foundation in Taiwan 3. Taiwan’s Emissions Trading Scheme 4. International Linkage 5. Concluding Remarks Outline

3. Existing and Emerging ETS Worldwide 1 Taiwan ETS similar in size to RGGI

4. 1 Elements for ETS Linkage • Cap (absolute vs. intensity-based, stringency of cap) • Coverage (sectors and GHGs) • Allocation rules (free vs. auction) • MRV standards (methods for monitoring, reporting, verification) • Offsets (eligibility of Kyoto and non-Kyoto units) • Cost containment (offsets, borrowing, price cap, etc.) • Registry system (inter-registry linkage, technical issues) • Trading platform (trading of various units, liquidity)

5. 1 Complementary Measures of Taiwan ETS • MRV Mechanism:assures that all sectors follow international MRV requirements when reducing their GHG emissions or generating offset credits. • National Registry:serves as the national GHG emissions database, and provides a transparent management system for emitters. • Offset Project Management System: managing early action that the government has been promoting over the past years, and issues offset credits following MRV requirements. • Carbon Credit Management and ETS:establishing a system which is capable of linking with international markets, offers participants a fair and open trading environment. • Foreign Offset Credit Transfer Mechanism: provides a strict reviewing process to ensure the credibility and cancellation of foreign offset credits, in order to avoid reselling.

6. 2 500 450 400 350 300 250 200 2015 2020 2000 2005 2010 Taiwan’s Voluntary Reduction Target • Government adopted emission reduction targets with the National Energy Conservation and Carbon Reduction Program • Returning to 2005 level by 2020 • Returning to 2000 level by 2025 2009 BAU (GDP High Growth Scenario) 467 Energy intensity -2%/yr 391 375 M Tonnes CO2 370 341 LNG 338 Renewables 305 Nuclear Afforestation 269 Taipower offsets 265 257 257 257 243 Shortfall (~48 mt) Return to 2005 level in 2020 6

7. 2 Our GHG Reduction Goal • GHG reduction goal in Taiwan – Return to 2005 level in 2020, it means 45% BAU decreasing percentage in 2020. • This BAU reduction percentage is far more than those comparative countries as Taiwan (Koreadeclines 30% GHG emission of BAU , Singapore declines 16% GHG emission of BAU); and IPCC suggested developing countries shall set a goal as decreasing 15-30% GHG emission of BAU in 2020. Low Growth Scenario High Growth Scenario Medium Growth Scenario Growth M Tonnes M Tonnes M Tonnes emissions BAU reduction contribution compared to 2020 Reduction Reduction Reduction Sorts of Contribution Sorts of Contribution Sorts of Contribution (1) Nation Reduction (including yearly 2% energy density decline) Oversea Credits Reduction Gap Note: GHG emissions are mainly combusted fuel CO2 in Taiwan (90%), Other Non-CO2 emissions declined in recent year.

8. 2 Establishing a Legal Foundation for GHG Reduction in Taiwan • In order to achieve the target, “Green Policies” will be the important legal foundation for“Energy Saving and Carbon Reduction” : • Energy Management ActandRenewable Energy Development Act have already been passed in the Legislative Yuan in 2009. • The above-mentioned bills are complementary to Greenhouse Gas Reduction Bill andEnergy Tax Bill, waiting to be reviewed and promoted the Legislative Yuan and Executive Yuan.

9. 3 Taiwan Emissions Trading Scheme (ETS) • The design of the Taiwan ETS is according to the spirit of low-cost and cost effectivenessin the GHG Reduction Bill, currently being reviewed by the Legislative Yuan. Taiwan ETS is a market-based approach used to reduce the emissions by providing economic incentives. The scheme also works to develop industries capacity-building. • MRV Mechanism: The design of the Taiwan ETS not only follows the international MRV requirements, but UNFCCC/CDM mechanism as well, using similar standards for verifying project-based reduction.

10. 3 GHG Reduction Strategies by Stages

11. GHG Reduction Act Implementation 3 Before GHG Act Stage I Stage II Stage III Voluntary inventory/ reduction Mandatory inventory/ Voluntary reduction Performance standards/ Offset trading Cap and Trade Inventory reporting Inventory reporting Inventory reporting Inventory reporting Verification system Verification system Verification system Verification system Performance standards Performance Stds Allocation Auction Emission Permits Cap and trade Pilot offset trading Offset trading Early action/offset Early action/ offset projects Early action/offset projects International offsets International offsets International offsets Perform std offsets Perform std offsets Allowances 11

12. 3 Current Participants of the Taiwan ETS • Under the Environmental Impact Assessment (EIA)Act, facilities thatarerequired to offset their emissions will be the potential participantsof the Taiwan ETS. Other facilities are not included in the scheme, but voluntary buyers are welcomed. • EIA commitment: Companies have committed to offset the increased emissions by purchasing carbon credits. • Voluntary buyers(e.g., Carbon Disclosure andCarbon Neutral): In order to strengthen international competitiveness, companies in Taiwan are participating the Carbon Disclosure Project and considering making their company carbon neutral to promote green business image.

13. 3 Recent Progress • Since the GHG Reduction Bill is still being reviewed by the Legislative Yuan, the following guiding principles were set using Executive Regulations: • 6 November 2009: “EPA Operational Principles for GHG Verification Bodies” - establish third-party verification system • 10 September 2010:“EPA Management Principles for GHG Emissions Inventory and Registration”– establish MRV system • 10September2010:“EPAPromotionPrinciplesforEarlyActionandOffsetProjects”– establishemissioncreditMRVsystem • Emissioncreditsmanagementandtradingsystem: under development

14. 3 Early Action Crediting Program Offset Projects Early Action Reduction Project Methodology ISO14064-2 Designated Sources Emissions Intensity ISO14064-1 • EIA Offsets • Performance • Standards • CapandTrade Organization-based reduction credits Offsets Project-based reduction credits May choose either one but NOT both

15. 3 Early Action Crediting • Crediting starting from 1 January 2000 • Intensity-based standards • e.g., emissions/unit production • To be set in consultation with industry authorities • Target: designated emission sources before the performance standards (GHG Reduction Act) Emission Reductions = (Intensity Standard – Calculated intensity) x Activity (e.g., production units)

16. 3 Offset Crediting • CDM methodology or those approved by the central competent authority (EPA) • Additionality test • Nuclear power excluded • Crediting starting date: • No earlier than EPA registration date (except for those that have been validated before rules set) • Crediting period: • Forestry: 30 years fixed, or 20 years with 2 renewals • Others: 10 years fixed, or 7 years with 2 renewals

17. Emission Credits Management System 3 EPA Completed Under development Accreditation Entity Domestic (Early action offsets) International Offsets (CDM) Verification Bodies (international) Project Proponents National Inventory National Registry Emission Credits Platform Emission Sources Inventories Sector Allocation EPA Trading Platform 17

18. Pilot Emissions Trading Plans Emissions trading platform consist of “registry”, “trading”, and “clearing” systems Trading platform is an electronic database that provides credits registration and transfer by participants, and linkage to national registry Trading account functions managed by the trading system. 3 Registry system Emission Credits Management System Electronic operations Clearing system Trading system 18

19. 3 Reduction Credit Source and Application Domestic Reduction Project Before CAP Validation/ Verification EIA International Offset Performance Standard Early Action / Offset Program Permit CERs EPA Approval Offset Acquire Credit After CAP Others approved by the UNFCCC Allowance Central GHG Registry

20. Preliminary ETS Scheme Design 3 Economy-wide Target ETS Sector coverage Other policy instruments Energy Industry Transport Resident/ Commercial Allocation Source A Source B Source C Source D International Offsets 35-50% (CERs, etc.) Acct. A Acct. B Acct. C Acct D Govt. Approval Central Registry Early action, Domestic offset Carbon Price Signal Clearing Acct. A Acct. B Acct. C Acct. D Others? Domestic Trading Platform

21. 3 Implications of Taiwan Entities for Getting CERs • To assist emitters to use available resources in the most cost-effective manner to meet their responsibility under our government’s voluntary GHG reduction program, or provide credits to new emission sources for meeting their reduction commitment from the environmental impact assessment. • For those emission sources implementing domestic reduction and offset as a priority but would still need to meet their voluntary reduction responsibility through foreign carbon offset projects, the government would assist them acquire offset credits from the CDM in order to gain international credibility, while assuring the effectiveness of their foreign investment.

22. International Offset Credits Acquisition 3 Set up foreign entity and Annex-I account Establish Foreign Account Annex I country issues LoA Entity participates in CDM projects in non-Annex I countries Develop CDM Projects Transfer CERs to foreign account CERs from primary, secondary markets CERs Management CERs cancellation for domestic offset (EIA, cap) Account Administrator (EPA Registry) Indirect Transfer to Taiwan Issue domestic credits 22

23. 4 International Linkage • Advantages of International Linkage • Reduce the aggregate cost of the linked systems’ collective emissions target • By broadening markets for allowances and credits, linking increases liquidity and improves the functioning of those markets • High cost of reduction in Taiwan is one of the reasons to explore the possibilities of international linkage.

24. 4 Linkage with International Carbon Market • Establishing a domestic ETS linking with Kyoto mechanisms has become the main measure for countries to reduce CO2 emission. • Taiwan is actively seeking an opportunity to participate in international carbon markets and build bilateral or multilateral corporations with developed countries and countries in Asia-Pacific region. • Taiwan ETS would inevitably linked with the international carbon markets e.g., EU Linking Directive e.g., EU ETS, Norway, Switzerland, etc. e.g., CDM, international offsets RegionalCarbon Market 24

25. 5 Concluding Remarks • As a highly industrialized economy, Taiwan is building the capacity for domestic mitigation, but our reduction cost is very high. • We are aiming at measurable, verifiable, reportable (MRV) management for GHG reduction, and proceeding with legislation of the GHG Reduction Bill. • Market mechanisms such as emission trading would allow us to join the global effort to reduce emissions in a cost-effective manner, through linkage with other offset and trading schemes. • A clear carbon price signal would promote domestic reduction, moving us toward a low-carbon society.

26. Thanks for your attention, Comments please…