Introduction to Domestic Emissions Trading

1. Introduction to Domestic Emissions Trading Warren Bell Associate, IIISD Kyoto Mechanisms Seminar for the Manitoba Business Sector March 14, 2003

2. Outline • Emission trading basics • Kinds of emission trading • Key elements of a trading system • Targets for large industrial emitters • The role of offsets

3. Emission Trading: • An alternative to traditional command and control regulation in many environmental and resource areas: • air emissions, fishing quota, lead in gasoline • Combines a regulatory approach with the flexibility and innovation of private markets • Provides a common price signal to emitters – the market then determines where emissions occur, where abatement occurs

4. How Emission Trading Cuts Costs Objective: Reducing emissions by 2 tonnes Each plant reduces 1 tonne total cost: $325 $300 $250 Plant B “hires” Plant A Plant A reduces 2 tonnes Total cost: $200 $225/tonne $200 Plant B Cost per tonne $150 $100/tonne $100 $50 Plant A Plant A Plant B No trading Trading

5. Advantages of Emission Trading • Emitters are given flexibility and control • Firms choose to emit/abate, not bureaucrats • Rewards innovation and investment in new technology • an incentive to go beyond minimum requirements • Common price signal ensures that reductions take place where they are least costly • achieves environmental goals at least cost • The overall cap on emissions ensures environmental objective is achieved

6. Disadvantages of Emission Trading • Still requires monitoring, reporting, verification and compliance infrastructure - like traditional regulation • May result in increased local concentrations of emissions • Price is uncertain – determined by market • Relies on a price signal – some markets may be less efficient • Allocation of target/allowances is highly contentious

7. Kinds of Emission Trading • Trading within a capped or regulated sector • “Closed market” trading of allowances or permits • “Cap and trade” • Examples: International emission trading between Annex B countries, U.S. Acid Rain program trading • Trading outside a capped or regulated sector • “Open market” trading of offsets or credits for project-based reductions or removals • Credits are used for compliance by capped entities • Trading is one-way – into the capped sector • Examples: Clean Development Mechanism, Ontario emission trading system, Alberta offset requirement

8. Key Elements Required • A limit on emissions – less than BAU • Participants must have different costs for emission reduction • Monitoring and reporting requirements • Trading rules – banking, offsets • Consequences for non-compliance

9. Emission Limits or Targets • Absolute limits • X tonnes/year (Canada’s Kyoto target) • Intensity limits • X tonnes/GW.h • Y tonnes/tonne market pulp • Z tonnes/$GDP • Canada is proposing to set intensity targets for large industrial emitters

10. Intensity Targets • Advantages: • Preserves incentive for efficiency while not penalizing growth – addresses some competitiveness concerns • Addresses problems related to new entrants, shutdowns • Does not penalize firms who take early action (but a problem at sector level) • Challenges: • Measuring output • Basis for defining target – technology/cost analyses? Across the board cuts? • Limited incentive for structural change • No overall limit on emissions – unless targets adjusted

11. Intensity Targets for Large Industrial Emitters • Key Issues for large emitters: • Achievability of overall target • Risk from growth • Equity across sectors • Uniform 15% off 2010 BAU intensity may penalize sectors that took early action • Huge diversity within some sectors • E.g., electricity • Need to maintain incentives for lower emission technologies

12. Offsets • Allowing credits or offsets for project-based emission reductions/removals would: • Expand participation in the trading system • Promote investment in emission reductions outside the capped LIE sector • Keep investment dollars in Canada • Increase the number of compliance options, and potentially reduce costs • Could provide environmental and other co-benefits • Potential offsets - landfill gas capture and flaring, agriculture and forestry reductions & removals

13. Possible Offset System • Credits would be earned for voluntary reductions below an emissions baseline • Possible criteria for eligible reductions: • real (beyond business as usual), measurable, verifiable, surplus (beyond what is required), additional/incremental • real project experience from Canadian pilots – Greenhouse Gas Emission Reduction Trading (GERT) pilot and Pilot Emission Reduction and Trading (PERT) project • Credits would be certified by an accredited body • Credits could be used for compliance with targets

14. Key Questions • For those who may face emission limits: • How will targets be set? • What kind of flexible compliance options will there be? • For other sources: • What will the rules be for offsets?