BRIEFING: The challenges of linking Asia-Pacific carbon markets

Published 15:12 on April 7, 2016  /  Last updated at 11:39 on May 11, 2016  /  Asia Pacific, Australia, China, China's National ETS, China's Pilot Markets, International, Japan, Kyoto Mechanisms, New Market Mechanisms, New Zealand, Other APAC, South Korea  /  No Comments

Asia-Pacific nations are building carbon markets at an unprecedented pace, but their vastly different circumstances could mean they risk hampering future efforts to link the schemes.

Asia-Pacific nations are building carbon markets at an unprecedented pace, but their vastly different circumstances could mean they risk hampering future efforts to link the schemes.

Thailand earlier this week became the latest nation in the region to reiterate plans to set up a domestic emissions trading scheme, building on a trend that could see some form of carbon pricing mechanism emerge in nearly a dozen countries within a few years.

In a report out this week, the Asian Development Bank urged that these governments should design their markets in a way that makes linking possible in the future.

“As we look to more concerted and ambitious actions to cut GHG emissions, the linking of ETSs will be an important approach. It encourages emissions savings where they are cost effective, and minimizes the impact of carbon costs on competing industries through a common carbon pricing mechanism,” said Carmela Locsin, director general at the ADB’s Sustainable Development and Climate Change Department.

But the countries are at vastly different stages in the development process.

New Zealand and South Korea already have emissions trading schemes in operation, China is aiming to launch a national one next year, while nations such as Thailand and Vietnam are only in the early stages of preparations.

And other big emitters in the region, such as India and Indonesia, having put limited related policies in place, are still considering whether to move towards cap-and-trade.

Governments in Kazakhstan, New Zealand and South Korea have been vocal advocates of linking, while for others, including China, it’s not a priority.

Linking markets would be highly unlikely this side of 2020, but aiming to do so in the longer-term would, according to the ADB, be beneficial to the region and a stepping stone towards a potential global carbon market further down the line.

BE PREPARED

While there are a number of barriers to linking carbon markets – for example differently structured economies, varying degrees of ambition, unequal capabilities, and so on – the ADB report argued that governments can do a lot of the groundwork when drawing up their initial blueprints.

“Countries will pursue ETS approaches suited to their particular circumstances and the political environment. Although linking is usually considered only once a domestic market is functioning well, it would be beneficial to have some consideration of future linking requirements at the early, piloting stages,” it said.

The report provided an overview of the areas that governments should consider in an international context to facilitate future linking negotiations:

  • Caps – While relative emissions caps (for example cutting carbon intensity, or the CO2 per unit of GDP) are tempting for developing nations relying on steady GDP growth to alleviate poverty, they make linking nearly impossible. In terms of achieving GHG cuts, absolute caps are more predictable, and hence more linking-friendly.
  • Flexibility mechanisms – “The use of reserves in which allowances are withheld or released but an absolute cap is preserved would be more amenable to linking, since the environmental integrity of the system is stronger,” the ADB said. “Mechanisms to adjust the cap or apply floor or ceiling prices are more problematic for linking.”
  • MRV standards – Using internationally-recognised standards to monitor, report and verify emissions would make cross-border ETS links more manageable than if each nation or region developed their own. Building capacity and culture for implementing MRV rules is very important, the ADB said.
  • Offsets – Markets should have reasonable quantitative limits and rigorous qualitative limits on offset use in order to ensure they drive abatement and are not vulnerable to offset price shocks.  These are key considerations in becoming an attractive linking partner.
  • Leakage – Existing systems provide models for determining the exposure to carbon leakage risks and how free allowance allocations can be used to mitigate them. “Use of common approaches can help create the conditions for linking,” the ADB added.
  • Enforcement – An ETS can only function effectively within a strict compliance framework. If it is not robust enough, then the environmental effectiveness of the cap would be questioned, creating political barriers for linking, the ADB said. A strict compliance and enforcement framework should be established in the design phase of the system and needs to be maintained at all times, the report added.
  • Legal framework – “Emissions trading is established based on a political commitment to reduce GHG emissions. It is implemented through a number of rules, principles, and standards, with compliance required by law and supervision by an appointed body or bodies. Only when an ETS is properly functioning can the system link to other systems, and this requires a robust legal framework.”

COORDINATION BODIES

A number of the existing Asia-Pacific carbon markets fall short on several of these elements.

For example, the New Zealand ETS – until the country declined to sign up to Kyoto II – offered its companies unlimited access to UN-issued offsets. As well, the scheme does not have a fixed cap.

And several of China’s regional pilot markets lack a legal foundation, with the Tianjin ETS lacking penalties for companies that fail to comply.

The ADB said market operators should strive to align for linking and be open to common coordination to make it possible in practice.

“The establishment of cooperation and coordination institutions among countries would help facilitate an agreement on linking later on in the development process,” it added.

“Mechanisms for collaboration would facilitate policy and technical dialogues among countries and enhance long-term cooperation towards developing a more integrated carbon market in Asia and the Pacific.”

FACTFILE

Below is a quick guide to the status of carbon pricing in selected countries and regions in the Asia-Pacific region:

  • Australia – The current government was elected by promising to repeal the former administration’s ETS and carbon tax, and the issue remains highly controversial. The country launched its Emissions Reductions Fund, through which the government buys offset credits from project developers, as well as a Safeguard Mechanism that sets emissions baselines for big emitters. Many observers expect these measures to eventually form a baseline-and-credit scheme. If it wins this year’s election, the current coalition government will carry out a climate policy review in 2017 that is expected examine buying international units.  However, if the opposition Labor party wins, it will introduce an ETS and could seek to link it to the Chinese market.
  • China – The top global emitter has seven regional pilot markets in operation and will launch a national ETS in the second half of 2017, which will impose CO2 limits on more than 10,000 companies and cap some 3-4 billion tonnes of CO2, making it the world’s largest carbon market. The country said it will consider international links after 2020, and has initiated studies on a possible future link to the Korea ETS.
  • India – The country has a coal tax, a Renewable Energy Certificate (REC) scheme, and an energy efficiency trading mechanism called “Perform, Achieve, Trade”. It participates in the World Bank’s Partnership for Market Readiness (PMR), though emissions trading remains ‘a consideration’. It also partners Japan in the Joint Crediting Mechanism (JCM).
  • Indonesia – It is considering an ETS or a different type of crediting mechanism, and may introduce some form of pilot system in 2019. It participates in Japan’s JCM.
  • Japan – There are regional markets up and running in Tokyo and Saitama prefecture. The government is officially considering whether to launch a national ETS, but powerful interests in government and industry oppose this.  The country has bilateral offset crediting agreements with 16 nations under its JCM.
  • Kazakhstan – It has operated an ETS since 2013, but the government suspended the scheme in February following complaints from industry. There are plans to reopen the market in 2018 after carrying out some design fixes.
  • New Zealand – The country has operated a national ETS, one of the first, since 2008, and it regulates electricity generators, manufacturers, transport, waste and forestry. The market covers nearly half the country’s GHG emissions.
  • South Korea – Launched in Jan. 2015, South Korea’s national ETS caps CO2 from 525 major emitters at around 570 million tonnes. The country has indicated that it is open to linking after 2020.
  • Taiwan – Last June, the country adopted a climate change law that included provisions to set up a domestic cap-and-trade programme, though no start date has been announced.
  • Thailand – It will launch an energy performance certificate scheme next year and a national ETS in 2020 or later. The country operated a voluntary carbon market since 2013 and will launch a government-backed offset scheme in 2017. It’s also a partner in Japan’s JCM.
  • Vietnam – The country will launch a steel sector ETS in 2020, and there are plans to start a national ETS after that, though details remain unclear. It also participates in the JCM.

By Stian Reklev – stian@carbon-pulse.com

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