Global Carbon Markets

California Cap-and-Trade Program

The Global Warming Solutions Act of 2006 (AB 32) identified a market-based mechanism as a means to achieve California’s strategy of reaching the 1990 emissions level by 2020 and reducing 80 percent of GHG emissions from the 1990 level by 2050. Following the bill, a cap-and-trade regulation was adopted in 2011 and the California Cap-and-Trade Program started on 1 January 2012, with the first obligatory compliance period beginning in 2013. The first compliance period (2013-2014) covers the electricity and industrial sectors. Beginning from the second compliance period (2015-2017), the program will expand to the transportation sector and heating fuels, then covering approximately 85 percent of California’s total GHG emissions. California is a member of the Western Climate Initiative’s (WCI) Regional Cap and Trade Program, which furthers cooperation among US states and Canadian regions to develop and harmonize their emissions trading policies. Thus, California and Québec linked their emissions trading schemes on 1 January 2014.

Québec Cap-and-Trade System

Québec’s cap-and-trade system is used as a tool for funding the 2013-2020 Climate Change Action Plan. Québec was the first Canadian member of the Western Climate Initiative to adopt its own emissions trading regulation in 2011. In 2012, the provincial government amended the regulation in order to harmonize its system with the Californian ETS, preparing it for a possible future linking. Thus, the Québec Cap-and-Trade system design is very similar to California’s with three mandatory compliance periods (2013-2014, 2015-2017, and 2018-2020), covering the electricity and industrial sectors in the first period. As the reduction opportunities in the electricity and manufacturing sectors are very low due to a great share of renewable energies such as hydropower, Québec strongly focuses on the transportation sector and heating fuels and will include both in its ETS starting from 2015. On 1 January 2014, Québec linked its emissions trading scheme with California’s ETS. The ETS in Québec and California do not only cover carbon emissions, but all six greenhouse gases covered by the Kyoto Protocol plus nitrogen triflouride (NF3).

New Zealand Emissions Trading Scheme

The New Zealand Emissions Trading Scheme was launched in 2008 and gradually expanded from the forestry sector to transport fuels, electricity production and industrial processes in 2010, and waste and synthetic gases sectors in 2013. The Climate Change Response Act of 2002 defines specific activities that are obliged to participate in the ETS, which covers all six Kyoto greenhouse gases. New Zealand is the only country to include land-based sectors such as forestry in its ETS. It is planned to oblige the agriculture sector to participate, but a final date for inclusion has not been decided.
However, the ETS does not include a fixed cap for overall emissions and is based on free allocation with the grandfathering method. Instead of a cap, enterprises are obliged to surrender one emission unit for every two tons of CO2. The emissions units needed can be received by free allocation or be bought from the NZ government for a fixed price of NZD $25 as well as in form of Kyoto units from the international carbon markets. Due to strong criticism on the functioning of the market, the 2012 revision regulated that the price cap will increase by NZD $5 per year and that emission units have to be surrendered for every ton of CO2.

Regional Greenhouse Gas Initiative (RGGI)

The RGGI is a voluntary initiative of the nine US states Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New York, Rhode Island and Vermont; New Jersey ended participation in 2011. The target is to reduce carbon emissions in the power sector by 10 percent until 2018 compared to the year of 2009 by establishing a market-based mechanism. The RGGI was launched in 2009 and consists of individual cap-and-trade schemes for electricity generation facilities, which are all linked. While a common understanding of overall targets and an emissions budget (cap) has been set in the Model Rule of 2006, the design of the programs can vary from state to state. Interestingly, the majority of allowances (90 percent) within the RGGI is auctioned quarterly instead of allocated freely, and returns from the auctioning processes are re-invested in energy efficiency, renewables, utility programs, etc. Moreover, RGGI has set a so-called reserve price, a minimum price for every CO2 allowance, of around USD $2. After the first compliance period from 2009 to 2012, the initiative underwent a comprehensive review and evaluation involving multiple stakeholders. As there was an over-allocation during the first compliance period and enterprises banked allowances, the overall emissions budget (cap) has been adjusted in order to stabilize prices.

Swiss ETS

In 2008, Switzerland has introduced the Swiss ETS and a carbon tax in parallel. The ETS was designed as a voluntary scheme which provides an alternative to the CO2 levy. Switzerland and the EU have started negotiations on linking their ETS. For this purpose, the Swiss scheme has been under revision after 2012 in order to fully align it to the EU ETS in its 3rd phase. Thus, the ETS became mandatory for large emitters in 2013, while medium-sized enterprises can decide to pay the carbon tax or instead participate in the ETS (opt-in). All ETS participants are exempted from paying the CO2 levy. If a voluntarily participating enterprise does not comply with the ETS, the carbon tax will be applied with retrospective effect. The benchmarks used in the Swiss ETS for the issuance of allowances are equal to those used in the EU ETS. The Swiss ETS target is an absolute with a total cap designed for achieving 10 percent of carbon emissions reduction by 2010 and 20 percent by 2020, compared to the base year of 1990.

Japan – Tokyo & Saitama Cap-and-Trade Programs

As the world’s first urban area, the Tokyo Metropolitan Government (TMG) announced the establishment of a cap-and-trade scheme in 2007. The basis for the ETS was laid in 2002 by the Carbon Reduction Reporting Program, which included two voluntary phases: Phase I (2002-2004) established mandatory emissions reporting and three-year emissions reduction plans for large commercial buildings and phase II (2005-2009) required plans to be published and evaluated. While emissions reductions at this stage remained voluntary, the stage helped to improve data collection and to build necessary capacities for emissions trading. The mandatory ETS was launched on 1 April 2010. The first compliance period (2010-2014) only covers CO2 and allowances are freely allocated. An extension of the market to all six Kyoto greenhouse gases is planned for 2015. The TMG ETS distinguishes itself from other schemes by a five-year compliance period and by targeting the demand-side in form of large-scale buildings and commercial facilities.
The Saitama cap-and-trade scheme is very similar to the Tokyo ETS, with the same compliance periods, inclusion thresholds and emissions baseline.

Australia’s Carbon Pricing Mechanism (CPM)

Australia’s Carbon Pricing Mechanism started operation on 1 July 2012 with the target to reduce emissions by 5 percent by 2020 and 80 percent by 2050, both based on the emissions level of 2000. The Carbon Pricing Mechanism is implemented in two stages: A fixed price is set for the period of 2012 to 2015. Beginning from June 2015, the price will be set by the market within a cap-and-trade system. In the first three years of the flexible price period (2015-2018) a price ceiling will be used. The cap-and-trade system is designed to be easily linked to other carbon markets. Thus, a linkage to the EU ETS is planned for 2018.
However, following the Australian elections on 7 September 2013, the newly elected government of Tony Abbott introduced legislation to repeal the CPM. Up to now, it is unclear if the legislation will be approved by the Senate, so that the CPM will likely remain in operation until the end of the compliance year (30 June 2014).

Kazakhstan (pilot phase)

In 2013, Kazakhstan started a one-year pilot phase for emissions trading. During the pilot phase, there were no punishment clauses for non-compliance regarding the surrendering of allowances, but non-compliance regarding reporting emission amounts was regulated. Currently, there is some delay in ETS enforcement, so that the mandatory phase is unlikely to start before 2015. The design of Kazakh ETS is very similar to that of the EU ETS, as Kazakhstan aims for a future linkage with the EU ETS.

Future Trading Schemes

South Korea

In 2012, the government of the Republic of Korea adopted the ETS Act and a presidential decree with the plan to establish an ETS. Due to strong opposition from the industry, the government has postponed the launching date of its scheme to 2015. In 2010, Korea introduced the Greenhouse Gas Energy Target Management System (TMS), a mandatory reporting system requiring energy-intensive enterprises to report their GHG emissions. The ETS design is expected to be close to the EU ETS, with three compliance phases and a slow increase of auctioning in the second and third periods. The South Korean government will be able to reserve allowances in order to increase supply in times of strong demand by an early auction.

Many regions and countries are considering the implementation of a mandatory ETS and are currently exploring and assessing options for market instruments. These countries/regions are Russia, Ukraine, Turkey, Ontario (WCI), Manitoba (WCI), British Columbia (WCI), Mexico, Rio de Janeiro, Sao Paolo, Brazil, Thailand, Japan and Vietnam.