–Carbon-market links come into sharper focus, but first
–The world’s biggest market sadly shrinks because of Brexit
–U.S., Canada and even China focus on aggressive effort for 2030
–Companies, too, get on board
By Mathew Carr
Dec. 14-21, 2020 — LONDON: Britain is calling for countries to partner with its proposed new carbon market as it leaves the European Union’s program and its touted price aligns with other nations.
It’s a terribly sad state of affairs that the EU market is shrinking as the fractured world seeks to align on its climate effort during the next several years.
While the U.K. has said it might link its new carbon program with the EU emissions market, the world’s biggest by traded volume, it’s also got options with other nations, according to people with knowledge of the matter. On Dec. 9, it signed a trade deal with Canada, which may levy C$170/ton carbon prices by 2030.
The Zero Carbon Commission in Britain said in September the target should be about 75 pounds a ton, or C$130, with analysts estimating similar levels in the EU. But the commission cited a range with a top of as much as 140 pounds, or C$240.
These prices are high compared with current market levels – eg 31 euros a ton in Europe (C$49).
Canada’s plan follows the introduction of the Canadian Net-Zero Emissions Accountability Act to parliament earlier this year.
The EU and Canada are both proposing border adjustments where imported goods would face fees that match the internal carbon prices. Programs are also planning to “recycle” the money raised from selling or taxing carbon emissions to protect poorer people in rich and poorer countries hurt by rising costs (and who have faced the brunt of bad pollution policies until now).
In the U.S., the Energy Innovation and Carbon Dividend Act, which puts a price on carbon and rebates the revenue to Americans on an equal basis, was last year sponsored by Democrat Rep. Ted Deutch and co-sponsored by Republican Rep. Francis Rooney, both of Florida. It would have seen prices around $125 (C$160) by 2030, but would need steeper emission cuts to reach net zero. While the congress is looking split, the idea of a carbon fee and dividend has had more Republican support than other policy.
By choosing cap and trade over carbon taxes, North American states and provinces can probably expect a lower climate-transition cost, said Dirk Forrister, president of the International Emissions Trading Association. (Dare we hope for a linked U.S.-Canada-Mexico carbon market?)
“You can probably beat those price levels,” by invoking market forces to cut emissions, Forrister, a former climate advisor to President Bill Clinton, said by phone.
By aligning trade policy and carbon prices, the ability to achieve maximum removal of emissions globally over the next few years is enhanced.
“If you focus only inwardly, you are set up for failure,” Forrister said.
International cooperation under a well-functioning Article 6 of the Paris Agreement could save as much as $250 billion per year by 2030, according to a study last year by IETA that was co-sponsored by the Carbon Pricing Leadership Coalition, with the help of researchers and modellers from the University of Maryland.
The report sets out how financial flows can help right climate injustices, something the Biden-Harris team say they are focussed on. See this chart:
Environmental lobby groups are also pushing global alignment because President Elect Joe Biden will struggle to lead on climate without it. Biden and Vice President Elect Kamala Harris reiterated over the weekend (Dec. 19) they wanted to lead globally and right climate injustice as they appointed a diverse range of climate advisors.
“Some may argue that it would be better for the U.S. Paris commitment to focus on a later target year such as 2035 because an additional five years may allow for a bigger initial U.S. commitment. However, adopting a different time frame than others are committed to under the Paris Agreement may well undermine our ability to exert pressure on other countries to enhance their commitments. Further, the U.S. can’t articulate the urgency of needed transformations and drive near-term action and accountability if it only signals a 2035 target timeframe,” according to this plan by climate experts, including Jake Schmidt of the Natural Resources Defense Council:
The ultimate goal globally for carbon-pricing enthusiasts and economists is aligned greenhouse gas markets and prices, which can eventually form the basis of a new global commodity that does not hinder other trade flows too much.
“A global price and linking is one of the things we want,” said Andrei Marcu, founder & director of the European Roundtable on Climate Change and Sustainable Transition, speaking last week at the European Climate Summit.
Carbon market linkages don’t need to be struck between nations in close geographical proximity, because trading is done electronically. However, rules and the ambition of emission-reduction targets would probably need to be similar for linkages to be effective, according to analysts, officials and lawyers.
Linking won’t be easy and Brexit shows delinking remains a risk.
“Some of the biggest challenges are political,” said Constanze Haug, senior advisor at the International Carbon Action Partnership, a research group. “By combining your market with another one, you’re giving up a partial sovereignty over your own market, its design and its robustness.”
Emerging countries, less to blame for climate damage, could face lower price levels initially, according to Xiliang Zhang of the Institute of Energy, Environment & Economy at Tsinghua University. China is seeking net zero by 2060. See this slide, presented at the summit last week:
But even China, the biggest emitter and most populous nations, is aligning with aggressive action through 2030:
Tighter emission-reduction targets boost carbon prices because they result in scarcity of allowances, which grant the right to pollute.
For Britain, its proposed carbon pricing system “gives industry the certainty it needs to invest in low carbon technologies. The government is open to linking the U.K. emissions trading system internationally in principle and we are considering a range of options, but no decision on our preferred linking partners has yet been made.”
The U.K has already legislated to establish its ETS, and the technical system underpinning it is in “final stages of development and on track to be ready on time,” it said in a statement.
“We recognise the importance of international co-operation on carbon pricing and the important role international carbon markets can play,” the U.K. Department for Business, Energy and Industrial Strategy said in an e-mailed response to questions.
The U.K. is leaving the EU carbon market at the end of this month, shrinking it and probably reducing trading liquidity. Negotiations on a possible trade deal continue, with “environment” and market incentives as among the sticking points, according to press reports.
“I personally think that it would be so much easier for the U.K. to join the EU emissions trading system, which they know,” said Silke Karcher, head of division, EU Climate and Energy Policy, European Climate Initiative, carbon markets, at the German Ministry for the Environment. “I find it hard to imagine they would try anything else, but who knows?”
Other forces driving acceptance of higher carbon prices are companies adopting net zero targets and the related embracing of climate-risk disclosure rules. Governments around the world are pushing to recover from the coronavirus pandemic in a cleaner, greener way.
The global voluntary carbon market is also linking in with the wider Paris system. Companies are already simultaneously setting net-zero targets and factoring carbon prices into their business plans and investment decisions. They are also buying carbon credits, another factor favoring markets over taxes.
“A number of large multinationals including Unilever, Microsoft, Mars, Maple Leaf Foods, Google, Nike, HSBC, Swiss Re have committed to making their business operations carbon neutral,” said Lisa DeMarco, senior partner at DeMarco Allan LLP and others, in an article published last week on the Energy Regulation Quarterly website. The firm specialises in climate law.
“And any number of entities are purchasing carbon offsets in the voluntary carbon market in order to achieve those targets. These developments herald a new age of climate commitment veracity that are certain to require additional climate-related financial disclosures to both shareholders, investors, and ultimately, end-use customers.“
See this story on the voluntary carbon markets:
U.K.’s BEIS also said:
The proposed British system starting the end of the month is “more ambitious than the EU system it replaces – from day one the cap on emissions allowed within the system will be reduced by 5%,” and the nation said it will consult in due course on how to align with net zero.
• The U.K. ETS has been designed by the UK Government jointly with the Scottish Government, Welsh Government and Northern Ireland Executive, so it’s already international – sort of.
• The U.K. ETS will promote cost-effective decarbonisation, allowing businesses to cut carbon where it is cheapest to do so. In doing so it will promote innovation and growth for U.K. businesses.
• Implementing a U.K. ETS is a crucial step towards achieving the U.K.’s target for net zero carbon emissions by 2050.
The U.K. is seeking “environment & clean growth” with Australia under a new trade deal, it said earlier this month in a statement. BEIS: Australia does not currently have an Emissions Trading Scheme (ETS). In 2011 the Australian Government were preparing to put in place an emissions trading scheme and initiated discussions with the EU on how the systems could be linked, however the scheme was later repealed in 2013/14.
Canada-UK trade deal statement here:
Australia-UK trade deal info here:
U.K. Australia strategies mesh:
(Updates Tuesday afternoon with Germany official, BEIS comments, Wednesday with additional comments, context, corrects title of the BEIS department, updated Thursday with DeMarco, recast Monday Dec. 21, added Forrister)