Climate change is a global challenge and requires a global solution. Through analysis and dialogue, the Center for Climate and Energy Solutions is working with governments and stakeholders to identify practical and effective options for the post-2012 international climate framework. Read more
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by Elliot Diringer
This article is draft version of a chapter in the forthcoming book, Development in the Balance: How Will the World's Poor Cope with Climate Change?, to be published by the Brookings Institution Press
A successful post-2012 climate agreement must engage all the world's major economies through a "multi-track" framework allowing different types of commitments for developed and developing countries. The 25 major economies accounting for 84 percent of global emissions are extremely diverse, with per capita incomes and per capita emissions ranging by a factor of 18. Strategies for integrating climate action with broader economic and development agendas will vary with national circumstance. Accommodating these differences requires a flexible but binding international framework integrating different types of commitments, such as economy-wide emission targets, policy-based commitments, and sectoral agreements. Incentives for developing countries, including both market-based schemes and direct assistance, also must be provided. A post-2012 agreement might advance adaptation on two fronts: proactively, by facilitating comprehensive national planning; and reactively, by helping countries cope with the risks that remain. Given the time it will take a new U.S. administration and Congress to establish a domestic climate policy, a detailed post-2012 agreement is unlikely when governments meet in late 2009 in Copenhagen. Instead, governments should aim for consensus on a broad framework and continue negotiating toward specific commitments.
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India is the world’s fourth largest economy and fifth largest greenhouse gas (GHG) emitter, accounting for about 5% of global emissions. India’s emissions increased 65% between 1990 and 2005 and are projected to grow another 70% by 2020. On a per capita basis, India’s emissions are 70% below the world average and 93% below those of the United States. As in many other countries, India has a number of policies that, while not driven by climate concerns, contribute to climate mitigation by reducing or avoiding GHG emissions.
For more details on policies and measures related to climate change in India, please read our India Policy Brief (pdf).
Statement of Eileen Claussen, President
Pew Center on Global Climate Change
July 8, 2008
The G8’s endorsement of an aspirational long-term climate goal is a positive step but far short of a solution. While cutting global emissions in half by 2050 probably would not avoid dangerous climate change altogether, it would greatly reduce the odds of catastrophic impacts. And with emissions now rising faster than ever, meeting such an ambitious goal requires an all-out global effort.
But more important than the long-term goal is actually getting the job started, and there the G8 again failed to deliver. Endorsing the use of economy-wide goals to achieve absolute emission reductions is a step forward for President Bush. But what is needed – and what is missing – is a clear declaration by the industrialized powers that they are ready to negotiate strong, binding mid-term targets. That is the kind of leadership it will take to get all the major economies on board an effective, sustained global effort.
More G8 coverage
Click here to listen to an interview with Elliot Diringer, Director of International Strategies at the Pew Center.
**This background note was released on June 11, 2008 at the UNFCCC Bonn Climate Change Talks**
In the UN Framework Convention on Climate Change, developed countries commit generally to provide financial resources, including for the transfer of technology, needed by developing countries to fulfill their obligations under the Convention.
In order to successfully support the adoption of climate-friendly technologies in developing countries, multiple sources of investment – including public and private finance, carbon finance, and multilateral funding – are needed.
This note outlines key design issues and options in considering new means of multilateral funding for climate-friendly technology in a post-2012 climate change agreement.
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May 8, 2008
Contact: Tom Steinfeldt, (703) 516-4146
EU EMISSIONS TRADING SYSTEM DELIVERS VALUABLE LESSONS
New Report Offers Insights to Policy-Makers on Cap and Trade
The Pew Center on Global Climate Change today releases a new report examining the European Union’s Emissions Trading Scheme (EU ETS) that offers a realistic assessment of the system’s initial objectives and outcomes. The report, “The European Union’s Emissions Trading System in Perspective,” by A. Denny Ellerman and Paul L. Joskow of the Massachusetts Institute of Technology, examines the development, structure, and performance of the system to date.
As the U.S. Congress moves closer to developing a national climate change policy, this report delivers key insights into the world’s first carbon dioxide cap-and-trade program. Through analysis of the controversies and lessons learned from the program’s initial three-year trial phase, the authors provide important information for U.S. policy-makers and other countries. Main findings of the report include:
- Good information is critical. Accurate data on baseline emissions is needed to create an effective trading system that results in sufficient emissions reductions;
- Suppliers quickly factor the price of emissions allowances into their business decisions under a cap-and-trade program;
- Price volatility can be reduced by including banking and limited borrowing of emissions allowances;
- The relationship between allowance allocation, allowance markets, and the unsettled state of electricity regulation must be understood and addressed to avoid unintended consequences; and
- The linkage of 28 separate trading programs in the EU ETS provides a valuable prototype for a globally linked carbon market.
“The EU’s experience with emissions trading offers valuable lessons for Congress as they work to craft a sensible cap-and-trade program for the U.S.,” said Pew Center President Eileen Claussen. “The EU has done more than any other nation or set of nations in limiting GHG emissions – and the implementation of their cap-and-trade system has been a key part of their efforts.”
The report finds initial concerns with the EU ETS are being addressed and the program’s trial period has provided important lessons about the creation of new emissions trading schemes. In fact, the system has worked much as it was envisioned ¬– it established a European-wide carbon price; caused businesses to incorporate this price into their decision-making; and created the infrastructure for a multi-national trading program. In addition, emission reductions were realized in some covered sectors which underscore the system’s initial benefits.
The report helps address key cap-and-trade concerns in the U.S. and internationally, including over-allocation, price volatility, and excessive “windfall” profits. While it remains a work in progress, the EU ETS affords many important lessons for policy-makers and major stakeholders to consider when developing appropriate short- and long-term measures to limit greenhouse gas emissions.
For more information about global climate change and the activities of the Pew Center, visit www.c2es.org.
The Pew Center was established in May 1998 as a non-profit, non-partisan, and independent organization dedicated to providing credible information, straight answers, and innovative solutions in the effort to address global climate change. The Pew Center is led by Eileen Claussen, the former U.S. Assistant Secretary of State for Oceans and International Environmental and Scientific Affairs.
The European Union's Emissions Trading System in Perspective
Prepared for the Pew Center on Global Climate Change
A. Denny Ellerman,
Paul L. Joskow
Massachusetts Institute of Technology
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Eileen Claussen, President, Pew Center on Global Climate Change
To meet its obligations to reduce greenhouse gas (GHG) concentrations under the Kyoto Protocol, the European Union (EU) established the first cap-and-trade system for carbon dioxide emissions in the world starting in 2005. Proposed in October 2001, the EU’s Emissions Trading System (EU ETS) was up and running just over three years later. The first three-year trading period (2005-2007)—a trial period before Kyoto’s obligations began—is now complete and, not surprisingly, has been heavily scrutinized. This report examines the development, structure, and performance of the EU-ETS to date, and provides insightful analysis regarding the controversies and lessons emerging from the initial trial phase.
Recognizing their lack of experience with cap and trade and the need to build knowledge and program architecture, EU leaders began by covering only one gas (carbon dioxide) and a limited number of sectors. Once the infrastructure was in place, other GHGs and sectors could be included in subsequent phases of the program, when more significant emissions reductions were needed. As authors Denny Ellerman and Paul Joskow describe, the system has so far worked as it was envisioned—a European-wide carbon price was established, businesses began incorporating this price into their decision-making, and the market infrastructure for a multi-national trading program is now in place. Moreover, despite the condensed time period of the trial phase, some reductions in emissions from the covered sectors were realized.
The development of the EU-ETS has not, however, proceeded without its challenges. The authors explain some of the controversies regarding the early performance of the EU-ETS and describe potential remedies planned for later compliance periods:
- Due to a lack of accurate data in advance of the program, allowances to emitters were overallocated. Now with more accurate emissions data and a centralized cap-setting and reporting process, the emissions cap should be sufficiently binding;
- Concerns about program volatility emerged when initially high allowances prices (driven largely by high global energy costs) dropped precipitously in April 2006 upon the release of more accurate, verified emissions data. Late in the trial phase, there was another sharp decline in allowance price because there were no provisions for banking emissions reductions for use in the second phase of the program. Improved data quality and provisions for unrestricted banking between compliance periods will help moderate price fluctuations in the future;
- Windfall profits by electric power generators that passed along costs (based on market value) of their freely issued allowances resulted in improved understanding of how member country electricity sector regulations affect the market and calls for increased auctioning in subsequent phases of the program.
Interest in developing a national cap-and-trade program in the United States has intensified in recent years. The first comprehensive greenhouse gas reduction bill ever to be reported out of a committee emerged from the Senate Environment and Public Works Committee in December 2007. As debate continues on this landmark legislation, the House of Representatives has signaled its intention to design its own emissions trading program. This report provides an excellent resource for those developing U.S. proposals. As Europe’s experience with the EU-ETS suggests, everything does not have to be perfect at the outset of a cap-and-trade program. We do, however, need to get started and, for this, the EU-ETS has provided valuable lessons for us all.
The Center and the authors would like to thank Robert Stavins and Peter Zapfel for comments and suggestions on earlier drafts. None of them are responsible for the analysis, conclusions or any remaining errors. The views expressed here are solely those of the authors.
The performance of the European Union’s Emissions Trading System (EU ETS) to date cannot be evaluated without recognizing that the first three years from 2005 through 2007 constituted a “trial” period and understanding what this trial period was supposed to accomplish. Its primary goal was to develop the infrastructure and to provide the experience that would enable the successful use of a cap-and-trade system to limit European GHG emissions during a second trading period, 2008-12, corresponding to the first commitment period of the Kyoto Protocol. The trial period was a rehearsal for the later more serious engagement and it was never intended to achieve significant reductions in CO2 emissions in only three years. In light of the speed with which the program was developed, the many sovereign countries involved, the need to develop the necessary data, information dissemination, compliance and market institutions, and the lack of extensive experience with emissions trading in Europe, we think that the system has performed surprisingly well.
Although there have been plenty of rough edges, a transparent and widely accepted price for tradable CO2 emission allowances emerged by January 1, 2005, a functioning market for allowances has developed quickly and effortlessly without any prodding by the Commission or member state governments, the cap-and-trade infrastructure of market institutions, registries, monitoring, reporting and verification is in place, and a significant segment of European industry is incorporating the price of CO2 emissions into their daily production decisions.
The development of the EU ETS and the experience with the trial period provides a number of useful lessons for the U.S. and other countries.
- Suppliers quickly factor the price of emissions allowances into their pricing and output behavior.
- Liquid bilateral markets and public allowance exchanges emerge rapidly and the “law of one price” for allowances with the same attributes prevails.
- The development of efficient allowance markets is facilitated by the frequent dissemination of information about emissions and allowance utilization.
- Allowance price volatility can be dampened by including allowance banking and borrowing and by allocating allowances for longer trading periods.
- The redistributive aspects of the allocation process can be handled without distorting abatement efficiency or competition despite the significant political maneuvering over allowance allocations. However, allocations that are tied to future emissions through investment and closure decisions can distort behavior.
- The interaction between allowance allocation, allowance markets, and the unsettled state of electricity sector liberalization and regulation must be confronted as part of program design to avoid mistakes and unintended consequences. This will be especially important in the U.S. where 50 percent of the electricity is generated with coal.
The EU ETS provides a useful perspective on the problems to be faced in constructing a global GHG emission trading system. In imagining a multinational system, it seems clear that participating nations will retain significant discretion in deciding tradable national emission caps albeit with some negotiation; separate national registries will be maintained with some arrangement for international transfers; and monitoring, reporting and verification procedures will be administered nationally although necessarily subject to some common standard. All of these issues have had to be addressed in the trial period and they continue to present challenges to European policy makers.
The deeper significance of the trial period of the EU ETS may be its explicit status as a work in progress. As such, it is emblematic of all climate change programs, which will surely be changed over the long horizon during which they will remain effective. The trial period demonstrates that everything does not need to be perfect at the beginning. In fact, it provides a reminder that the best can be the enemy of the good. This admonition is especially applicable in an imperfect world where the income and wealth effects of proposed actions are significant and sovereign nations of widely varying economic circumstance and institutional development are involved. The initial challenge is simply to establish a system that will demonstrate the societal decision that GHG emissions shall have a price and to provide the signal of what constitutes appropriate short-term and long-term measures to limit GHG emissions. In this, the EU has done more with the ETS, despite all its faults, than any other nation or set of nations.
About the Authors
Dr. A. Denny Ellerman
A leading energy economist, Dr. Ellerman is a Senior Lecturer with the Sloan School of Management at the Massachusetts Institute of Technology, where he previously served as the Executive Director of the Center for Energy and Environmental Policy Research and of the Joint Program on the Science and Policy of Global Change. Dr. Ellerman is internationally recognized as an authority on emissions trading, and his current research interests focus on the U.S. and European emissions trading programs and on environmental regulations. He is co-author of the report, The European Union’s Emissions Trading System in Perspective, and he coauthored the well-respected text, Markets for Clean Air: The U.S. Acid Rain Program with MIT Sloan colleagues. Dr. Ellerman has also worked for Charles River Associates, the National Coal Association, the U.S. Department of Energy, and the U.S. Executive Office of the President, and he served as President of the International Association for Energy Economics in 1990.
Dr. Ellerman received his undergraduate education at Princeton University and his Ph.D. in Political Economy and Government from Harvard University. His current research interests focus on emissions trading, climate change policy, and the economics of fuel choice, especially concerning coal and natural gas.
Paul L. Joskow
Paul L. Joskow became President of the Alfred P. Sloan Foundation on January 1, 2008. He is presently on leave from his position as Elizabeth and James Killian Professor of Economics and Management at MIT. He received a BA from Cornell University in 1968 and a PhD in Economics from Yale University in 1972. Professor Joskow has been on the MIT faculty since 1972 and served as Head of the MIT Department of Economics from 1994 to 1998. He was Director of the MIT Center for Energy and Environmental Policy Research from 1999 through 2007. At MIT he has been engaged in teaching and research in the areas of industrial organization, energy and environmental economics, competition policy, and government regulation of industry for over 35 years. Dr. Joskow has published six books and over 125 articles and papers in these areas. He serves as a Director of Exelon Corporation, as a Director of TransCanada Corporation, and as a Trustee of the Putnam Mutual Funds. He is a member of the Board of Overseers of the Boston Symphony Orchestra. Dr. Joskow is a Fellow of the Econometric Society and the American Academy of Arts and Sciences and a Distinguished Fellow of the Industrial Organization Society.
Statement of Elliot Diringer, Director of International Strategies
Pew Center on Global Climate Change
April 4, 2008
The Bali agreement was a major step forward, and while the Bangkok talks managed to keep the momentum going, they also underscored the enormous challenges ahead. The aim remains a new global deal in 2009, but it’s hard to leave Bangkok confident that deadline can be met.
As might be expected at the start of a new negotiating round, it seemed at times that parties were moving backwards, reverting to the hard lines and rhetoric that lead nowhere but stalemate. Thankfully by the end they were able to agree on a work program to move the negotiations forward this year, including workshops on such key issues as adaptation, technology, finance, and sectoral approaches.
While the United States’ refusal to negotiate a binding emissions target remains the single largest obstacle to an effective climate agreement, U.S. negotiators did put forward a number of pragmatic suggestions for structuring the negotiations. Hopefully this new, more constructive approach will make it easier for the next administration to negotiate an agreement setting fair, effective, and binding commitments for all major economies.
It’s clear that all eyes are on the upcoming U.S. election. And there’s every reason to expect that, whatever the outcome, the prospects for U.S. action will be far stronger. But that alone will hardly guarantee a new global agreement in a matter of months. Other parties will have to show new flexibility and a greater willingness to act if there is to be a deal in Copenhagen.
**This brief background paper was released on March 30, 2008 at the UNFCCC Bangkok Climate Talks**
Since climate change first emerged as an international issue in the late 1980s, a recurring policy question has been whether to address it on a comprehensive or a sector-by-sector basis. In recent years, sectoral approaches have received renewed attention and are among the options proposed for the post-2012 period.
This background paper helps clarify different types of sectoral approaches under discussion and how they might fit into a post-2012 international climate framework.
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International Sectoral Agreements in a Post-2012 Climate Framework
Working Paper, May 2007
Climate change is a global challenge and requires a global solution. Greenhouse gas emissions have the same impact on the atmosphere whether they originate in Washington, London or Beijing. Consequently, action by one country to reduce emissions will do little to slow global warming unless other countries act as well. Ultimately, an effective strategy will require commitments and action by all the major emitting countries.
United Nations Framework Convention on Climate Change
The international response to climate change was launched in 1992, at the Earth Summit in Rio de Janeiro, with the signing of the United Nations Framework Convention on Climate Change (UNFCCC). The Convention established a long-term objective of stabilizing greenhouse gas concentrations in the atmosphere "at a level that would prevent dangerous anthropogenic interference with the climate system". It also set a voluntary goal of reducing emissions from developed countries to 1990 levels by 2000 - a goal that most countries did not meet. Currently 191 parties, including the US, have ratified the UNFCCC.
UNFCCC First Ten Years: A Report of the UN Secretariat
Recognizing that stronger action was needed, countries negotiated the 1997 Kyoto Protocol, which sets binding targets to reduce emissions 5.2 percent below 1990 levels by 2012. The Protocol entered into force on February 16, 2005, which made the Protocol's emissions targets binding legal commitments for those industrialized countries that ratified it (the United States has not ratified it). In addition, the market-based mechanisms established under the Protocol, including international emissions trading and the Clean Development Mechanism, became fully operational with the Protocol's entry into force.
Conference of the Parties (COPs)
COP 21 Paris
November 30 - December 12, 2015
COP 20 - Lima, Peru
December 1 - 12, 2014
COP 19 - Warsaw Poland
November 11 - 23, 2013
COP 18 - Doha, Qatar
November 26 - December 7, 2012
COP 17 - Durban, South Africa
November 28 - December 9, 2011
COP 16 - Cancún, Mexico
November 29 - December 10, 2010
The Cancún Agreements import the essential elements of the Copenhagen Accord into the UNFCCC, including mitigation pledges and operational elements such as a new Green Climate Fund for developing countries and a system of “international consultations and analysis” to help verify countries’ actions. Agreement hinged on finding a way to finesse the more difficult questions of if, when, and in what form countries will take binding commitments. The final outcome leaves all options on the table and sets no clear path toward a binding agreement.
COP 15 - Copenhagen, Denmark
December 7-18, 2009
A new political accord struck by world leaders at the U.N. Climate Change Conference in Copenhagen provides for explicit emission pledges by all the major economies – including, for the first time, China and other major developing countries – but charts no clear path toward a treaty with binding commitments.
COP 14 - Poznan, Poland
December 1-12, 2008
Governments resolved in Poznan to shift into “full negotiating mode” in hopes of delivering a comprehensive new climate change agreement in December 2009 in Copenhagen.
COP 13 - Bali, Indonesia
December 3-15, 2007
In tense and chaotic talks that ran a full day longer than planned, delegates to the UN Climate Change Conference in Bali remained far apart on fundamental issues but in the end agreed to launch a loosely framed negotiating process with the ambitious goal of achieving a new global climate agreement in 2009.
COP 12 - COP/MOP 2
November 6-17, 2006
Government negotiators at the United Nations Climate Change Conference in Nairobi continued two processes launched last year in Montreal to consider next steps in the international climate effort, and agreed in the final hours to open another track to review the Kyoto Protocol.
COP 11 - Montreal, Canada
November 28 - December 10, 2005
In two weeks of talks, delegates to the UN Climate Change Conference in Montreal concluded the decade-long round of negotiations that launched the Kyoto Protocol and opened a new round of talks to begin considering the future of the international climate effort.
COP 10 - Buenos Aires
December 6-17, 2004
COP 9 - Milan, Italy
December 1-12, 2003
COP 8 - New Delhi, India
October 23 - Novomber 1, 2002
COP 7 - Marrakech, Morocco
October 29 - November 9, 2001
COP 6 BIS - Bonn, Germany
July 16-27, 2001
COP 6 - The Hague, The Netherlands
November 13 - 24, 2000