market mechanisms

Details of the Clean Energy Incentive Program

ceip-details-cover

Details of the Clean Energy Incentive Program

June 2016

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Under its final Clean Power Plan (CPP), the U.S. Environmental Protection Agency (EPA) established the Clean Energy Incentive Program (CEIP) to encourage early action in meeting CPP objectives. The CEIP is a voluntary program for states to incentivize renewable and energy efficiency projects by giving them assets that will be tradable in Clean Power Plan markets. On June 16, 2016, EPA proposed design details for the CEIP.

This fact sheet has been developed by C2ES in support of the Alliance for a Sustainable Future, in partnership with The United States Conference of Mayors. For more information about the Alliance, see: http://www.allianceforasustainablefuture.com

Fact sheet outlining details of EPA's Clean Energy Incentive Program and compliance options for states.
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Secondary Carbon Markets

Secondary Carbon Markets

April 2016

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Many state regulators are considering carbon trading as a compliance option with the Clean Power Plan. An important part of carbon trading is the secondary carbon market—the market among private sector buyers and sellers that arises to provide more efficient price discovery, price-hedging opportunities, and satisfy compliance demand. This fact sheet provides a brief overview of the role of different types of secondary market participants and key policy choices that need to be made to allow secondary markets under the Clean Power Plan.

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How the US can meet its climate pledge

The following was published in March 2016 on the EcoWomen blog. View the original post here.

I let out a cheer when Leonardo DiCaprio mentioned climate change during his Oscars acceptance speech. But concern about climate extends far beyond the red carpet.

Religious leaders, military officials, mayors, governors, business executives, and leaders of the world’s nations are all speaking about the need to address the greenhouse gas emissions that threaten our environment and economies.

Last December, world leaders reached a landmark climate agreement at the UN Climate Change Conference (COP 21) that commits all countries to contribute their best efforts and establishes a system to hold them accountable. COP 21’s Paris Agreement also sent a signal to the world to ramp up investment in a clean energy and clean transportation future.

The U.S. committed to reduce its greenhouse gas emissions 26-28 percent below 2005 level by 2025. The U.S. Environmental Protection Agency (EPA)’s Clean Power Plan was touted as a key policy tool to help reach that goal. However, with the recent surprise stay of the rule by U.S. Supreme Court, can the U.S. still meet its climate pledge? Simply put, yes.

How the US can meet its climate pledge

The following was published in March 2016 on the EcoWomen blog. View the original post here.

By Manjyot Bhan, Policy Fellow, Center for Climate and Energy Solutions

I let out a cheer when Leonardo DiCaprio mentioned climate change during his Oscars acceptance speech. But concern about climate extends far beyond the red carpet.

Religious leaders, military officials, mayors, governors, business executives, and leaders of the world’s nations are all speaking about the need to address the greenhouse gas emissions that threaten our environment and economies.

Last December, world leaders reached a landmark climate agreement at the UN Climate Change Conference (COP 21) that commits all countries to contribute their best efforts and establishes a system to hold them accountable. COP 21’s Paris Agreement also sent a signal to the world to ramp up investment in a clean energy and clean transportation future.

The U.S. committed to reduce its greenhouse gas emissions 26-28 percent below 2005 level by 2025. The U.S. Environmental Protection Agency (EPA)’s Clean Power Plan was touted as a key policy tool to help reach that goal. However, with the recent surprise stay of the rule by U.S. Supreme Court, can the U.S. still meet its climate pledge? Simply put, yes.

Under the Clean Power Plan, the EPA sets unique emissions goals for each state and encouraged states to craft their own solutions. It is projected that the rule will reduce power sector carbon emissions at least 32 percent from 2005 levels by the year 2030.

Last month’s stay does not challenge “whether” EPA can regulate—the court has already ruled that it can—but rather “how” it can regulate. And the stay is not stopping many states and power companies from continuing to plan for a low-carbon future.

Some of the key ingredients that led to success at COP 21—national leadership and a strong showing by “sub-national actors,” including states, cities and businesses—will also be fundamental to U.S. success in meeting its climate goals.

recent event in Washington—held by the Center for Climate and Energy Solutions and New America—outlined the gap between existing policy trajectories and the U.S. goal. A secondary outcome of the meeting also explored how federal, state, and local policies and actions can leverage technology to close the gap.

An analysis by the Rhodium Group found that even without the Clean Power Plan, the recently extended federal tax credits for solar and wind energy will help significantly. Existing federal policies on fuel economy standards for vehicles and energy efficiency also support the U.S. goals, as well policies in the works to regulate hydrofluorocarbons and methane emissions from oil and gas operations.

States and cities made a strong showing of support for the Paris Agreement, and they have emerged as leaders in promoting energy efficiency and clean energy.

Additionally, many states are continuing to work toward implementing aspects of the Clean Power Plan. And even those not doing public planning are discussing ways states and the power sector can collaborate to cut carbon emissions cost-effectively. Last month, a bipartisan group of 17 governors announced they will jointly pursue energy efficiency, renewable energy, and electric and alternatively fueled vehicles. The Clean Power Plan stay can be looked at as giving states more time to innovate.

More than 150 companies have signed the American Business Act on Climate Pledge committing to steps such as cutting emissions, reducing water usage and using more renewable energy across their supply chains. One hundred companies have signed the Business Backs Low-Carbon USA, which calls the entire business community to transition to a low-carbon future.

Following the court’s stay, many power companies came out in support of the rule or reaffirmed plans to work toward clean energy and energy-efficiency.

2015 UNEP report suggests that beyond each countries’ individual commitments, actions by sub-national actors across the globe can result in net additional contributions of 0.75 to 2 gigatons of carbon dioxide emissions in 2020. While it is hard to accurately quantify the specific contributions of U.S. states, cities, and businesses in reducing emissions, they have the potential to accelerate the pace at which the U.S. meets its climate goals.

 

We need states to show clean energy leadership

Smart policy often comes from the states, and many states have shown and are expected to continue to show leadership in addressing climate change and promoting clean energy.

The Clean Power Plan stimulated discussions across the country, sometimes for the first time, among state energy and environment department officials, regulators, and energy companies about ways to reduce emissions. And we see momentum to keep those and other conversations going.

Consider some of the many ways states are leading:

Key Insights: Business, State and City Collaboration on Interstate Trading under the Clean Power Plan

Key Insights: Business, State and City Collaboration on Interstate Trading under the Clean Power Plan
 

February 2016

Download the Fact Sheet (PDF)

C2ES facilitated a second private Solutions Forum workshop around the Clean Power Plan in February 2016. More than 50 business leaders, state and city officials, other experts, and representatives of the U.S. Environmental Protection Agency (EPA) participated. The discussion built on previous Solutions Forum events and took a deeper dive into implementation issues states are facing as they consider trading-ready compliance plans. This paper summarizes key insights and remaining questions from the workshop.

The week following our workshop the U.S. Supreme Court ordered a stay of the Clean Power Plan. In our assessment, most stakeholders continue to value answering these questions while awaiting the legal outcome.

More information about the C2ES Solutions Forum

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What's ahead for carbon markets after COP 21

The following was published in the February 2016 edition of Biores, a publication of the International Centre for Trade and Sustainable Development.

By Anthony Mansell, International Fellow, Center for Climate and Energy Solutions (C2ES)

The new climate deal includes several provisions relevant to market-based emissions reductions efforts. 

At a UN conference in Paris, France in December countries agreed to a new framework for international cooperation on climate change. The “Paris Agreement” ties together nationally determined contributions (NDCs) with international rules and procedures to ensure transparency and promote rising ambition. Paris also provided a future for international market mechanisms as a tool for countries to fulfil their NDCs.

Many NDCs submitted as part of the Paris process demonstrate an enthusiasm for market approaches. Sixty-five governments say they will use international markets and another 24 will consider using them in the future. Many groups such as the Carbon Pricing Leadership Coalition (CPLC) urged support in Paris for the use of market mechanisms and a ministerial declaration issued by 18 governments at the close of the conference was designed to send “a clear signal to the global carbon market…that there is an important role for markets in the post-2020 period.”

The Paris Agreement includes provisions that can advance carbon markets in two ways: by ensuring there is no double counting when countries engage in emissions trading, and by establishing a new mechanism to facilitate trading. In both areas, however, the text provides only broad parameters and important details remain to be decided. This article addresses the current state of carbon markets, their history in international climate agreements, and relevant provisions of the Paris deal – including issues still to be negotiated before it comes into effect.

Carbon market context

Carbon pricing is currently in place in 38 jurisdictions, according to the World Bank, encompassing both carbon taxes and emissions trading schemes (ETS). A number of additional policies are scheduled to enter force between now and 2020 including carbon taxes planned for Chile and South Africa. Ontario will develop an ETS similar to neighbouring Québec and US states Washington and Oregon are considering the same. In terms of scale, the most significant will be a new national ETS in 2017 across China, the world’s largest greenhouse gas (GHG) emitter.

Not all carbon market programmes seek to trade internationally; some focus solely on domestic emission reductions. Nevertheless, bottom-up linkages are already occurring. For example, California and Québec have linked their cap-and-trade programs, making carbon allowances and offsets fungible between programs. There are also ongoing discussions in California about using sector-based offsets that reduce deforestation – known as REDD+ – from Acre, Brazil and Chiapas, Mexico. The EU Emissions Trading System (EU ETS) and Swiss ETS have agreed a link, pending ratification by each.

In addition, the International Civil Aviation Organisation (ICAO) is to decide by the end of this year on the design of a global market-based mechanism (MBM) to reduce emissions from aviation. The MBM would come into force in 2020, around the same time the Paris Agreement aims to be in place.

History of international market mechanisms

Market-based approaches are not referred to in the founding 1992 UN Framework Convention on Climate Change (UNFCCC) document, but were integral to the design of its first sub-agreement, the 1997 Kyoto Protocol.

Under Kyoto, participating developed countries have binding emission limits – “quantified emission limitation and reduction commitments” – inscribed in Annex B of the agreement. They are allocated “assigned amount units” (AAUs) in line with those targets and, to enable least-cost emission reduction, are permitted to trade AAUs and other certified emission units.

Kyoto established three methods for transferring units – either emission allowances or emission reductions – between countries. International Emissions Trading (IET) allows countries that have reduced emissions below their targets to sell excess allowances to countries whose emissions exceed their targets. Joint Implementation (JI) allows Annex B countries to earn emission reduction units (ERUs) through emission reduction or removal projects in other Annex B countries. The Clean Development Mechanism (CDM) allows Annex B countries to earn certified emission reduction (CERs) credits through emissions-reduction projects in developing countries.

Emissions trading under the Kyoto Protocol relies on international oversight. All transfers are tracked using a registry called the International Transaction Log (ITL). A common accounting standard applies to all countries with emission targets. An executive board must approve the methodology CDM projects propose using. Finally, under the Protocol, only the international transfers it sanctions are considered legitimate to fulfil a country’s emissions-cutting obligations.

The Kyoto model provides important infrastructure for an international carbon market. Common accounting procedures ensure that any transfer meets an internationally agreed level of environmental integrity. An AAU allocated to Switzerland represents a metric tonne of emissions measured using the same standard as an AAU allocated to Norway. Common offset methodologies give a blueprint to replicate in projects across the globe. The CDM has been able to issue 1.4 billion credits – each representing a metric tonne of avoided emissions – and mobilise over US$400 billion in investment using this international rulebook for managing offset projects. Moreover, when countries submit their national GHG inventories, any recorded transfers can be verified by checking the international registry thereby reducing the potential for emissions double counting.

The Kyoto Protocol's market mechanisms have, however, lately encountered shrinking participation. One reason has been a reliance on the EU ETS as a source of demand, where low economic growth and restrictions placed on the types of credits has created a generous oversupply of CDM credits.

The Paris Agreement and carbon markets

The Paris Agreement establishes a fundamentally different framework from Kyoto. Rather than binding emission limits, which readily lend themselves to market approaches, the new climate regime requires all parties to undertake nationally determined contributions of their own choosing. As of writing, 187 countries had put forward NDCs, presenting various 2020-2030 target reduction dates.  These contributions are not legally binding and come in many forms, ranging from absolute economy-wide targets to peaking years, carbon intensity reductions, and so on. A new transparency system will apply to all parties, but will be less prescriptive than the accounting of AAUs that underpinned the Kyoto Protocol.

Fitting market approaches into this new landscape poses a different set of challenges. In a literal sense, the Paris Agreement is silent on markets, in that the term does not feature in the text. This is not unusual, the Kyoto Protocol also did not include the term. Instead, the new agreement houses markets under Article 6, geared towards addressing “voluntary cooperation” between parties in achieving their NDCs.

Article 6 recognises that parties may choose to pursue voluntary cooperation in implementing their NDCs. If these “cooperative approaches” involve the use of “internationally transferred mitigation outcomes,” or ITMOs, robust accounting shall be used to avoid double counting. The use of ITMOs are voluntary and authorised by participating parties.

The same article also establishes a mechanism to contribute to GHG mitigation and support sustainable development. The new mechanism will be under the authority of meeting of parties to the Paris Agreement. It has four listed aims including to promote greenhouse gas mitigation while fostering sustainable development; incentivise and facilitate participation by public and private entities who are authorised by a party; contribute to reduction of emissions level in host country, which can also be used by another party to fulfil its NDC; and deliver an overall reduction in global emissions. In addition, emission reductions occurring from the new mechanism must not be double counted. A share of proceeds will be used to cover administrative expenses and assist developing countries to meet the costs of adaptation, which is similar to the share of proceeds under the CDM, a portion of which was channelled to the Adaptation Fund. Article 6.8 and 6.9 contain a framework for promoting “integrated, holistic and balanced non-market approaches.”  

So what comes next? When the CDM, JI, and IET were established under the Kyoto Protocols, the details were not finalised until the Marrakech Accords four years later. Similarly, the COP21 outcome sets a work plan for negotiators to deliberate and decide how the Paris system will work, to be addressed in upcoming UNFCCC meetings.

Cooperative approaches accounting

The existing UNFCCC accounting system is bifurcated between developed and developing economies. Under the Convention, GHG inventories are required each year for industrialised countries, while these are included in national communications submitted every four years for developing nations.

The Paris Agreement establishes an “enhanced transparency framework for action and support,” with built-in flexibility to take into account national capacities. Under this framework each party must submit a national greenhouse gas inventory. An accompanying decision elaborates that all countries – except least developed countries and small island developing states – shall provide these inventories at least biennially.

On markets the Subsidiary Body for Scientific and Technologic Advice (SBSTA) will develop and recommend guidance on how to apply “robust accounting” for cooperative approaches, for adoption at the first session of governing body of the Paris Agreement, known as the CMA . Countries will need to be “consistent” with this guidance, but not necessarily follow it strictly. How to determine if a country’s accounting is consistent is not clarified in the Paris agreement, though it will likely be reviewed as part of the new transparency system.

Pending decisions will provide greater clarity on a number of issues. On ITMOs, it will be useful to define the scope of what can be considered a “mitigation outcome” transferred between countries. Under Kyoto, AAUs serve as a unit of account for transferring obligations, but also define the scope of accepted international transfers. In other words, only transfers involving AAUs are accepted when submitting national GHG accounts. Parties will also need to consider whether other forms of co-operation – such as Japan’s Joint Crediting Mechanism (JCM), which is similar to the CDM, or the bilateral linking of two ETSs –would be considered ITMOs. Transfers involving one or more countries without absolute economy-wide targets could complicate the methodology needed to avoid double counting.

On the accounting system, the CMA could take an active role in facilitating transfers, including through a central registry similar to the ITL. Alternatively, in a more decentralised system, it may require that parties maintain their own accounting – such as double-entry bookkeeping – and rely on the transparency arrangements to provide oversight. The provision referencing ITMOs also requires parties to “promote sustainable development and ensure environmental integrity.” The SBSTA guidelines will need to define these terms and how countries will meet them when undertaking transfers.

Paris “mechanism”

Another accompanying COP decision recommends that the CMA adopt “rules, modalities, and procedures” for the new mechanism at its first session. The parameters for these are: voluntary participation authorised by each party involved; real, measurable, and long-term benefits related to the mitigation of climate change; specific scope of activities; reductions in emissions that are additional to any that would otherwise occur; verification and certification of emission reductions resulting from mitigation activities by designated operational entities; experience gained with and lessons learned from existing mechanisms and approach adopted under the Convention.

This leaves much to be hammered out by governments. A key area to address will be the type of system. The new mechanism may continue to credit at a project level. A Brazilian proposal in Paris envisioned a mechanism similar in scale to the CDM, referred to as an “enhanced CDM,” or “CDM+.” Conversely, in prior discussions for a “new market mechanism” (NMM), both the EU and the Environmental Integrity Group negotiating group have proposed a scaled-up or sector-based crediting mechanism.

The future of the Kyoto flexibility mechanisms is also unclear, in particular whether the new mechanism will succeed the CDM and JI, or will sit alongside either of these. The Paris Agreement does not mention the CDM or JI, but notes that the new mechanism should draw on the experience gained from existing mechanisms. Similarly, it is unclear whether units generated under the Kyoto mechanisms will be eligible for compliance after 2020 and if so, whether they will need to be converted to an alternative credit type to conform with credits issues under the new mechanism.

Negotiators may also decide to transfer project methodologies over from the CDM to apply to the new mechanism, discard some of these existing approaches, or move away from project level crediting altogether as noted above. They may also consider other methodologies used outside the UNFCCC. Finally, the Paris Agreement frames sustainable development on a par with GHG mitigation, so parties may require measured sustainable development outcomes to be eligible for crediting.

Parties will need to decide on governance arrangements for the new mechanism. The CDM is managed by an Executive Board of ten government officials, comprising one member from each of the five UN regional groups, two other members from parties included in Annex I, two other members from non-Annex I parties, and one representative of the small island developing states. Similarly, JI has a supervisory committee (JISC) to oversee the verification of projects. The new mechanism could incorporate governance from either of these existing platforms.Guidance on rules and procedures will also need to be clarified. The CDM and JI have existing procedures for developing projects that are ultimately credited. Countries could transfer these rules to the new mechanism or adopt new procedures.

Given the breadth of views across governments on the role of market mechanisms, reaching conclusions on these issues will be challenging. The slow progress since 2011 in the UNFCCC toward a “framework for various approaches” (FVA) and NMM demonstrated the difficulties in gaining consensus on the subject. Nevertheless the importance afforded to international markets by many countries in their NDCs implies there is a strong impetus to find a workable system for international transfers.

Efforts beyond UNFCCC

It is possible that initiatives undertaken outside the UNFCCC will inform efforts within. The Carbon Market Platform established under the G7, for example, is a strategic political dialogue that can complement the UNFCCC in developing guidance on accounting for international transfers. The system that ICAO builds could seek consistency with the Paris Agreement. For example, it would be beneficial if credits used for compliance in the UNFCCC and ICAO are fungible, to prevent project developers choosing between separate customers. It remains to be decided what types of international credits will be used for compliance in the ICAO MBM, but this should take into account the emergence of the new mechanism. In addition, the accounting system used by ICAO should at least be consistent with that used under the Paris system, insofar as this would avoid the double counting of units used for compliance in both ICAO and the UNFCCC.

Unfinished business

Paris reaffirmed carbon markets as an instrument for meeting climate goals. Outside of the agreement itself, groups such as the CPLC are building strong momentum for market approaches as a key component to meeting the mitigation targets set by NDCs. COP21 did not, however, finalise a new system of international carbon markets or cooperative approaches. Accounting for ITMOs and other forms of voluntary cooperation require elaboration and guidance. The role of the new mechanism remains to be negotiated. And if these talks become stalled, as was the case for the FVA/NMM deliberations, interested countries may pursue bottom-up linkages elsewhere rather than continue to search for solutions within the UN climate talks. The pace and extent of progress under the UNFCCC will determine how central a role multilateral platforms will play on these issues in the future and the prospects of a truly global carbon market.

Powering Phoenix: City and Business Collaboration on Clean Energy

Powering Phoenix:
City and Business Collaboration on Clean Energy

February 2016

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The City of Phoenix has developed innovative partnerships with the private sector, investors, and the state across various projects to promote energy efficiency and increase the share of renewable energy. As these projects are expanded or emulated, they may help regulated entities comply with the Clean Power Plan.

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Distribution of Allowances under the Clean Power Plan

Distribution of Allowances under the Clean Power Plan

February 2016

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In August 2015, the U.S. Environmental Protection Agency (EPA) finalized the Clean Power Plan for existing power plants. Under the rule, states can implement a mass-based or rate-based compliance plan to reduce greenhouse gas emissions from the power sector. States choosing a mass-based approach must also decide how to allocate emission allowances. This fact sheet provides an overview of how allowances could be distributed under a mass-based approach and the policy objectives achieved by their distribution.

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Market Oversight Under the Clean Power Plan

Market Oversight under the Clean Power Plan

February 2016

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Carbon markets, like other commodities markets, require provisions to ensure that the market functions effectively and is not manipulated by some participants. Regulators conduct oversight to ensure that buyers can procure carbon credits when needed at a price that reflects the cost of reducing emissions and buyers’ risk tolerance. By making sure that buyers only pay a fair and transparent price, regulators help protect consumers from overpaying for cleaner electricity. This fact sheet investigates the options and implications
of potential market oversight provisions that might be useful as states consider implementing the Clean Power Plan.

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