Sectoral approaches in the carbon market Richard Baron
Sectoral approaches in the carbon market Richard Baron Head, climate change unit International Energy Agency IEA – ‘XXXElectricity and climate change. XXX’ UNFCCC side-event, Bonn, 11 June 2009 richard. baron@iea. org © OECD/IEA 2009
Outline • Brief definitions / scope / principles • Supply and demand questions • Sectoral approaches and the carbon market: how would they work? – Crediting based on intensity (i. e. relative) goals – Sectoral trading
Sectoral approaches and the carbon market – how would they work? – l Sectoral crediting u Option for analysis: a ‘no-lose’ (non-binding) sector-wide crediting mechanism n u Ability to sell credits if national/sectoral performance beats the baseline – No obligation to buy otherwise Based on an intensity goal n X tonnes of CO 2. eq per unit of output w MWh of electricity, tonnes of cement, steel, aluminium, … n u Creditscountry = (goal – performance) x output = Y t. CO 2 Credits issued ex post after some form of certification l Sectoral trading l Technology goals Annex I Expert Group on the UNFCCC
Sectoral market mechanisms Supply and demand (year 2020) Annex I Expert Group on the UNFCCC
Why supply-and-demand balance matters with no-lose crediting: t. CO 2 or t. CO 2/unit of output Effect on global mitigation via the carbon price Business as usual Actual performance Global mitigation (low carbon price) Offsets No lose crediting baseline Actual performance (high carbon price) Unexpectedly high supply could depress prices, discourage action on “no lose” goals – and undermine global mitigation Time Annex I Expert Group on the UNFCCC
Additional measures to CO 2 reductions in generation Total electricity output Electricity savings 2030 Business-as 2030 usual Climate Policy Case ~ 3 Gt. CO 2 reductions in generation 2006 All credited? 2006 2030 ~13 Business. Gt. CO 2 as-usual ~10. 4 2030 Climate Gt. CO 2 Policy Case ~ 8. 2 Gt. CO 2 Intensity of electricity Area = CO 2 from electricity in developing countries Area = Total energy-related CO 2 from developed countries Source: Freely adapted from IEA World Energy Outlook 2008 – 450 ppm Climate Policy Case
Sectoral market mechanisms in the current negotiation l Introduce a mechanism that is no longer a ‘zero-sum game’ for global emission levels – CDM today l From a technical to a more political definition of baselines? u Alternatives: discounting supply or demand l Various ideas on how to orchestrate this discussion (registries, etc. ) Annex I Expert Group on the UNFCCC
Implementing sectoral market mechanisms l Intensity-based crediting is a data intensive instrument for a government u Reliable projections for baseline negotiation u Mitigation costs (host’s interest) u Data on emissions and output l Crediting: setting a sectoral baseline at country level will not, alone, get the carbon finance mobilised Annex I Expert Group on the UNFCCC
Sectoral crediting: who gets what? International carbon market Intensity (t. CO 2/MWh) Maximum revenues to Group A = 4. 5 Mt. CO 2 Credits sold = 4. 5 Intensity. B = 0. 51 Baseline = 0. 5 -0. 5 5. 0 Domestic policy tools to beat the baseline? Intensity. Country = 0. 455 Credits issued = 4. 5 Intensity. A = 0. 4 20. 0 Group A 25. 5 Group B 45. 5 Country total Annex I Expert Group on the UNFCCC
Implementing sectoral market mechanisms (2) l Intensity-based crediting: some flexibility to accommodate for unexpected growth/slow down l Requires some practical policy instruments at domestic level to beat the baseline u u u Mandatory, minimum efficiency for power plants, or share of non-CO 2 technologies by companies Feed-in-tariffs, replenished by credit sales Or mandated implementation (government-owned utilities) Work needed on facilitating carbon finance’s role under sectoral crediting Annex I Expert Group on the UNFCCC
Technology goals l Link mitigation directly to technology diffusion (and transfer, in some cases) l Could be the main instrument to achieve a sectoral baseline l A more practical basis to discuss international support l Same questions as other approaches, e. g. , what is the business-as-usual trend (consider recent announcements revising up wind, solar and nuclear goals in China)? u Link to global mitigation must be clearly established Annex I Expert Group on the UNFCCC
Implementing sectoral market mechanisms (3) Sectoral trading l Based on absolute emission goals l Similar sectoral / boundary issues as ‘crediting’ l Only one set of data needed for compliance assessment (sector-wide emissions) l Possibility to allocate ‘allowances’ at the outset and to trade ex-ante u Similar to Article 17 under Kyoto Protocol u More direct link between sources and carbon finance l Uncertainty on future emissions and related cost could lead to ‘hot air’ allocation Annex I Expert Group on the UNFCCC
In summary • Sector-based mitigation and market mechanisms represent a step-change in policy for developing countries – Must be clear on domestic policy requirements for access to international carbon market • The possibility to move crediting to a sectoral scale throws major uncertainty on supply-demand outlook – Will developing countries adhere to the idea? – Which sectors will be proposed? Eligibility criteria? Sectoral priorities set by Parties? – How will baselines be set? How will sectoral expertise be brought into the UNFCCC? • What is the role of carbon finance vis-à-vis other support to NAMAs? © OECD/IEA 2009
References Sectoral approaches and the carbon market Baron, Buchner, Ellis, 2009 – OECD/IEA Options for integrating sectoral approaches (SA) into the UNFCCC Baron, Barnsley, Ellis, 2008, OECD/IEA www. oecd. org/env/cc/aixg Sectoral approaches in electricity – building bridges to a safer climate IEA, 2009, forthcoming www. iea. org Carbon Trust (2008) - Global Carbon Mechanisms: Emerging lessons and implications UNEP (2009) - CD 4 CDM Working Paper No. 6, December. UNEP Risoe centre.
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