The Energy and Climate Change Committee launches its new inquiry into Linking Emissions Trading Systems.
An emissions trading system (ETS) is a market mechanism which aims to control greenhouse gas (GHG) emissions. The advantage of an ETS over other measures designed to curb emissions, such as carbon taxes, is that an ETS can incorporate a cap on total emissions and thereby guarantee that they do not exceed this total. An ETS also enables the market to identify the lowest-cost means of reducing emissions.
Although there is no prospect of establishing emissions trading on a global scale in the immediate future the fact that the IPCC 5th Assessment Report has introduced the concept of a total safe level of emissions highlights the desirability of working in the long-term towards a global ETS.
Emission Trading Systems
The first international ETS was introduced by the European Union in 2005. Today there are a number of trading systems in force or scheduled to be implemented in North America, parts of Asia, Australia and New Zealand. Piloting of emissions trading in China is now well under way and trading systems are also being considered in parts of South America, Eastern Europe and the Middle East.
Another advantage of emission trading as an instrument to tackle climate change is that it is feasible to connect systems across borders. This ‘linking’ of two or more ETSs creates a larger carbon market, which can provide the participating regions with more cost efficient options to reduce their emissions. Linking emissions trading systems could also help to facilitate a global climate deal.
There are significant compatibility challenges involved in linking, however, with regulatory and governance consequences to be taken into account. These include system design elements and the need to establish robust monitoring, reporting and verification standards. Different government policies and economic developments across regions may also need to be taken into account.
Purpose of inquiry
This inquiry will explore the extent to which the ETSs around the world are evolving in a way which makes eventual linking more or less likely. It will consider, among other things, the scope for linking these emerging ETSs, the potential benefits of linking, the challenges which would need to be overcome and the respective roles of different bodies in facilitating linking. We would welcome ideas for mechanisms whereby inter-system trading should be administered.
Terms of Reference
The Committee invites responses addressing some or all of the following issues:
- How far advanced are the existing ETSs around the world and how many more systems are likely to be fully operational by the end of the decade?
- What scope is there to link current and future emissions trading systems? Are there any examples of trading systems which have already been linked and, if so, what lessons can be learnt for the future?
- What are the potential benefits and disbenefits of linking emissions trading systems?
- What are the main challenges to linking emissions trading systems and what are the consequences of failing to address them adequately? Specifically:
o How can differing levels of ambition in terms of emissions caps in different systems best be managed?
o How can systems between countries at different stages of economic development be harmonised?
o How can national priorities and particularities best be catered for?
- How can the adoption of consistent design features between emissions trading systems be encouraged? (e.g. monitoring reporting and verification rules; compliance and enforcement mechanisms; limits on the use of international offset credits; banking and borrowing rules; and price interventions, such as price floors and ceilings.)
- What are the essential common features of linked emissions trading systems? Do these include common definition of emissions? Do linked systems have to cover emissions from the same sources and have the same banking and time periods? How can the rules of linked systems be renegotiated in the event of unexpected events?
- What should be the respective roles of intergovernmental organisations (e.g. UNFCCC), nation states and businesses in enabling emissions trading systems to be linked?
- What is the UK Government doing to encourage or facilitate linking of emissions trading systems? Could it do more? If so, what could it do?
- To what extent could progress on linking emissions trading systems help facilitate a global climate deal at international climate negotiations?
The deadline for the submission of written evidence is 24 April 2014