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Greenhouse gas emissions trading schemes: A global perspective

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An overview of rules and developments in major jurisdictions globally, including the US, Canada, Mexico, Japan, the UK and the EU.

Navigating greenhouse gas emissions schemes worldwide

As global emissions trading systems undergo fundamental changes, understanding the policies and rules around them can alert you to opportunities as well as challenges.

The impacts of greenhouse gas (GHG) emissions continue to be of great concern globally. Innovations have occurred in market-based solutions, technology development and international law, and there are 17 GHG emissions trading schemes that have been established globally, operating in 35 countries, 12 states and seven cities.

These trading schemes present a market-based approach to controlling GHG emissions and mitigating the effects of climate change by limiting the quantity of industrial discharges of GHGs, either through the allocation or purchase of emissions allowances from a central authority or the purchase of emissions credits from market participants. For example, a company that emits more GHGs than its permits allow can buy credits from others willing to sell them. GHG emissions credit units are often known as carbon credits or GHG emission-reduction credits.

With the 2013 – 2020 Kyoto Protocol compliance period coming to an end, meeting intended nationally determined contributions under the Paris Agreement has opened up new challenges, and the resulting changes are confronting GHG emissions trading globally. These changes include economic dynamics, which have lowered the value of emission-reduction credits and have affected the marketplace, potential political opposition to the policies underlying GHG emissions trading and the rise of cost-effective innovations in fnancing GHG emissions reductions.

This report offers readers an overview of the status of GHG emissions trading schemes in major jurisdictions globally, including the United States, Canada, Mexico, Japan, the United Kingdom and the European Union. It illustrates the current status of global GHG emissions trading systems and also offers insights into where the global GHG emissions trading system is headed, alerting readers to potential opportunities and challenges.

 

United States

Individual states are expected to take the lead in regulating greenhouse gas emissions.

California Coast and Pacific Ocean

Canada

Ontario and Québec lead the way in developing trading schemes.

aerial view of Toronto, Canada

Mexico

Implementation of a cap-and-trade program and compliance market is expected by 2021.

Monarch butterflies

United Kingdom

EU's trading scheme framework dominates, but Brexit brings uncertainty.

Wind Electricity

European Union

The world’s biggest trading scheme sees proposals intended to stabilize the market and links to Switzerland.

Offshore Wind Platform

Japan

Tokyo Metropolitan Government's and Saitama Prefecture's schemes are connected as Japan considers a national scheme.

Japanese bamboo

The global future

Regional trading systems are expected to expand and increase their connections with one another.

Greenhouse gas emissions

Global auction statistics

Mapping emissions trading globally

European Union: Greenhouse gas emissions trading schemes

Insight
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7 min read

The world's biggest trading scheme sees proposals intended to stabilize the market and links to Switzerland

The European Union Emissions Trading System (EU ETS) is the world's first and biggest international emissions trading scheme, accounting for trading of almost 50 percent of Europe's emissions. It came into effect in 2005 and since has developed in three phases. The frst phase was the testing or "learning by doing phase" (2005 – 2007), followed by Phase II, coinciding with the Kyoto Protocol's frst compliance period of 2008 to 2012. The current and third phase started in 2013 and will end in 2020 when Phase IV will take over.

 

What is covered

The EU ETS currently operates in 31 countries—the 28 EU Member States (while the UK's connection to the EU ETS post-Brexit remains to be resolved), plus Iceland, Liechtenstein and Norway. It applies to carbon dioxide (CO2) emissions from power and heat generation equal to or more than 20 MWs of capacity and energy-intensive industry sectors (including oil refineries, steel works and production of iron, aluminum, metals, cement, lime, glass, ceramics, pulp, paper, cardboard, acids and bulk organic chemicals). The EU ETS also applies to nitrous oxide from production of nitric, adipic and glyoxylic acids and glyoxal, as well as perfuorocarbons from aluminum production. All in all, approximately 11,000 energy-intensive installations, as well as intra-European Economic Area (EEA) civil aviation, are included, covering approximately 45 percent of EEA's greenhouse gas (GHG) emissions.

From 2012 to 2016, emissions from fights between airports located in the EEA fell within the EU ETS's scope. The EU legislature is currently considering extension of the EU ETS's coverage of intra-EEA fights for the 2017 to 2021 period. The EU Aviation Resolution sets the trajectory for all EU countries to join the International Civil Aviation Organization's Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA), which is a global market-based measure to address CO2 emissions from international aviation as of 2021, with the goal of stabilizing CO2 emissions at 2020 levels by requiring airlines to offset the growth of their emissions after 2020. Under CORSIA, airlines will be required to monitor emissions on all international routes and offset emissions from routes included in the scheme (e.g., airlines will be permitted to purchase eligible emission units generated by projects that reduce emissions in sectors such as renewable energy). Although the implementation mechanics for the scheme will be developed at the International Civil Aviation Organization level, to make CORSIA effective national measures will need to be developed, and ultimately enforced, at national domestic levels.

 

A market stability reserve will be established in 2018 to start operating in January 2019, to address the current surfeit of allowances and make the EU ETS resilient to shocks.

What is required

The EU ETS is a "cap-and-trade" system. It works by setting limits on overall emissions from high GHG-emitting industry sectors, with the limit reduced over time. Within that limit, companies may buy and sell emission allowances as needed for their production purposes. Each allowance represents the right to emit one ton of CO2-equivalent emissions. The overall number of allowances issued determines the volume of emissions permitted, and in that way emissions are "capped." The idea is that the cap is reduced over time, thereby reducing emissions. In the current (third) phase of the EU ETS, the number of allowances issued is declining annually. Allowances are distributed to installations by allocation and increasingly by auction. The allowances can be freely traded on the market or between covered entities. Each year, installations must surrender allowances equivalent to the amount of CO2-equivalent emissions they emit. If installations produce more emissions than covered by allowances, they face signifcant financial penalties amounting to €100/tCO2 (rising with EU infation from 2013); if they produce less, they can trade the surplus allowances.

For installations to receive free allocation, they must meet the relevant sector's benchmarks. For those installations that are not at a signifcant risk of carbon leakage (i.e., where, for reasons of costs related to climate policies, businesses transfer production to other countries with fewer constraints on GHG emissions), the scheme provides that free allowances decline annually, to 30 percent of all allowances in 2020. In principle, no free allowances will be available from 2027. To safeguard the competitiveness of industries, installations in sectors and sub-sectors deemed to be exposed to a signifcant risk of carbon leakage will continue to receive a higher share of free allowances in Phase IV compared to the other industrial installations, so long as they meet the relevant sector benchmark.

The power generation sector is not eligible for free allocation, except under special conditions in a few lower-income EU countries in order to modernize their power sectors.

 

Future outlook

The EU has committed under the Paris Agreement and for its 2030 Climate and Energy Policy Framework to reduce GHG emissions by at least 40 percent domestically by 2030. To accomplish this, it proposes to increase the pace of emissions cuts, address carbon leakage and fund low-carbon innovation. A market stability reserve will be established in 2018 to start operating in January 2019, to address the current surfeit of allowances and make the EU ETS resilient to shocks by introducing an adjustment to the supply of allowances that are to be auctioned. According to the EU's legislative proposal for the EU ETS (2021 to 2030), the annual rate of decline of total allowances would accelerate to 2.2 percent from the current 1.74 percent.

The proposal also aims to update sector benchmarks to refect technological progress, provide a more targeted carbon leakage classification (and develop "predictable, robust and fair rules" to address the risk of carbon leakage), and more closely align free allocation with production levels. The proposal puts in place two new funds—an innovation fund and a modernization fund—to help industry and power sectors meet the innovation and investment challenges inherent in reducing their emissions.

 

Linking with others

The EU ETS is linked with the Kyoto Protocol's international emissions trading system. Emission-reduction credits generated from Kyoto Protocol Clean Development Mechanism and Joint Implementation projects could be used for EU ETS compliance (with quantitative restrictions). This was designed to cover reductions in sectors not included in the EU ETS as well as help expand market access to low-cost emissions reductions and support technology transfer. The EU ETS adopts this through the 2004 EU Linking Directive, allowing operators to use Kyoto Protocol credits for compliance with the EU ETS on a one-for-one basis.

Additionally, the EU and Switzerland have finalized technical negotiations and in principle have agreed to link their systems. However, the final conclusion of the Linking Agreement is dependent on negotiations on a broader package of issues with Switzerland. Once the agreement has entered into force, linking will result in the mutual recognition of EU and Swiss emissions allowances.

 

 

This publication is provided for your convenience and does not constitute legal advice. This publication is protected by copyright.
© 2017 White & Case LLP

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