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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

United States: Greenhouse gas emissions trading schemes

Insight
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7 min read

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

In the US, the trading of greenhouse gas (GHG) emission-reduction credits is underway in a large group of states on the East Coast and in California. In the northeast US, New England states and a group of Mid-Atlantic states joined together to set up a carbon dioxide (CO2) cap-and-trade regime that covers CO2 emissions from power plants in those states. On the West Coast, California's broader trading regime, which covers a wide range of GHGs from a variety of California emitters, is looking to expand to markets outside of the state.

On the federal level however, signs are pointing to lighter regulation of GHG emissions. This results from a combination of factors, including the actions of the Trump administration and pending legal challenges to the federal Environmental Protection Agency’s plans for regulation of GHG emissions. Therefore, individual states—rather than the federal government—are expected to take the lead with the development of GHG emissions regulation over the next four years.

 

The trading of greenhouse gas emission reduction credits is underway in a large group of states on the East Coast and in California.

NEW ENGLAND, NEW YORK,  MARYLAND AND DELAWARE

The nine states of Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New York, Rhode Island and Vermont jointly operate a regional CO2 cap-and-trade system known as the Regional Greenhouse Gas Initiative (RGGI). This system was the frst US mandatory cap-and-trade program for GHG emissions.

What is covered

The RGGI trading scheme, which became effective in 2009, applies only to CO2 emissions from fossil fuel-fred power plants with capacities to generate 25 MWs or more in the nine RGGI states. The RGGI system is therefore narrower than some other regional GHG emissions trading systems that cover GHGs other than CO2 and that apply to emitters other than power plants.

What is required

RGGI applies to emissions reductions within a regional framework, consistent with how the power system in the US operates. Together, the RGGI states set a cap for total emissions of CO2 from covered power plants in the region. Each state implements the program through emissions caps in individual RGGI-participating states that are equal to shares of the region-wide cap. The RGGI cap declines over time, gradually tightening emissions limits. Covered power plants in participating states must obtain an allowance for each ton of CO2 emitted annually (RGGI auctions allowances, rather than allocating them for free). Power plants within the region may comply by purchasing allowances at quarterly auctions, purchasing allowances from other generators within the region that have excess allowances or supporting offset projects. RGGI administered its frst auction of CO2 allowances in 2008.

Future outlook

By 2020, the RGGI CO2 cap is projected to contribute to a 45 percent reduction in the region's annual power-sector CO2 emissions from 2005 levels. The RGGI states recently proposed changes to the program after 2020, whereby the region's CO2 cap would decline by 2.275 million tons of CO2 per year after 2021, resulting in a reduction in the regional CO2 cap by 30 percent relative to 2020 levels through 2030. The RGGI states will host a public meeting on this proposal on September 25, 2017. Although Virginia is not an RGGI member, its governor recently directed environmental regulators in that state to cap power plant GHG emissions in Virginia and establish a GHG emissions trading system in the state where credits can be used in, and traded across, similar trading systems in other states. This could potentially include RGGI states. Whether Virginia establishes its trading connection with its East Coast RGGI neighbors or California's regional trading system remains to be seen. Additionally, both major political party gubernatorial candidates competing in New Jersey's upcoming election favor New Jersey's return to RGGI. New Jersey's current governor pulled the state out of the program in 2011.

 

CALIFORNIA

The State of California operates one of the most active GHG trading markets in the world, covering a signifcant portion of the state's economy. California's program is second in size to the European Union's Emissions Trading System. The California cap-and-trade rules came into effect in 2013.

What is covered

Following a 2015 expansion, California's GHG trading scheme applies to power plants and industrial facilities that emit 25,000 metric tons or more of Co2-equivalent, and fuel distributors that meet the 25,000 metric ton threshold. The covered emissions include weighted equivalent values of methane, nitrous oxide, sulfur hexafluoride, perfluorocarbons and nitrogen trifluoride, along with Co2. This makes the California cap-and-trade system broader than the East Coast's RGGI system because the California system covers emitters other than power plants and GHGs other than CO2.

What is required

Covered emitters in California must hold enough emissions allowances to cover their emissions, and are free to buy and sell allowances on the open market. Under the California program, some allowances are auctioned, while others are allocated or given away for free. Covered entities in California can also use offsets rather than allowances to cover a limited percentage of their emissions limits. The percentage of free allowances allocated to emitters has been reduced over time.

Future outlook

California's cap-and-trade program is one element of the state's larger climate change initiative, the California Global Warming Solutions Act of 2006, which aims to reduce the state's GHG emissions to 1990 levels by 2020 and to 40 percent below 1990 levels by 2030. On July 25, 2017, California Governor Jerry Brown signed into law legislation extending the state's GHG trading program through 2030. Notably, the extension law includes price ceilings and floors and new limits on the use of offsets. Furthermore, it prohibits local air districts from imposing additional limits on CO2 emissions from facilities subject to the cap-and-trade rules.

California's GHG cap-and-trade system also recently overcame a legal challenge in court. A split panel of judges in California's Third District Court of Appeals recently upheld the program, rejected claims that the state’s auction revenues equate to an unconstitutional tax, and instead found that the costs of buying or selling emissions allowances are property rights that can be traded. Had the court found the revenues to be taxes, the system would have been invalidated because tax increases must be approved by a two-thirds majority of the state Legislature, and the program did not have that level of support when it passed. The California Supreme Court declined to hear an appeal of this decision.

Connections

California's cap-and-trade system is connected to a similar carbon reduction scheme in Québec, Canada, which is discussed in the Canada section on page 4. This connection represents the first multi-sector cap-and-trade program connection in North America. Under it, allowances can be traded across jurisdictions. Ontario plans to join the program by next year as well.

Nevertheless, some environmental non-governmental organizations oppose cross-border trading system connections because of their belief that GHG emissions reductions should occur directly at the source of the emissions, rather than outside of the jurisdiction where the source is located.

 

 

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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