08 September 2009

GPPi publishes paper on potential and limits of carbon market integration

GPPi published a new policy paper entitled "Towards a Global Carbon Market? The Potential and Limits of Carbon Market Integration". The policy paper was written by GPPi Associate Director Jan Martin Witte and GPPi Fellow Timo Behr, with Wade Hoxtell and Jamie Manzer. The policy paper is a product of GPPi's Global Energy Governance Project.

Almost 20 years after the publication of the first Assessment Report of IPCC, there is now almost universal recognition that climate change is a serious challenge that requires urgent policy action. In this context, policymakers around the world are placing growing trust in the potential of market-based emissions trading regimes for achieving large-scale mitigation of man-made greenhouse gas emissions, and especially of carbon dioxide (CO2).

However, for such cap-and-trade systems to make a real dent into emissions, two important conditions need to be satisfied. First, emissions trading would have to be almost global in scope, both for reasons of environmental effectiveness as well as political feasibility. And second, such a global approach to cap-and-trade would need to feature a sufficiently stringent cap on emissions in order to incentivize a shift from investment in fossil fuels into low-carbon or no-carbon alternatives.

This policy paper assesses the potential and limits of the emergence of a global carbon market in the years ahead. The key findings include:

• The emergence of a global market for carbon either through top-down design or bottom-up linking is unlikely in the foreseeable future.
  
• With regard to top-down design, all indications suggest that an ambitious agreement at the Copenhagen Summit in December 2009 is unlikely to emerge. While some successor treaty to the Kyoto Protocol will probably be concluded, neither will it feature an ambitious overall cap, nor will it include significant emissions reductions commitments by all major emitters. In addition, while an institutional architecture based on government-to-government trading that is comprehensive (in terms of emissions covered) and equipped with an ambitious cap could have great emission reduction potential, it is unlikely that such a system would work effectively because of the likely prevalence of strategic trading, a lack of sufficient market transparency and the absence of a functioning price revealing mechanism.
  
• An examination of variation in the political-economic bargains that underlie existing and prospective emissions trading regimes also suggests that the emergence of a global carbon market through bottom-up linking is a distant, if not entirely unrealistic, ambition. A political-economic analysis of emissions trading regimes in the EU, Australia and the US suggests that the "rules of the game" in these carbon markets – i.e. the ways in which costs and benefits are allocated – reflect carefully crafted political-economic bargains. The precariousness of these bargains in combination with international variation and the lack of a reliable global framework is one of the key drivers of political uncertainty that impacts, among other things, energy sector investments.
  
• The most likely medium-term scenario is the parallel existence of emissions markets with some fragile (indirect) links. Carbon prices will continue to differ across these markets, reflecting diverging caps and marginal abatement costs. In order to preserve the contribution national and regional cap-and-trade systems can make towards mitigation, preventing leakage, managing quality of offset credits and ensuring policy coherence in climate change policy packages will be the key challenges for policymakers in the years ahead.
  
• All this implies that the contribution of carbon markets towards mitigation of emissions in the short- and medium-term is likely to be smaller than is widely assumed. While existing emissions trading systems (such as the EU ETS) can make a very useful and substantial contribution to emissions reductions, other tools and mechanisms need to be developed to engage emerging market economies such as China and India.

To download the article, please click here.

For more information, contact Jan Martin Witte

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