My Green Audit

Arguments in Favour of an Emissions Trading Scheme

In light of the Australian government's and the conservative opposition's disagreements on the ETS, in this and the next  news item we'll discuss arguments advanced  for and against an ETS. In this news report, Nav Brah, NCSI's Environment and Sustainability Services Manager reflects on arguments advanced in favour of an ETS which were presented in a recent report prepared for the UK government titled "Global Carbon Trading - A framework for reducing emissions" by MP Mark Lazarowicz.  The report makes clear that a global system for carbon trading is essential for countries to avoidand reduce climate change and without it the costs of climate action will be higher.

How does a Cap and Trade ETS work?

The scheme allows trading between companies or countries.  It is known as ‘cap and trade’ because it operates by ‘capping’ the total emissions and allowing the participants to ‘trade’ emissions allowances. Each participant must regularly ‘reconcile’ their emissions budgets by ‘surrendering’ an allowance for every tonne of CO2 emitted. This encourages them to reduce their emissions if they can do so for less than the cost of allowances. Alternatively they can comply with the system by buying allowances from elsewhere. The EU ETS is the only functioning national and transnational carbon emissions trading system. Emissions trading systems currently planned in other countries could result in 17% to 35% of global emissions being covered by 2015.

Trading in emissions was started in the United States in 1990. The US trading system for sulphur dioxide reduced emissions by 43% between 1990 and 2007, three years ahead of schedule and at a quarter of the predicted cost. And the EU Emissions Trading System, which is now in its second phase has already started impacting on company decisions to reduce emissions.

The UK's recent proposal on ways that developed and developing countries can pay for tackling climate change estimated that a global figure of $100 billion a year would be needed by 2020 to help developing countries reduce their emissions, tackle deforestation and adapt to the climate change already being experienced. The carbon market could provide a significant proportion of that sum. Cap and trade systems can play as part of the global climate change response and the steps are needed to expand and link trading systems over the next decade. Carbon markets alone will not however be sufficient to successfully tackle climate change, but they need to operate in tandem with robust domestic action to cut emissions. For example, the UK Government is committed to meeting its required 34% cut in emissions by 2020 through domestic action alone, apart from emissions covered under the EU ETS where limits on offsetting are set at EU level. The UK’s Low Carbon Transition Plan, published on 15 July, sets out the domestic actions required to meet its carbon budgets.

Mark Lazarowicz's report on Global Carbon Trading concluded that:

• Cap and trade systems can provide ambitious cuts in greenhouse gas emissions by putting a price on carbon and ensuring that the polluter pays.
• Cap and trade will need to act alongside a range of other targeted policies, such as domestic effort to introduce feed-in tariffs on renewable energy and public finance for developing carbon capture and storage.
• Global carbon trading could reduce the costs of cutting emissions by up to 70%. Potentially, this could allow the world to cut global emissions by an additional 40-50% at the same cost compared to domestic action alone.
• Carbon trading will also provide substantial financial flows to the developing world to support their transition to a low carbon economy.
• Cap and trade systems – like the EU’s - are already operating or planned in over 35 countries in the developed world. These will need to be coordinated and linked to form a global network, creating a more comprehensive, effective international system.
• Advanced developing countries such as China and Brazil could also start to take part in such systems, including key sectors like the power sector. Having more advanced developing countries engaging in sectoral trading could achieve substantial cuts in emissions at low or no net cost to themselves in 2015.
• Scaled-up mechanisms for supporting developing countries to cut emissions are needed that are more efficient and equitable than the current Clean Development Mechanism. These should be designed to provide substantial real emissions reductions that go beyond offsetting and deliver financial flows to the developing world. Using sectoral trading rather than the CDM could reduce the global cost of emission cuts financed through carbon trading by around a half, enabling developed countries to make deeper emissions cuts.
• The international community needs to provide urgent support to developing countries to build capacity for accessing carbon finance, including technical knowledge sharing and funds for measuring, legal and institutional reforms.