As part of the ELEEP Transatlantic Energy and Climate Dialogue, Ecologic Institute and Climate Strategies organized a UNFCCC Side Event entitled "Transatlantic Perspectives After Paris: Carbon Markets and the linking of Emission Trading Systems". The Bonn Climate Change Conference in May 2016 marked the beginning of the Paris Agreement’s implementation and comes at a time that discussions on carbon markets are gaining renewed prominence: - The Paris Agreement provides the framework for new mechanisms in its Article 6 and leaves room for interpretation in its implementation. - While facing legal challenges, Obama’s Clean Power Plan could enable US States to achieve GHG reduction targets with the support of carbon market mechanisms. - Within the EU Emission Trading System, options like the Market Stability Reserve are being explored to improve on the balance of allowances’ supply and demand. - Additional states and regions (ex. China) have started carbon markets in recent years and could provide powerful partners for the linking of Emission Trading Systems. In this context, our experts Aki Kachi and Michael Mehling discussed existing options for the development of carbon markets post-Paris and provided a perspective on what they could mean for carbon markets in the US and the EU. Our experts’ presentations were followed by a discussion, moderated by Matthias Duwe.

1. http://mit.edu/ceepr
Transatlantic Perspectives
After Paris:
Carbon Markets and the linking of
Emission Trading Systems
Michael Mehling
26 May 2016

2. • 1969: Canadian John H. Dales explores the idea of emissions
trading in a book (Pollution, Property and Prices, U. Toronto Press)
• 1982: First market-based instruments used for conventional
environmental pollutants (1982: lead; 1995: SO2; 1998: NOx)
• 1993: President Clinton proposes a broad energy tax (“BTU Tax”) in
his State of the Union Address, but the measure fails
• 2001: President Bush declares withdrawal from the Kyoto Protocol
• 2005: Seven U.S. states announce regional trading system (RGGI)
• 2007: Supreme Court Decision in Mass. v. EPA; WCI emerges
• 2009: Emissions trading begins in ten U.S. states (RGGI)
• 2010: Broad cap-and-trade bill fails in Senate after passing House
• 2013: Emissions trading begins in California and Québec (WCI)
• 2014: California and Québec link their trading systems (WCI)
• 2015: EPA passes final rule on Clean Power Plan http://mit.edu/ceepr
Evolution of Carbon Markets in North America

3. 5/26/2016
2008-2012
Carbon Markets in the Americas

4. 5/26/2016
2009
Carbon Markets in the Americas

5. 5/26/2016
2013
Carbon Markets in the Americas

6. 5/26/2016
2017
Carbon Markets in the Americas
Existing
Intended
Mention in INDC
Considering

7. http://mit.edu/ceepr
U.S. Clean Power Plan
On 3 August 2015, the EPA issued a final rule (“Clean Power
Plan”) for existing power plants under Sec. 111(d) CAA:
• Aims to achieve a 32% reduction from 2005 in emissions
from existing power plants nationwide by 2030, with State
Implementation Plans due at the latest by September 2018
• States are assigned rate- and mass-based mitigation goals,
reflecting the degree of abatement achievable through
application of a source-specific best system of emission
reduction (BSER) given the current generation portfolio
• BSERs are based on an analysis of what is technically
feasible using three categories of abatement opportunities:
• Increasing the operational efficiency of coal-fired power plants
• Shifting electricity generation to natural gas-fired power plants
• Increasing electricity generation from zero-emitting sources

8. http://mit.edu/ceepr
U.S. Clean Power Plan: A Court Drama
• 2007: With Mass. v. EPA, Supreme Court opens the door to
regulation of greenhouse gas emissions under the CAA
• 23 Oct. 2015: CPP enters into force with publication in the
Federal Register
• 23 Oct. 2015: Coalition of states, utilities and other parties file
CPP lawsuits before U.S. Court of Appeals, D.C. Circuit
• 9 Feb. 2016: Supreme Court narrowly votes to stay imple-
mentation of Clean Power Plan pending review of its merits
• 13 Feb. 2016: Justice Scalia, one of the supporters of the
stay, passes away, vacating a seat in the Supreme Court
• 17 May 2016: District Court decides to forego three-judge
panel and instead opts for ‘en banc’ hearing in September

9. http://mit.edu/ceepr
Trading under the U.S. Clean Power Plan
• Under the CPP, states have emission performance rates and
mass-based emission budgets
• 23 Oct. 2015: Federal plan and model trading rule proposal
• Rate-based and mass-based federal plan
• Rate-based and mass-based model trading rule
• Mass-based trading:
• EPA-operated tracking system; banking; set-asides for clean energy
incentive program, output-based allocation and renewable energy
• Rate-based trading:
• Unit: Emissions Rate Credit (ERC) = 1 MWh @ 0 lbs. CO2
• ERCs can be generated from RES and nuclear generation,
overachieving subcategory emissions standard and NGCC redispatch

10. http://mit.edu/ceepr
Clean Power Plan: Compliance Options

11. Integrating Markets through Linking
5/26/2016
U.S.-Canada Joint Statement on Climate, Energy, and
Arctic Leadership, 10 March 2016:
”Recognizing the role that carbon markets can play … both countries
commit to work together to support robust implementation of the carbon
markets-related provisions of the Paris Agreement … will explore options for
ensuring the environmental integrity of transferred units, in particular to
inform strong INDC accounting and efforts to avoid ‘double-counting’ of
emission reductions … will expand their collaboration in this area over time.”
Maroš Šefčovič, European Commission Vice President for
Energy Union, 25 February 2016:
“We’re ready to explore with our international partners like China, Quebec,
Ontario, Manitoba, California and South Korea the possibilities of a global
system of linked markets.”

12. Are We Any Closer Than a Decade Ago?
5/26/2016
California Governor Arnold Schwarzenegger
Executive Order S-20-06, 16 October 2006:
“[S]hall develop (...) a comprehensive market-based
compliance program with the goal of creating a program that
permits trading with the European Union (...) and other
jurisdictions.”
German Foreign Minister Frank-Walter Steinmeier
Strategy Paper, 5 July 2007:
“[For] the next phase of international
climate negotiations (...) the goal has
to be a powerful new trans-Atlantic
market”

13. Linking in a Multilevel Trading Architecture:
Case Study on California and Québec
5/26/2016

14. Accounting under the WCI
5/26/2016
Accounting under
WCI rules

15. Potentially: Accounting under the CPP
5/26/2016
Accounting under
WCI rules
Accounting under Clean
Power Plan rules

16. Accounting under the Paris Agreement
5/26/2016
Accounting under
WCI rules
NDC Accounting
under UNFCCC rules
Accounting under
Clean Power Plan rules

17. Heterogeneity as a Challenge for Linking
5/26/2016
• Heterogeneity of Targets
– Absolute emissions limitation or reduction targets
– Relative emissions limitation or reduction targets (GDP, BAU,
MWh)
– Renewable energy or energy efficiency targets
• Heterogeneity of Units
– Allowances issued under mass-based cap-and-trade systems
– Credits issued under baseline-and-credit systems (incl. ERCs, but
also offset projects, sectoral crediting, REDD+ (?), SDM (?))
– Renewable energy or energy efficiency credits/certificates (incl.
ERCs, but also RECs or Green Certificates, White Certificates )
• Heterogeneity of Policies and Measures
– Quantity rationing (emissions trading)
– Pricing (carbon taxes, fees and charges)
– Regulation (e.g. performance standards)

18. Managing Heterogeneity: Two Options
5/26/2016
A D
F E
CB
A Hub D
F E
CB
Source: Mehling and Görlach, 2016
Harmonization Approach Hub-Based Approach

19. Harmonization Approach
5/26/2016
Example: Western Climate Initiative
• Based on a “Western Regional Climate Action Initiative
Agreement” signed on 26 February 2007
• WCI members adopted a common “Design for the WCI
Regional Program” in 2010, setting out a template for a
regional emissions trading system
• California and Québec have each adopted mandatory
mitigation targets, emission reporting rules, and emission
trading systems based on the common design
• Joint administrative organization (WCI, Inc.) created in
2011 maintains a registry, manages joint auctions,
oversees offset crediting and monitors the market

20. Emergence of Clusters or “Clubs”
5/26/2016
Eurasian
Market
Asia-Pacific
Market
North
American
Market
South
American
Market

21. From Compatibility to Comparability
5/26/2016
Source: World Bank, 2014Rating = f {program rating, credibility rating, ambition adjustment}
ICAR
Rating
Agency
Rating
Agency
Rating
Agency
Settlement
Platform
Offset Offset
A
D
C
B
Rating
Agency
Offset
A
Settlem
ent Platform
ICAR
Direct Link
Direct Link (via Hub)
Emissions Trading System
Offset Crediting System
International Carbon Reserve
International Settlement Platform
Independent Rating Agency
Networked Carbon Markets
(All Systems Linked via Hub with Risk-Based Rating)

22. http://mit.edu/ceepr
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