Bilateral Cooperation in Carbon Trading Markets
“What we saw in Bonn is that the Paris spirit is very much alive,” Anna-Kaiser Itkonen, Commission spokesperson for Climate Action and Energy, said referring to the Paris accord in 2015. In Bonn, Germany, the 23rd annual Conference of Parties (COP) wrangled international participants in the fight against climate change this past November. Compared to those held in previous years, this COP showed no major leaps forward and was considered more technical in order to keep political momentum going. According to Itkonen, this was an expected outcome that she dubs “modest but robust”. One main thing COP23 showed was that the exchange of ideas and a willingness of subnational and non-state actors to cooperate in tackling climate change issues is prevalent globally. What remains to be seen is whether the unilateral and bilateral coalitions will be enough to offset the lack of clear political leadership to lead on this issue.
This past August, the EU and Switzerland agreed to link their carbon markets, giving the companies on which carbon trading is implemented on a larger market and fairer competition conditions. Their geographic proximity and the closely integrated aspects of the internal market made this linkage possible. Itkonen says that Swiss-EU linkage is a good sign for other non-EU countries hoping to one day follow after. But as the EU and California carbon markets are so differently designed and are facing such different issues, the collaboration between both parties is more political than anything, an exchange of ideas and results while simultaneously showing solidarity.
In climate action solidarity, California’s Governor, Jerry Brown, and EU Commissioner of Climate Action, Miguel Arias-Cañete, announced a mutual commitment to cooperate in the improving of the Californian and the EU carbon markets. This partnership is one example of the types of voluntary coalitions emerging worldwide. In a statement after the meeting with Brown, Arias-Cañete said, “it’s very clear that the EU and California are stepping up efforts…We have agreed on new cooperation on carbon markets and clean mobility.” In 2013, when Brown met with Climate Action commissioner, Connie Hedegaard, talks about linking the EU’s carbon market with California’s began. And although Brown expressed, at COP23, a desire to see a more global carbon market, Itkonen said that they are certainly not presently talking about linking the systems.
Annalisa Savaresi, lecturer in Environmental Law at the University of Stirling, has been closely observing the Paris agreement and was present at COP23. Savaresi says she thinks that the cooperation between California and the EU is a sign of the times we live in. “Political leadership on climate change is not widespread, therefore coalition of the willing is emerging to show that at least some actors are serious and willing to move on with this agenda and are unconcerned about the lack of sensitivity of their federal governments, especially in the US, but not only.”
While in Bonn, Governor Brown called the EU a leader, “if not the leader in coping with climate change.” Still, global emissions continue to rise. The upcoming period between 2020 and 2030 is an important time that will determine whether the EU will be able to reach its goal of reducing emissions by 80-95% by 2050, as was envisioned in the Paris agreement. Following the Paris accord, EU member states agreed to legally binding national climate change action. The Emissions Trading Scheme (ETS) has been one of the EU’s main tools in helping member states reach these agreed upon goals. The ETS functions as a cap and trade system. A limit is set on the amount of emissions for the period in which the cap applies. Emission allowances can be sold by companies that emitted less than their cap permitted. The ETS is implemented on companies that fall under certain industry sectors, those that are the largest emitters, such as iron, steel, and cement among others.
While California’s carbon market behaves in much the same way, the differences in cost management, uses of externals offsets and in each of their design features makes a near-future linkage unlikely. California acknowledges forest credits as offsets while the EU recognizes Clean Development Mechanisms (CDM). As the use of credits and allowances are interchangeable, the offset in one system would have an impact on the second system, even if that type of offset is not recognized. Similarly, upon linking systems with differing stringency designs, members within the constituent of lower allowance costs will be obliged to abide by the costlier system’s prices. The cost of allowances is a political decision and while California and the EU are willing to cooperate, the degree of autonomy that must be given up to make such a linkage possible is too great for each entity.
The EUs ETS is the world’s first and largest cap-and-trade system, according to Climate Policy Info Hub. Since its introduction in 2005, it has passed through multiple phases of reform. As a pioneer of the carbon trading system, “the EU has learnt the hard way how not to do carbon trading and now it is trying to adjust its course,” said Savaresi. While the EU’s emissions have slowed down, scientists argue that they have not slowed down as fast as they should and no one can say for sure how much the ETS has contributed to the reduction of emissions. During the 2008-2009 financial crisis the price on carbon dropped dramatically, showing some of the scheme’s structural weaknesses. Economic theory suggests that in creating a larger carbon market by linking with California, efficiency in ‘reaching the collective emission reduction target is increased since more reduction options are available.’
The week before COP23, the commission proposed new reforms to the ETS that are slated to kick in by 2019. One of the current issues with the system is a surplus of allowances in the market. This surplus means cheaper carbon prices resulting in less incentive for industries to cut back on carbon emissions. But making carbon prices too high causes higher costs of production, making international competition difficult for European companies. Bas Eickhout, Member of European Parliament for the European Greens, posits that the new “mechanism will also allow us, deletion/cancellation of a surplus of allowances starting from 2023 onwards.”
The Market Stability Reserve helps to stabilize markets by putting excess allowances back in the market during economic crisis’. The reform will permit some of those excess allowances to be cancelled on a yearly basis, reducing the overall amount that can be returned back in the market. The proposal also sets the Linear Reduction Factor to decrease the percentage of emission allowances per year. Yet even if a perfect system existed, emissions trading alone will not get member states to near carbon neutrality, as is envisioned in the Paris accord. To achieve that goal requires that all sectors contribute to a low-carbon transition. The cooperation between the EU and California may provide sustainable energy investment incentives for other carbon intensive industries.
Eickhout has witnessed that, in general, everyone agrees to climate policy in theory which then leads to some action, at which point lobbies emerge. Even in within a system such as ETS, which is already set in place and whose rules are familiar to the sectors covered by it, the fear of economic losses will always raise voices of dissent. In the transition away from fossil fuels, winners and losers emerge but the EU has shown that an economy can grow while still reducing emissions. Under Donald Trump, the current US administration has a relaxed stance on environmental policies, giving some US industries a competitive economic advantage. In both economic and pollution output terms, the US represents a huge market. But the federal governments outright dismissal of climate action also has its own economic risks with the rising international push on new energy systems and green technologies being recognized by other politically significant economies.
Anthony Zito, Professor of European Public Policy at Newcastle University says that you exclude yourself or at least lower the leverage you have if you’re not seen as being a player, let alone a leader in this issue. “Your ability to engage with the agenda and to drive it,” Zito said, “is going to be weakened if you wish to rejoin that political agenda or wish to object to some of the ways it’s going in the future.” Should the US federal government choose to suddenly change its position, it would look like backing down. In order to successfully reach the Paris goals, action must be taken at more than just the nation-state level. Though despite the unprecedented amount of action taken in the US non-governmental sectors including states, cities, and companies, Itkonen said that “the fact remains that climate talks are held between federal governments.” Subnational efforts, as seen with the EU-California coalition, may address the absence of international agreements.
Being the extensive issue that climate change is, the lack of willingness to take an assertive lead at the international level has sceptics wondering whether the Paris agreement goals will be met in time. “International diplomacy is important for the coordination of action and to keep scrutiny on state action,” Savaresi said. But the high level of unilateral and bilateral cooperation that was witnessed at COP23 is encouraging to those keeping a close eye on climate change action. Influential entities such as the EU and California rolling up their sleeves, instigating their own methods of climate action is exactly what needs to be seen worldwide as an example to other political actors.