The governance challenge for implementing effective market-based climate policies: A case study of The New South Wales Greenhouse Gas Reduction Scheme

The New South Wales (NSW) Greenhouse Gas Reduction Scheme (GGAS) in Australia is a baseline and credit emissions trading scheme with the stated aim of reducing the per-capita greenhouse emissions associated with electricity consumption in the state of NSW. Here we provide a detailed assessment of the GGAS design and operation, with a particular emphasis on its effectiveness in delivering physical emissions reductions that would not have occurred in its absence. We find that a number of design features mean a significant proportion of the tradeable ‘abatement’ certificates are unlikely to correspond to the claimed emissions reductions. While some of these adverse design choices might be corrected, others would seem inherent to the underlying scheme design. Our analysis highlights the major governance challenges with emissions trading approaches and hence the importance of good policy implementation processes including the need for separation of powers through a scheme development process that involves design, assessment and revision. These GGAS lessons would seem relevant for governance with all emissions trading schemes, and has particular implications for cap and trade schemes that incorporate baseline and credit offset schemes, as well as to the ‘White Certificate’ schemes increasingly being seen as a means of fostering enhanced end-use energy efficiency.     

Design limitations in Australian renewable electricity policies

Renewable electricity is pivotal to the medium and long-term reduction of Australia’s greenhouse gas (GHG) emissions, if deep cuts in them are eventually implemented. This paper examines the effectiveness of the principal existing policies that could potentially promote the expansion of renewable electricity (RElec) in Australia: the expanded Renewable Energy Target (RET); the proposed emissions trading scheme (ETS); and the state and territory-based feed-in tariffs. We find the effectiveness of RET is severely eroded by the inclusion of solar and heat pump hot water systems; by the inclusion of ‘phantom’ tradable certificates; and by high electricity consumption growth. We also find that the ETS will not produce a high enough carbon price to assist most RElec technologies before 2020; and that most of the feed-in tariffs exclude large-scale RElec and will give little assistance to small-scale RElec because they are mostly net tariffs. Unless there is a major revision of its RElec policy mechanisms, Australia will fail to reach its renewable electricity target and in particular will fail to build up its solar generation capacity which could be a major source of future deep cuts in the country’s electricity generation emissions.     

Banning banking in EU emissions trading?

Admitting banking in emissions trading systems reduces overall compliance costs by allowing for inter-temporal flexibility: cost savings can be traded over time. However, unless individual EU Member States (MS) decide differently, the transfer of unused allowances from the period of 2005–2007 into the first commitment period under the Kyoto Protocol, i.e. 2008–2012, will be prohibited. In this paper, we first explore the implications of such a ban on banking when initial emission targets are lenient. This analysis is based on a simulation which was recently carried out in Germany with companies and with a student control group. The findings suggest that a EU-wide ban on banking would lead to efficiency losses in addition to those losses which arise from the lack of inter-temporal flexibility. Second, we use simple game-theoretic considerations to argue that, under reasonable assumptions, such a EU-wide ban on banking will be the equilibrium outcome. Thus, to avoid a possible prisoners’ dilemma, MS should have co-ordinated their banking decisions.     

The EU Renewables Directive—What is the fuss about trading?

Considerable argument about trading in green electricity certificates (GECs) preceded the publication of the proposed EU Renewables Directive in early 2008. The proposed Directive set a binding target of 20 per cent of EU energy to be derived from renewable energy by 2020 broken down into targets for each member state. Those arguing for trade in green certificates, called certificates of guaranteed origin (GO), included major electricity companies. However, the idea of mandatory trading was opposed by the main renewable energy industry lobby groups. The proposed Directive limited trading in accordance with the demands of the renewables industry pressure groups. Analysis suggests that if member states were forced to trade to achieve a mandatory target of 20 per cent target, then GEC prices would rise to high levels because the demand for tradeable certificates would be much higher than their supply. Trading is unlikely to improve the prospects for meeting the targets. A system of nationally based ‘feed-in tariff’ systems would not face the problems of uncertain certificate prices faced by compulsory trading in GECs.     

Setting SMART targets for industrial energy use and industrial energy efficiency

Industrial energy policies often require the setting of quantitative targets to reduce energy use and/or greenhouse gas emissions. In this paper a taxonomy has been developed for categorizing SMART industrial energy use or greenhouse gas emission reduction targets. The taxonomy includes volume reduction targets, physical efficiency improvement targets, economic intensity improvement targets and economic targets. This paper also provides a comprehensive overview of targets for industrial energy use or greenhouse gas emission reductions at sector or firm level in past, current and proposed future policies worldwide. This overview includes approximately 50 different emission permit systems, voluntary or negotiated agreement schemes and emission trading systems. Finally, the paper includes an assessment of the various types of targets. The target types are compared with respect to the certainty of the environmental outcome and compliance costs, the targets’ relevance for the public and for industry and their environmental integrity, as well as their complexity and potential for comparison.     

How ambitious are China and India’s emissions intensity targets?

Several developing economies have announced carbon emissions targets for 2020 as part of the negotiating process for a post-Kyoto climate policy regime. China and India’s commitments are framed as reductions in the emissions intensity of the economy by 40–45% and 20–25%, respectively, between 2005 and 2020. How feasible are the proposed reductions in emissions intensity for China and India, and how do they compare with the targeted reductions in the US and the EU? In this paper, we use a stochastic frontier model of energy intensity to decompose energy intensity into the effects of input and output mix, climate, and a residual technology variable. We use the model to produce emissions projections for China and India under a number of scenarios regarding the pace of technological change and changes in the share of non-fossil energy. We find that China is likely to need to adopt ambitious carbon mitigation policies in order to achieve its stated target, and that its targeted reductions in emissions intensity are on par with those implicit in the US and EU targets. India’s target is less ambitious and might be met with only limited or even no dedicated mitigation policies.     

Can China benefit from adopting a binding emissions target?

In the run-up to the Copenhagen climate summit, the USA announced an emissions reduction target of 17% by 2020 (relative to 2005), and the EU of 20–30% (relative to 1990). For the same time horizon, China offered to reduce the CO₂-intensity of its economy by 40–45% (relative to 2005), but rejects a legally binding commitment. We use the targets announced by the EU and the USA to analyze the potential gain for China if it were to adopt a binding emissions target and join an international emissions trading scheme. We show that China would likely benefit from choosing a binding target well below its projected baseline emissions for 2020.     

The hedge value of international emissions trading under uncertainty

This paper estimates the value of international emissions trading, focusing on a here-to-fore neglected component; its value as a hedge against uncertainty. Much analysis has been done of the Kyoto Protocol and other potential international greenhouse gas mitigation policies comparing the costs of achieving emission targets with and without trading. These studies often show large cost reductions for all Parties under trading compared to a no trading case. We investigate the welfare gains of including emissions trading in the presence of uncertainty in economic growth rates, using both a partial equilibrium model based on marginal abatement cost curves and a computable general equilibrium model. We find that the hedge value of international trading is small relative to its value in reallocating emissions reductions when the burden sharing scheme does not resemble a least cost allocation. We also find that the effects of pre-existing tax distortions and terms of trade dominate the hedge value of trading. We conclude that the primary value of emissions trading in international agreements is as a burden sharing or wealth transfer mechanism and should be judged accordingly.     

Quantifying regional economic impacts of CO2 intensity targets in China

To address rising energy use and CO₂ emissions, China's leadership has enacted energy and CO₂ intensity targets under the Twelfth Five-Year Plan (2011–2015), which are defined at both the national and provincial levels. We develop a computable general equilibrium (CGE) model with global coverage that disaggregates China's 30 provinces and includes energy system detail, and apply it to assess the impact of the current binding provincial CO₂ emissions intensity targets. We compare the impact of the provincial targets approach to a single target for China that achieves the same reduction in CO₂ emissions intensity at the national level. The national target assumes trading of emissions allowances across provinces, resulting in the least-cost reductions nationwide. We find that the national target results in about 20% lower welfare loss in China relative to the provincial targets approach. Given that the regional distribution of impacts has been an important consideration in the target-setting process, we focus on the changes in provincial-level CO₂ emissions intensity, CO₂ emissions, energy consumption, and economic welfare. We observe significant heterogeneity across provinces in terms of the energy system response as well as the magnitude of welfare impacts. We further model the current policy of fixed end-use electricity prices in China and find that national welfare losses increase. Assumptions about capital mobility have a substantial impact on national welfare loss, while changing assumptions about the future availability of domestic natural gas resources does not have a large effect.     

碳交易市场机制发展综述

对国际和国内碳排放交易的理论和实践的发展进行了总结,在总结和分析国际碳市场发展规律的基础上对碳市场的结构、主体构成、价格形成机制、激励机制以及发展趋势等进行了分析,提出了发展我国碳排放交易市场的任务,以及建设和发展我国碳交易市场的途径。     

White certificate schemes: Economic analysis and interactions with the EU ETS

This paper examines the economic, environmental and distributional impacts of an idealised tradable white certificate (TWC) scheme and shows how the impacts are modified when the scheme operates in parallel with the EU emissions trading scheme (EU ETS). It uses simple graphical techniques to assess whether a TWC scheme will increase, decrease or have an ambiguous effect on electricity demand, wholesale and retail electricity prices, carbon emissions and investment in energy efficiency, paying particular attention to the interpretation of ‘additionality’.     

Impacts of China's emissions trading schemes on deployment of power generation with carbon capture and storage

The establishment of an emissions trading scheme (ETS) in China creates the potential for a “least cost” solution for achieving the greenhouse gas (GHG) emissions reductions required for China to meet its Paris Agreement pledges. China has pledged to reduce CO₂ intensity by 60–65% in 2030 relative to 2005 and to stop the increase in absolute CO₂ emissions around 2030. In this series of studies, we enhance the MIT Economic Projection and Policy Analysis (EPPA) model to include the latest assessments of the costs of power generation technologies in China to evaluate the impacts of different potential ETS pathways on deployment of carbon capture and storage (CCS) technology. This paper reports the results from baseline scenarios where power generation prices are assumed to be homogeneous across the country for a given mode of generation. We find that there are different pathways where CCS might play an important role in reducing the emission intensity in China's electricity sector, especially for low carbon intensity targets consistent with the ultimate goals of the Paris Agreement. Uncertainty about the exact technology mix suggests that decision makers should be wary of picking winning technologies, and should instead seek to provide incentives for emission reductions. While it will be challenging to meet the CO₂ intensity target of 550 g/kWh for the electric power sector by 2020, multiple pathways exist for achieving lower targets over a longer timeframe. Our initial analysis shows that carbon prices of 35–40$/tCO₂ make CCS technologies on coal-based generation cost-competitive against other modes of generation and that carbon prices higher than 100$/tCO₂ favor a major expansion of CCS. The next step is to confirm these initial results with more detailed modeling that takes into account granularity across China's energy sector at the provincial level.     

Global trading versus linking: Architectures for international emissions trading

International emissions trading is widely seen as an indispensable policy pillar of climate change mitigation [Stern, N., 2007. The Economics of Climate Change. The Stern Review. Cambridge University Press, New York]. This article analyzes five different types of trading architectures, classified into two top–down (UNFCCC driven) and three bottom–up (driven by individual countries or regions) approaches. The two types of approaches are characterized by a trade-off between environmental effectiveness and political feasibility, respectively, whereas their relative cost-effectiveness depends on implementation details. Bottom–up architectures constitute imperfect substitutes for top–down architectures in terms of environmental effectiveness, and thus remain mere fallback options. However, especially the ‘formal linking’ architecture can act as complement in terms of cost-effectiveness.     

Environmental and economic benefits resulting from citizens’ participation in CO2 emissions trading: An efficient alternative solution to the voluntary compensation of CO2 emissions

Over the last few months in the emerging and lucrative carbon project market, a growing number of organizations have proposed to offset citizens’ greenhouse gas emissions. The target of these carbon-offset initiatives is to satisfy the increasing demand of individuals wishing to take part in the fight against climate change. In this paper, we review and criticize these carbon-offsetting programs in general terms. We then propose an alternative that, in our opinion, should prove to be a better solution for citizens who are willing to pay for protecting the environment. This alternative is to organize citizens’ participation in carbon emissions trading on a large scale in order to purchase and retire (destroy) CO₂ permits. To do so, a benevolent Regulator or non-governmental organization must correct certain CO₂ emissions market failures; this particularly concerns the high transaction costs, which represent an entry barrier and prevent citizens from purchasing and withholding permits. Based on theoretical findings, we demonstrate that implementing citizens’ participation in emissions trading is an economically efficient and a morally preferable option.     

Clean energy scenarios for Australia

Australia, a major producer and user of coal, has the highest per capita greenhouse gas emissions in the industrialised world. This study investigates whether in theory such a ‘fossil-fuel dependent’ country could achieve a 50% reduction in CO₂ emissions from stationary energy by 2040, compared with its 2001 emissions. To do this scenarios are developed, using a combination of forecasting and backcasting methods, under conditions of continuing economic growth and a restriction to the use of existing commercial technologies with small improvements. The principal scenario achieves the above target by implementing on the demand-side a medium-level of efficient energy use and substantial solar hot water together with a supply side combination of mainly natural gas, bioenergy and wind power. In doing so the scenario also achieves a 78% reduction in CO₂ emissions from electricity. Within the large uncertainties in future prices, it is possible that the economic savings from efficient energy use could pay for all or a large part of the additional costs of renewable energy.     

Experimental performance evaluation of a novel heat exchanger for a solar hot water storage system

The performance of a novel heat exchanger unit (‘Solasyphon’) developed for a solar hot water storage system was experimentally investigated. The ‘Solasyphon’ is a simple ‘bolt-on’ heat exchange unit that can be integrated externally to a traditional single-coil hot water cylinder (HWC) avoiding the costly replacement of an existing HWC with a twin-coil HWC. The installation cost of a ‘Solasyphon’ is lower compared to a traditional HWC thus offers greater cost effectiveness. A data acquisition system was designed to compare the thermal performance of an integrated ‘Solasyphon’ HWC with a traditional twin-coil HWC under controlled simulated conditions. The analysis was based on experimental data collected under various operating conditions including different primary supply temperatures (solar simulated); primary supply patterns and draw off patterns. The results indicated that the ‘Solasyphon’ delivered solar heated water directly to the top of the HWC producing a stratified supply at a useable temperature. Under variable solar conditions the ‘Solasyphon’ would transfer the heat gained by a solar collector to a HWC more efficiently and quickly than a traditional HWC. The ‘Solasyphon’ system can reduce installation costs by 10–40% and has a lower embodied energy content due to less material replacement.     

Emissions trading in China: A conceptual ‘leapfrog’ approach?

China is well aware of the advantages of quantity-based economic instruments (i.e., emissions trading) for domestic pollution control, but pilot studies and experimental programs in Taiyuan, Hong Kong/Guangdong, and other locations have not been successful. This paper proposes a very different type of emissions trading program, designed with Chinese implementation concerns in mind. It has three component parts: (1) a real-time intermittent control system (ICS) strategy designed to address public health concerns in the near term; (2) software-oriented Predictive emissions monitoring systems (PEMS) targeting process parameter (rather than emission) reporting from individual emission sources; and (3) real-time emissions markets responding to the ICS constraint. The technical and political difficulties associated with implementing such a system are recognized as daunting. However, such an approach would ‘leapfrog’ over existing systems, allowing the country to develop a comprehensive air pollution control strategy as economic growth occurs, continuously improving air quality in a cost efficient manner, utilizing both advanced technology and market-based control approaches in a manner consistent with China's unique environmental needs. It would also lay the groundwork for the eventual pricing of CO₂ and other greenhouse gases within China.     

Personal carbon trading: A policy ahead of its time?

In 2008, the UK government undertook a review of personal carbon trading (PCT) and declared that it was ‘an idea currently ahead of its time’. PCT is a radical policy proposal which would entail all adults receiving an equal, tradable carbon allowance to cover emissions from household energy and/or personal travel. The allowance would reduce over time, in line with national emissions reduction goals. The government’s key concerns about PCT were its social unacceptability and high cost. This paper reviews the literature and identifies knowledge gaps, and then discusses whether these concerns are justified. Contrary to the government’s conclusions, most research shows PCT to be at least as socially acceptable as an alternative taxation policy. People think it could be both fair and effective. Set-up and running costs for PCT will undoubtedly be higher than for alternative taxation policies. However, PCT could deliver benefits from individual and social change motivated by non-economic aspects of the policy. These potential benefits are outlined here. The conclusion is that PCT is a promising and timely policy idea.     

Upstream vs. downstream CO2 trading: A comparison for the electricity context

In electricity, “downstream” CO₂ regulation requires retail suppliers to buy energy from a mix of sources so that their weighted emissions satisfy a standard. It has been argued that such “load-based” regulation would solve emissions leakage, cost consumers less, and provide more incentive for energy efficiency than traditional source-based cap-and-trade programs. Because pure load-based trading complicates spot power markets, variants (GEAC and CO₂RC) that separate emissions attributes from energy have been proposed. When all generators and consumers come under such a system, these load-based programs are equivalent to source-based trading in which emissions allowances are allocated by various rules, and have no necessary cost advantage. The GEAC and CO₂RC systems are equivalent to giving allowances free to generators, and requiring consumers either to subsidize generation or buy back excess allowances, respectively. As avoided energy costs under source-based and pure load-based trading are equal, the latter provides no additional incentive for energy efficiency. The speculative benefits of load-based systems are unjustified in light of their additional administrative complexity and cost, the threat that they pose to the competitiveness and efficiency of electricity spot markets, and the complications that would arise when transition to a federal cap-and-trade system occurs.     

Missing carbon reductions? Exploring rebound and backfire effects in UK households

Households are expected to play a pivotal role in reducing the UK's greenhouse gas (GHG) emissions, and the UK Government is encouraging specific household actions to help meet its targets. However, due to the rebound effect, only a portion of the GHG emission reductions estimated by simple engineering calculations are generally achieved in practice. For example, replacing short car journeys by walking or cycling reduces consumption of motor fuels. But this frees up money that may be spent on, for example, purchasing extra clothes or flying on vacation. Alternatively, the money may be put into savings. Since all of these options lead to GHG emissions, total GHG savings may be less than anticipated. Indeed, in some instances, emissions may increase—a phenomenon known as ‘backfire’. We estimate that the rebound effect for a combination of three abatement actions by UK households is approximately 34%. Targeting re-spending on goods and services with a low GHG intensity reduces this to a minimum of around 12%, while re-spending on goods and services with a high GHG intensity leads to backfire. Our study highlights the importance of shifting consumption to lower GHG intensive categories and investing in low carbon investments.