Trends in the Development of Global Carbon Markets Since the Adoption of the Paris Agreement, and the Implications for the Asia Pacific Region

Liou, Je-Liang and Julia Yang

  

 

With the signing of the Paris Agreement, global carbon markets can be expected to grow more rapidly

 

     Following the formal adoption of the Paris Agreement under the United Nations Framework Convention on Climate Change in late 2015, it can be anticipated that emissions trading schemes (ETS) with an emphasis on cost- effectiveness will come to play an ever more important role in the next stage of global planning to reduce greenhouse gas emissions.

     According to analysis published by the World Bank (2016), of the 162 Intended Nationally Determined Contributions (INDCs) that had been submitted as of May 1, 2016, 90 made reference to future plans for using ETS, carbon taxes or other policy tools to implement carbon pricing, with the aim of clarifying the cost of carbon dioxide emissions. Thirteen of the INDCs noted that it had either already been decided to use ETS, or that there were plans to do so. It can thus be seen that, besides the existing 17 ETSs, new ETSs will come into being in the future, and the scale of ETS coverage will expand. If the ETS proposed by China is included in the calculations then preliminary estimates would indicate that the existing and planned ETSs will come to account for around 20-25% of total global carbon dioxide emissions, making ETS the most widely used method for controlling greenhouse gas emissions, out of the various different policy tools that are available. On the basis of the above trends, it seems certain that, following the adoption of the Paris Agreement, ETS will emerge as one of the most important policy tools for greenhouse gas management, and that there will be rapid growth in the development of various types of carbon market deriving from ETS.

 

ETS will also create new "green" business opportunities

 

     The basic principle behind ETS is that, when faced with the need to reduce greenhouse gas emissions, some companies will find it cheaper to reduce their emissions through internal management tools, these companies can meet the reduction targets that have been set and still have some of the emission allowances that they were issued with by the regulatory authorities left over, while other companies will find that the allowances they have been allocated are insufficient to meet their needs; if the cost of reducing emissions is too high, these companies may experience serious difficulties. ETS provides a platform whereby, through the operation of the market mechanism, companies that have surplus emissions allowances and companies that have insufficient allowances can trade with one another. The company selling its surplus allowances gains revenue from the sale, while the company in need of extra allowances is able to reduce the financial burden of meeting emissions reduction targets; indirectly, ETS helps to realize the achievement of emissions reduction targets to help safeguard the environment.

     The original concept behind ETS was that it would provide a way for companies required to meet emissions reduction targets to do so with a reduced financial burden. The creation of the ETS mechanism has actually given rise to a carbon market that provides incentives for companies to develop and invest in new technologies for emissions reduction, with financial mechanisms (such as the development of new types of financial derivatives products) being used to stimulate the emergence of a "virtuous circle" in related industries. ETS thus effectively has two functions: helping to meet environmental targets, and boosting the development of "green" business opportunities relating to greenhouse gas emission reduction technology.

 

The emergence of an Asia Pacific carbon market will help to strengthen competitiveness

 

     Within the Asia Pacific region, there are several ETSs that are already in operation or at the planning stage. These include ETSs in Japan, South Korea and China, all of which are geographically close to Taiwan. ETS has thus come to be seen as an important tool for national-level management of greenhouses gas emissions. China is planning the establishment of a nationwide ETS; if the current preliminary planning comes to fruition, the scale of this ETS may eventually surpass that of the European Union (EU), making it the largest ETS in the world. It can therefore be anticipated that a variety of new carbon markets (including spot markets, and carbon allowance linked derivative products) will emerge as a result of these developments.

From a theoretical perspective the greater the number of participants in a carbon market the greater the market's effectiveness (in terms of cost reduction). In addition, if the carbon rights products of the future can be traded freely between different ETSs, then this should further intensify price competition. At the same time, the more lively trading activity is in the carbon markets, the more the markets will contribute to the development of

new "green" industries in the area of greenhouse gas emissions reduction and control technologies, helping to create a "virtuous circle" of industry growth. This is why, over the past few years, the question of how to integrate different ETSs within the same geographical region to create regional carbon markets has become a much-discussed issue.

     Responding to these developments, in 2013 the World Bank launched the Networked Carbon Markets project, the aim of which is to clarify the conditions needed (and the technical requirements) for linking together ETSs in different parts of the world, as a preparatory step towards future ETS linkage. Besides developing their own domestic ETSs, some countries in the Asia Pacific region are already starting to hold technical meetings to explore the potential for future regional ETS integration. For example, Asia Pacific region ETS linkage was a major focus of discussion at the 2016 Asia-Pacific Carbon Forum, which was jointly organized by the International Emission Trading Association (IETA), the Global Green Growth Institute (GGGI), the Asian Development Bank (ADB), and the Institute for Global Environmental Strategies (IGES); discussions of this kind are clearly set to become a focal point of the next stage of ETS implementation.

Opportunities for future participation by Taiwan

 

     In 2015, the Greenhouse Gas Emission Reduction and Management Act was formally enacted in Taiwan; the Act clearly stipulates that ETS may be used as an emission reduction tool as part of a cap-and-trade system in order to help meet national emission reduction targets. At the same time, the emergence of a regional carbon market should provide opportunities for participation by Taiwanese companies in industries related to emission

reduction technology. The first priority for Taiwan is to implement the necessary technology coordination and other preparatory work before regional ETS linkage formally takes effect. Taiwan already has several years of experience in implementing ETS-related ancillary mechanisms, and so there should be considerable potential for technology exchange and collaboration with other countries that are just starting to plan the establishment of their own ETSs; by sharing Taiwan's experience in establishing key elements of the relevant mechanisms, Taiwan can establish technology-based partnerships within the region, which will facilitate linkage with regional ETS mechanisms in the future. When viewed from the perspective of promoting the development of related industries, it should be possible for Taiwan to make use of existing models for international emission reduction projects to forge collaboration on emission reduction pilot projects with other countries that are interested in planning new ETSs, and to encourage participation in these projects by Taiwanese business enterprises so that they can share in the development of the latent business opportunities.

 

 (Liou, Je-Liang is an environmental economist and the Associate Research Fellow of The Center for Green Economy, Chung-Hua Institution for Economic Research and the mentor of Green Impact Academy. Julia Yang is the Founder of Green Impact Academy. Green Impact Academy acts as a Meet Market aggregator in green industries, providing talent development, marketing, and financial plumbing services to accelerate the growth of the green economy.