Greening the Economy

This opening European Business summit (EBS 2008) workshop will discuss the development of a global carbon market.

This post sets out the scope of this EBS 2008 workshop (see EBS ‘08 programme). Everyone interested in the topic, whether they’re coming to EBS 2008 or not, is welcome to use this blog to comment or submit their own ideas – see About this blog.

1. Introduction

  • The United Nations Framework Convention on Climate Change (UNFCCC), which was signed by 154 nations at the Earth Summit in Rio de Janeiro in 1992, recognizes the principle of ‘common but differentiated responsibilities’. This principle states that industrialized countries should take the lead in the mitigation of climate change.
  • The Kyoto Protocol, which is a protocol to the UNFCCC and which was agreed on 11 December 1997, has introduced three flexible mechanisms in order to reduce greenhouse gas emissions: emissions trading, joint implementation and the clean development mechanism. Through these mechanisms, countries can achieve (part of) their national objectives by investing in less expensive emission reductions abroad.
  • Different countries and regions throughout the world (e.g. the EU, different states in the US, Australia, New Zealand,…) are setting up emission trading schemes (ETS). In an ETS, each company receives a certain number of allowances (i.e. the cap), which represent the right to emit a specific amount. Companies that increase their emissions by more than their cap, need to buy allowances from other companies, which have increased their emissions by less than their cap. Currently, these schemes are not linked with each other.

2. Main issues at European level

  • In January 2005 the European Union Emission Trading Scheme (EU ETS) commenced operation as the largest multi-country, multi-sector emission trading scheme worldwide. The scheme is based on Directive 2003/87/EC. On average 10800 installations participated in the first phase (2005-2007) of the trading scheme
  • For the second trading period (2008-2012) the European Commission has enforced stricter limits. As a result, the allowed cap is more than 10% below the cap that was originally proposed by the member states.
  • At the European Summit of March 2007 the heads of state agreed to reduce the amount of greenhouse gas emissions by 20% against 2020. One of the most important instruments to achieve this goal represents the EU ETS. In order for the EU ETS to take on its proper role, the European Commission has recently proposed a revision of Directive 2003/87/EC.
  • On October 29, 2007, leaders of more than 15 governments met in Lisbon, Portugal to launch the establishment of the International Carbon Action Partnership (ICAP). ICAP is made up of countries and regions that have implemented or are actively pursuing the implementation of carbon markets through mandatory cap and trade systems. The partnership provides a forum to share experiences and knowledge.

3. Challenges in the short/medium and long run

  • One needs to create a global carbon market without any restrictions on the sell or buy of allowances. In this way, the climate change objectives can be achieved in a cost-effective manner.
  • The different emission trading schemes throughout the world (i.e. already in existence or still under development) should be linked as time progresses. Currently, these emission trading schemes are not characterised by the same level of ambition. The EU-ETS is currently more ambitious (e.g. in terms of the cap and the manner by which the allowances are being allocated) than the other schemes throughout the world (e.g. the Regional Greenhouse Gas Initiative in the eastern United States, the Western Climate Initiative in the western United States, New Zealand, Australia, Japan,…).
  • The current mismatch in terms of level of ambition between different emission trading schemes puts the European energy intensive industry at a competitive disadvantage on the international markets. In order to solve these distortions, a global level playing field needs to be assured.
  • Global sectoral approaches represent one way to guarantee a global level playing field in sectors, which are characterised by strong international competition. The coming years should see the development of several sectoral approaches.

4. Possible questions

  • What is the role of the global carbon market in the mitigation of climate change?
  • In which way will the flexible mechanisms be altered by the current international negotiations under the UNFCCC?
  • How will the design and ambition of emission trading schemes in countries such as the US, Japan and Australia evolve? Will they very soon start to converge towards the EU ETS?
  • Has the proposed revision of Directive 2003/87/EC by the European Commission struck a healthy balance between the mitigation of global climate change and the safeguarding of the competitiveness of the European energy intensive industry?
  • How can the international competitiveness of the European energy intensive industry in a carbon constrained world be safeguarded?
  • What is the role that global sectoral approaches can play in the mitigation of climate change?

5. Further reading

  • EC, 2008. (in te vullen op 23-01-2008)
  • Bruegel, 2007. Why Europe is not carbon competitive.
  • EEA, 2007. Greenhouse gas emission trends and projections in Europe 2007.
  • IEA, 2007. Emissions Trading: Trends and Prospects.
  • IEA, 2007. Sectoral Approaches to Greenhouse Gas Mitigation – Exploring Issues for Heavy Industry.
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