A global carbon trading network will be vital to preventing dangerous climate change, a new report commissioned by the Prime Minister Gordon Brown concluded today.
The report makes clear that without a global system for carbon trading, the ability of countries to avoid dangerous climate change will be limited and the costs of action increased.
The report follows the Prime Minister’s recent proposal on how developed and developing countries can agree new ways to pay for tackling climate change. He urged countries to work together on a global figure of $100 billion a year needed by 2020 to help developing countries reduce their emissions, tackle deforestation and adapt to the climate change already being experienced. The carbon market could provide a significant proportion of that sum.
The Global Carbon Trading report, by the Prime Minister’s Special Representative on Carbon Trading, Mark Lazarowicz MP, looks at the role that cap and trade systems can play as part of the global response to preventing dangerous climate change – and the steps needed to expand and link trading systems over the next decade.
Carbon markets themselves will not however be sufficient to successfully tackle climate change and are needed alongside strong domestic action to cut emissions. The UK Government is committed to meeting its required 34% cut in emissions by 2020 through domestic action alone, apart from emissions covered under the EU Emissions Trading System where limits on offsetting are set at EU level. The UK’s Low Carbon Transition Plan, published on 15 July, sets out the domestic actions required to meet its carbon budgets.
Mark Lazarowicz MP said:
“Climate change is an international threat that needs international action. The evidence shows that global carbon trading can deliver substantial cuts in greenhouse gases rapidly and cost-effectively.
“Cap and trade should be combined with targeted regulation, taxation and public finance for comprehensive action. This report proposes action in developed countries at two levels - ambitious national targets and a network of linked cap and trade systems for emitters.
“Reducing emissions in developing countries will be crucial. We need a global system that goes beyond offsetting while delivering financial flows to the developing world. The report shows how we can achieve that.”
Prime Minister Gordon Brown said:
“Developing the global carbon market is vital if we’re to succeed in helping the world avoid dangerous climate change.
“The carbon market can deliver a substantial part of the $100 billion a year needed by 2020 to help developing countries reduce their emissions, tackle deforestation and adapt to the climate change already being experienced.
“So I very much welcome Mark Lazarowicz’s report which shows that with the right reforms and participation, global carbon trading – alongside strong domestic effort - can help the world meet the tough emissions reduction targets as demanded by the science”.
Energy and Climate Change Secretary Ed Miliband said:
“Domestic action by developed and developing countries is essential to meet the challenge of climate change. So is public finance to help developing countries to adapt to climate change and make the transition to low carbon.
“Carbon trading can also play a role: as a way to get cost-effective emissions reductions and help provide finance to developing countries. This report is an important contribution to showing how carbon markets can do that.
“To make carbon markets work best in tackling climate change, we need a global network, building on the EU emissions trading system and plans in the US and Australia. By making carbon trading work, we can make it far more likely that we tackle dangerous climate change, get cost-effective emissions reductions and get money to the poorest countries of the world."
The report concludes that:
* Cap and trade systems can provide ambitious cuts in greenhouse gas emissions by putting a price on carbon and ensuring that the polluter pays.
* While central to tackling climate change, cap and trade will need to act alongside a range of other targeted policies, such as domestic effort to introduce feed-in tariffs on renewable energy and public finance for developing carbon capture and storage.
* Global carbon trading could reduce the costs of cutting emissions by up to 70%. Potentially, this could allow the world to cut global emissions by an additional 40-50% at the same cost compared to domestic action alone. This would give a greater chance of making the big cuts necessary to stop global temperatures increasing above 2 degrees centigrade – the threshold for dangerous climate change.
* Carbon trading will also provide substantial financial flows to the developing world to support their transition to a low carbon economy.
* Cap and trade systems – like the EU’s - are already operating or planned in over 35 countries in the developed world. These will need to be coordinated and linked to form a global network, creating a more comprehensive, effective international system. Linking the EU and a possible US federal system by 2015 would be ambitious but achievable.
* Advanced developing countries such as China and Brazil could also start to take part in such systems, including key sectors like the power sector. Having more advanced developing countries engaging in sectoral trading could achieve substantial cuts in emissions at low or no net cost to themselves in 2015.
* Scaled-up mechanisms for supporting developing countries to cut emissions are needed that are more efficient and equitable than the current Clean Development Mechanism. These should be designed to provide substantial real emissions reductions that go beyond offsetting and deliver financial flows to the developing world. Using sectoral trading rather than the CDM could reduce the global cost of emission cuts financed through carbon trading by around a half, enabling developed countries to make deeper emissions cuts.
* The international community needs to provide urgent support to developing countries to build capacity for accessing carbon finance, including technical knowledge sharing and funds for measuring, legal and institutional reforms. This could cost up to $5bn in total over the next 10 years and will need to come from non-market sources that are effectively coordinated.
What are carbon markets?
Systems that allow trading between companies or countries are often known as ‘cap and trade’ because they operate by ‘capping’ the total emissions and allowing the participants to ‘trade’ emissions allowances. Each participant must regularly ‘reconcile’ their emissions budgets by ‘surrendering’ an allowance for every tonne of CO2 emitted. This encourages them to reduce their emissions if they can do so for less than the cost of allowances. Alternatively they can comply with the system by buying allowances from elsewhere. The EU ETS is the only functioning national and transnational carbon emissions trading system. Emissions trading systems currently planned in other countries could result in 17% to 35% of global emissions being covered by 2015.
Trading in emissions was started in the United States in 1990. The US trading system for sulphur dioxide reduced emissions by 43% between 1990 and 2007, three years ahead of schedule and at a quarter of the predicted cost. And the EU Emissions Trading System, which is now in its second phase has already started impacting on company decisions to reduce emissions.