Falling EU carbon price should inspire greater mitigation efforts

Emissions growth in the 21st century was overwhelmingly concentrated in developing countries. My own calculations on “business as usual” emissions for the Climate Change Review Update suggested that in the absence of policy action to change established trends, developing countries would account for the whole of the increase in global emissions from 2005 to 2030. Developed country emissions as a whole were expected to remain steady between 2005 and 2030.

In the absence of policy action, China would account for 41% of global emissions in 2030 and developing countries 70%. Whatever weight were given to the requirements of historical responsibility and justice, effective global mitigation would require major and early reductions from business as usual emissions in China and other developing countries.

The Kyoto arrangements envisaged a comprehensive “top-down” agreement in which responsibility for constraining emissions would be allocated across countries and enforced internationally. This ideal would provide a firm basis for international trade in entitlements, to allow reductions in emissions to occur where they could be achieved at lowest cost.

A different approach to setting national targets began to emerge at Copenhagen, took firm shape at Cancun and was elaborated in subsequent UNFCCC meetings in Durban and Doha.

The big departure from the old regime is in the setting of country targets for constraining emissions. It has been accepted that substantial developing countries will make commitments to constrain emissions, in the form of reductions in emissions intensity or “business as usual” emissions. (Intensity targets are strongly preferred to business as usual, as they are capable of objective and unambiguous calculation.)

It is accepted if only by default that these and developed country commitments to absolute reductions in emissions are voluntary and represent serious domestic undertakings and are not binding under international law. The voluntary targets are set domestically rather than within a comprehensive international agreement. The pressures to make them ambitious come from domestic politics and review and commentary from other countries—a process that is known as ”pledge and review”.

The new process can be described as “concerted unilateral mitigation”.

It is a feature of the Kyoto arrangements carried over into the concerted unilateral mitigation regime that each country is free to use whatever instruments it chooses in meeting its targets. It is free to acquit its commitments through the purchase of international abatement to the extent that it chooses, or not at all. It is free to introduce carbon pricing in the form of an emissions trading system or a carbon tax or not at all. Whether or not it places a price on carbon, it can choose to regulate emissions-intensive activities and subsidise low-emissions substitutes to the extent that it chooses. International comparisons of mitigation effort are made in terms of the outcomes in reductions in emissions below defined baselines, and not in terms of how the emissions reductions are achieved.

For concerted unilateral mitigation to be effective, one major gap in the international regime needs to be filled. The regime needs some framework for guiding assessments of the level of mitigation in each country that amounts to a fair share of an international effort to achieve the agreed global effort.

It would be useful and probably necessary for heads of governments committed to strong global mitigation outcomes to appoint an expert group to develop such a framework for allocating the global effort among countries. Within the context of concerted unilateral mitigation, each country would be free to accept or reject guidance provided by such a framework. The framework would become a focus of international review of each country’s effort, and evolve over time in response to discussion and experience.

The Durban conference of the UNFCCC in late 2011 agreed to launch “a process to develop a protocol, another legal instrument or an agreed outcome with legal force”. The process, legal instrument or agreed outcome would be settled by 2015 and come into effect in 2020. Developed and developing countries would all accept obligations, although the form of those obligations could vary across countries.

The Durban decision was sometimes interpreted as a commitment again to seek a binding, top-down agreement, although the words allow other interpretations. At least there is no suggestion that we should return to seeking comprehensive agreement on the allocation of the required global mitigation effort across countries.

While there would be advantages in an internationally binding agreement if it were possible to achieve one without reducing mitigation ambition, the practical barriers to a good binding agreement remain as strong as they were at Copenhagen. It is important that we do not allow the search for excellent form to distract the international community from grasping immediate prospects for excellent substance.

We should acknowledge that trade in emissions entitlements has struck some large practical problems. Within the European emissions trading system, the many regulatory and fiscal interventions are forcing much larger reductions in emissions than carbon pricing. These together with slow growth in economic activity and the realisation of unexpected opportunities for low-cost abatement have caused permit prices to fall to levels that are well below the economic cost of emissions and the value of abatement.

The low prices raise questions about the effectiveness of the emissions trading system. Although controlled in quantum, use of offsets at very low prices from the Clean Development Mechanism (CDM) has pushed prices even lower. Low European and CDM prices would, if uncorrected, introduce low prices into other emissions trading systems with which Europe is linked, notably Australia from 2015. Already New Zealand’s emissions trading scheme has prices close to zero through allowing unlimited access to credits from the Clean Development Mechanism.

It is understood by economists that broadly based carbon pricing achieves more carbon emissions reduction at similar cost, or similar abatement at lower cost, than large numbers of separate regulatory and fiscal interventions. Considerable emissions reductions have been achieved in recent years in many countries through regulatory and differentiated fiscal interventions. However, the cost advantages of general carbon pricing become more important as mitigation targets become more ambitious, and are likely to be essential to achieving the deep reductions in emissions that will be necessary to achieve the agreed global objective.

The contemporary problems of uneconomically low prices in domestic and international trading schemes can therefore be seen as a threat to achievement of long term global mitigation goals. A tightening of emissions reduction targets is necessary to restore prices that relate appropriately to the cost and value of abatement in a world that is meeting its emissions reduction targets.

The Clean Development Mechanism (CDM) has emerged as the most important locus for international trade in carbon units, and for a number of years contributed substantially to incentives for investment in emissions reduction in developing countries. The NDRC has recently reported that to August 2012, Chinese certified emissions reduction under the CDM had reached 730 million tonnes per annum, a bit over half of the global total.

As analysed in the recent report of an independent review panel, the CDM is experiencing chronic oversupply of abatement units. Prices have fallen to levels that barely cover transaction costs. With recent and prospective reforms, the CDM is a legitimate offset mechanism with a potentially valuable place in a global system of climate change mitigation.

The review panel concluded that a major tightening of emissions reduction targets and widening of access on the demand side would be necessary to correct the chronic oversupply.

I would suggest as well a tightening of access on the abatement supply side, with only least developed countries having unconditional access. Other developing countries would have access if they accepted domestically binding emissions constraints and were living within those constraints without double counting of abatement for which CDM credits had been awarded.

If this approach were adopted by the international community, international mechanisms would need to be developed (perhaps through the established arrangements for Joint Implementation) to monitor double counting of emissions.

This article is excerpted from a speech given by Professor Garnaut to the National Development and Reform Commission in China. The full speech is available here. This article was originally posted on The Conversation. Re-posted with permission.