Paris climate deal must enable emissions trading systems to be linked

• Report: Linking emissions trading systems
• Report: Linking emissions trading systems (PDF 587 KB)
• Inquiry: Linking emissions trading systems
• Energy and Climate Change Committee

Tim Yeo MP, Chair of the Energy and Climate Change Committee:

"Putting a price on carbon is absolutely essential if we are to curb the greenhouse gas emissions that cause climate change. But using taxes to set a carbon price does not guarantee any particular level of emissions reduction because the emitters may simply pay the tax and carry on polluting.

Emissions trading allows us to set a cap on emissions and enables participating businesses to identify the most cost effective ways of reducing their emissions. Letting the market determine the price of carbon in this way is likely to be far more effective and politically palatable than carbon taxes."

To facilitate the development of a global carbon market that could cap overall emissions at a safe level – and keep temperature rises below the 2 degree danger threshold – any agreement reached at the UNFCCC COP 21, in Paris at the end of 2015, must ensure that in future it will be possible to link the disparate regional, national and subnational emissions trading systems that have emerged around the world.

"A global carbon market would ultimately be the best way to keep the world within a safe carbon budget because it is one of the most economically efficient ways to reduce emissions. Although there is no prospect of establishing emissions trading on a global scale in the immediate future, an international climate agreement that promotes carbon pricing and is favourable to linking represents the best chance of developing such a market in the long term.

The world's largest economies, China, the US and the EU, are already embraced emissions trading, so there are reasons to be hopeful about the prospects of progress in this area. But getting the framework right in Paris will be crucial if we want to make it easier for these emissions trading systems to link up in future."

The current hybrid approach in international climate negotiations – which combines top-down elements for establishing and reviewing targets, with bottom-up elements of pledge-and-review tied to national policies and actions – is welcomed by the MPs. However, the report argues that any new climate agreement must crucially allow parties to meet their Intended Nationally Determined Contribution’s (INDCs) by transferring parts of their contributions to other parties and financing emissions reduction activities in other countries. The UNFCCC could also play a critical role in providing basic standards including monitoring, reporting and verification, so that allowances are bought and sold in a transparent way and there is no prospect of double counting.

EU Emissions Trading Scheme

The EU Emission Trading System (EU ETS) will play a critical role in facilitating linking between different markets, the report points out, as it is the world's longest running and largest market - covering 11,000 power stations and industrial plants in 31 countries. Before it can do this, however, the EU ETS must be seen as a credible market. The excess allowances suppressing prices in the system as a result of the financial crisis must therefore be removed urgently, the report warns. The Committee is calling on the Government to focus on getting agreement in the European Parliament and Council to implement the market stability reserve (MSR) at the earlier date of 2017 rather than in 2021, as originally proposed by the European Commission.

Background

Emissions trading is an established policy instrument for controlling greenhouse gases. It works by setting an enforceable limit, or cap, on the amount of greenhouse gas emissions that can be released from a group of emitters. Emitters then acquire permits (also called ‘allowances’ or ‘credits’) for every unit of emissions released through an auction, with the total amount of permits available set by government or a supra-national body like the EU. Companies can then weigh the cost of measures to reduce emissions against the cost of buying permits and choose to either; cut their own emissions and sell the permits they do not need or buy surplus allowances from other firms who have.

The EU ETS has been responsible for most of the linking which has been achieved to date. In 2007 the EU incorporated Norway, Iceland and Liechtenstein into its trading system and it is currently exploring the possibility of linking with Switzerland. It also planned to link with Australia's Emissions Trading System but this was put on hold after the Australian government announced plans, in November 2013, to repeal its climate legislation.

There are two examples of linked systems in North America. The Regional Greenhouse Gas Initiative (RGGI), which held its first auction in 2008, is a cooperative effort among nine Northeastern and Mid-Atlantic States to cap and reduce CO2 emissions from the power sector. The California and Quebec cap and trade systems linked in 2014. President Obama's intervention to regulate emissions from power stations could see other States adopt emissions trading.

Further information

• About Parliament: Select Committees
• Visiting Parliament: Watch committees