The field of climate policy faces an uncertain future after the Kyoto Protocol expires at the end of 2012. Yet, countries are becoming more actively involved in this area—because it is in their own interests. More governments are striving to build regional and voluntary carbon markets, if not national carbon-trading systems, designed to stimulate effective economic growth that is safe for the public.
Underestimating global trends in this direction could significantly affect the competitiveness of countries that are unprepared to meet the new challenges of the day. The development of a national carbon-trading system and the introduction of corresponding legislation in the United States, for instance, could raise accusations of carbon dumping in countries that export to America but do not incorporate carbon costs into their production processes. Importers in the United States could be forced to pay for the carbon emissions brought about by the production of their goods in order protect U.S. producers and prevent domestic carbon-intensive industries from moving out of the United States.
The European market is clearly embracing these new trends. There is a growing trend toward tightening demands on importers in the realm of greenhouse gas emissions released in the production of their imported goods.
With the more progressive national system, the EU is striving to be the leader in the development of mechanisms to catch and secure the carbon produced by burning fossil fuels. Such technology will allow for a significant reduction of greenhouse gases emitted during this process. Regardless of whether a country is connected with the production or purchase of “carbon-capture” technology, simply remaining in accordance with existing climate policies, or taking part in the global carbon market, states that export to the European market will need to make a choice based on these new EU market access conditions.
After Europe, Japan has emerged next in line in establishing a national quota trading system. And it is assumed that Norway and Switzerland will join the European system. In the short term, it is also likely that Australia will establish a national system. The Russian Federation does not seem to be embracing global trends in climate policy, and in the United States, trading is taking place on the levels of individual states and regions. The development of the global carbon market is being accompanied by the emergence of new players as well. China, Brazil, and India are playing more active roles in emissions trading and mitigating the effects of climate change.
The Evolving Carbon Market
Climate change scientists have been fixated on the gradual increase, beginning in the mid-twentieth century, of the earth’s average annual temperature. Most scientists attribute this rise to the collection of greenhouse gases—like carbon dioxide—in the atmosphere as a result of human activity. The steps taken by countries in accordance with the Kyoto Protocol to decrease emissions of this kind have allowed for the development of mechanisms that form the global carbon market.
In a carbon market, a country’s governmental body sets a cap on pollutants that can be emitted. This limit is allocated or sold to companies in the form of emission allowances or emission credits. If a company exceeds emissions against the volume stipulated in the allowances it has, it must buy allowances from those who have not used up theirs. The current global carbon market includes regulated systems of trading emissions and voluntary commitments, which do not require any official regulation.
Existing carbon markets, regulated or voluntary, have addressed the fundamental tasks of reducing greenhouse-gas emissions and mitigating consequences of the greenhouse effect. Some countries and companies can exceed their emission limits but still fulfill their obligations to reduce emissions by purchasing emission allowances or emission credits. For other countries that emit less, selling carbon permits offers the possibility of attracting investment. And in some cases, using emissions-reducing technology has helped construct the conditions for effective economic development.
The carbon market was dominated by growth until 2009, with a small dip in 2010, despite significant fluctuations in the price of carbon units. According to data from the World Bank, Bloomberg, and several other organizations, over five years, the volume of transactions in the global carbon market increased by a factor of 13—from $11 billion in 2005 to $143.7 billion in 2009, amounting to 8.2 billion tons of carbon dioxide. After those five years of rapid growth, the volume of trade in the global carbon market shrank slightly from $143.7 to $141.9 billion dollars. This decrease was influenced by uncertainty about the market’s development after 2012 and political disagreements over founding a trading system in some developing countries. And as a consequence of the recession, the manufacturing sectors in developing countries have emitted fewer greenhouse gases, a natural occurrence since manufacturing has been reduced.
According to data from Point Carbon, during the crisis, the price of carbon dioxide emissions quotas in the largest trading system—the European Trading System—dropped sharply, from 30 tCO2e in 2008 to 12-15 euros/tCO2e. In 2010, European trading comprised 84 percent of the global carbon market. Post–financial crisis recovery will lead to a new round of rising prices in the carbon market, which will mean an increase in the competitiveness of alternative sources of energy. Raising the price of carbon-based energy in turn decreases the competitiveness of fossil fuels and carbon-intensive products. New, capital-intensive sources of energy, such as solar, wind, biomass and others, will be able to increase their market share, gradually displacing the traditional energy resources of oil, coal, and gas.
Voluntary markets play an important role in the overall global carbon market. Although their volume has traditionally been small, comprising not more than 0.3 percent of the global carbon market, 2010 saw a significant increase in the volume of transactions when compared with the previous year. According to a report by Ecosystem Marketplace and Bloomberg New Energy, the size of the voluntary carbon market increased by 34 percent in 2010 to a record 131 million euros per ton of CO2 equivalent (tCO2e) traded—a total of $424 million. The growth of the voluntary market took place against the backdrop of increasing activity by large, socially conscious companies that have increased their expenditures to compensate for their emissions of greenhouse gasses. In addition, many players in the market have been investing in renewable energy and sustainable development projects.
The development of systems for allocating emissions is bringing to the fore mechanisms for incorporating the costs of reducing carbon emissions and other greenhouse gases into the total cost of production, namely of energy resources. Many countries are considering a potential increase in the price of emissions in planning for their own stable economic development. And the year 2010 saw project developers gain a new tool for use in the struggle against greenhouse-gas emissions through the prevention of deforestation: Reducing Emissions from Deforestation and Degradation (REDD). After being officially recognized, REDD and REDD+’s market share increased 500 percent from 2009 levels. Such tools can be highly effective mechanisms for mitigating the long-term consequences of climate change.
The United States
The administration of President Barack Obama has launched several initiatives in the field of clean-energy development that should elevate the United States to the status of a major player in the carbon market. Contrary to the anti-Kyoto policies of the previous U.S. administration, President Obama has called for ensuring energy security while at the same time combating climate change.
Regardless of disagreements with Congress, the U.S. administration is actively developing programs to encourage effective energy use and reduce fossil-fuel consumption in order to reduce greenhouse-gas emissions. By introducing new technical requirements and supporting research and development, the government is providing the stimulus to decrease fuel consumption in the transportation sector. A 2011 proposal by President Obama for new commercial transportation standards will contribute to the more effective use of fuel, radically decrease greenhouse-gas emissions, and will also stimulate job creation. It is expected that the new emissions standards will reduce annual CO2 emissions by 50 million metric tons and save 300,000 barrels of oil per day.
Because of disagreements over climate change in the United States, the emphasis has shifted toward the development of national carbon markets to a regional and voluntary framework. The Regional Greenhouse Gas Initiative, for example, has united ten states along the Northeast and Atlantic seaboard. The initiative seeks to decrease electric station carbon emissions by 10percent using a cap-and-trade system. A market mechanism for trading emissions was launched by the Western Climate Initiative (WCI), which seeks to reduce greenhouse gas emissions to 85 percent of 2005 levels by 2020. The WCI unites California and other western states with several Canadian provinces.
Along with other developing countries, China is not bound by quantitative Kyoto Protocol obligations. Nonetheless, understanding its growing importance in geopolitical and economic spheres, in March 2011 Beijing announced its intention to do its part to help solve problems connected with climate change.
As was announced at the 2010 UN conference in Cancun, China must reduce its emissions to avoid the pressure that the consequences of climate change will have on its growing population—especially urban dwellers—and to deal with emerging challenges connected with providing for the country’s energy security. One goal of China’s twelfth Five-Year Economic and Social Development Plan is reducing its greenhouse-gas emissions by 17 percent per unit of GDP, as well as increasing the energy efficiency of the country 16 percent by 2015. That would correspond to a 40–45 percent nominal reduction in carbon-intensive production by 2020, relative to 2005 levels. The emissions of the steel and cement industries will also be limited.
Recently, China passed the United States to become the single-biggest emitter of greenhouse-gases in the world. Understanding the implications of this, the PRC has worked out a pilot plan for trading greenhouse-gas emissions which will slowly transition to a national system by 2015. The system will function based on punitive tariffs on electricity used in energy-intensive production. The pilot program will be launched in several major cities by 2013. For the creation and development of a trading system, China—along with Chili, Turkey, Indonesia, Thailand, and others—will receive $350,000 from the World Bank. Those funds should be put toward collecting and processing data, analysis and reporting, as well as the development of a legislative base.
Aside from that, the Five-Year Plan calls for the development of green technology. China plans to increase the area of forest plantations by 12.5 million hectares by 2015. The new plan also embraces increasing the energy effectiveness of building and industrial construction, further developing the infrastructure of public rail transportation, and utilizing alternative energy sources.
In addition to ambitious future plans, the PRC already supports emissions trading using the flexible mechanisms provided by the Kyoto Protocol and creating ecological and energy exchanges for trading Certified Emissions Reductions and Voluntary Emissions Reductions. In 2010, the National Development and Reform Commission approved around 2,850 projects on the basis of the Clean Development Mechanism. The total share of Chinese projects within the CDM comes to 42 percent, or the expected reduction in emissions of 240 million tons of CO2 equivalent.
Russia and other Countries
Other states are taking on voluntary obligations to limit greenhouse-gas emissions, as well as developing trading systems. In 2008, India began to realize its own system for dealing with climate change, which includes plans for eight programs, including plans for the use of solar energy, energy-efficient technology and mechanisms, and the development of the Himalayan ecosystem. India has assumed voluntary obligations to reduce the “energy intensity” of its GDP 20–25 percent by 2020, bringing it to 2005 levels. Analogous initiatives have appeared in Mexico, Brazil, South Korean, South Africa, and other countries. Additionally, several states, including Australia and New Zealand , could develop joint transnational mechanisms for trading “carbon credits” if, for example, Australia created its own single system for trading emissions.
In April 2011, Russia adopted the Complex Plan for the Realization of the Climate Doctrine of the Russian Federation to 2020, which includes the development and implementation of economic instruments limiting greenhouse-gas emissions. Despite this, the practical realization of controls, and verifying emission reduction units, raises many questions. Unfortunately, the practical implementation of that plan has not been clearly spelled out. If Russia wastes time, it risks economic losses.
With high confidence, in the medium term one can expect the expansion of carbon limits on carbon-intensive sectors—ferrous and nonferrous metallurgy, cement production, as well as development of the mechanisms supporting the modernization of those sectors. It would be useful to conduct model-based research concerning the functioning of those specific industries in the presence of carbon restraints to assess the risks for Russian companies in international emissions-trading systems.
Russia has announced the difficulties it will have in carrying out its obligations within the Kyoto Protocol framework to limit emissions after 2012. At the same time, Moscow has not assessed the impact of a policy that does not place limits on emissions. In light of the opening of the Conference in Durban, it seems necessary to quickly evaluate the consequences of Russia taking any decision to join (or not to join) a new climate agreement.
In it is hard to imagine the development of a carbon trading system in Russia either in the short or long term. But it could be helpful to develop plans for forming individual pilot cap-and-trade systems for interested sectors of the Russian economy. The Russian government could act as a coordinator for such a system.
The development of regional carbon trading systems for the long term will require the harmonization of individual country requirements limiting carbon emission. Given the relative backwardness of Russia in forming carbon markets, it would be useful to learn from the experience of existing systems concerning the risks and benefits of carbon trading, specifically when conducting future negotiations on the possible compatibility of those systems with Russian initiatives.
The increasing number of countries taking part in the process of developing the global carbon market demonstrates that many governments are aware of the necessity to take steps toward mitigating the consequences of climate change. In the near future, questions of economic interaction between countries will be examined through an ecological prism.
Leaders that successfully enact policies decreasing greenhouse-gas emissions while simultaneously growing their national economies will lead the way toward a new level of development. Benefits will be garnered by those countries which competently and effectively develop a legislative base and steadily realize policies that encourage emissions reductions by businesses using all instruments of the emissions trade.
The future of international climate change policy is seen by experts as somewhat unclear. The 2009 UN conference on climate change in Copenhagen did not meet expectations and introduced a few notes of frustration. And the 2010 Cancun conference gave participants the possibility to once again renew confidence in the effectiveness of the UN Framework on Combating Climate Change. But while emissions trading, project mechanisms, and Kyoto Protocol regulations remain in effect, what will replace Kyoto remains uncertain.
However, it is clear that regardless of the future of the Kyoto Protocol, carbon markets will continue to function and certain countries will continue to optimize their ecological policies in order to effectively manage their energy resources.