“Act Locally, Trade Globally” – Emissions Trading for Climate Policy

(Paris) — 24 November 2005

This morning, four days before the United Nations climate change conference in Montréal, Canada, the International Energy Agency (IEA) has launched a new publication: Act Locally, Trade Globally – Emissions Trading for Climate Policy. Rising CO2 emissions confirm the need to act. Under current energy policies, CO2 emissions will increase by about 50% by 2030. In addressing the emissions responsible for climate change, notably carbon dioxide from fossil fuel combustion, the study reviews the current and future role of emissions trading.

“It’s our role to deliver analyses and suggestions to the climate negotiators when they start considering the future beyond Kyoto”, said Claude Mandil, Executive Director of the IEA today in Paris. The current Kyoto Protocol only addresses about one-third of global emissions, and existing domestic emissions trading regimes only about 10%. “However, we believe that emissions trading will remain at the core of any future international agreement to combat climate change. Emissions trading allows reducing emissions at least-cost, and helps governments to achieve acceptability through allocation processes, domestically and internationally”, Mandil added.

The study, conducted by Richard Baron and Cédric Philibert, two economists at the IEA, foresees a yearly demand of roughly 1 billion tonnes of CO2-equivalent from industrialised Kyoto parties, unless climate policies are strengthened. Among the Kyoto Protocol trading mechanisms, the Clean Development Mechanism (CDM) could fulfil 10% of this demand with reductions from projects in developing countries. Economies in transition, notably Russia and Ukraine, should hold enough emission allowances to provide the rest, but ability to sell and willingness to buy remain to be confirmed.

The publication also reviews emissions trading systems currently under development, with a focus on the EU Emissions Trading Scheme (ETS). Starting January 2005, this mechanism already covers CO2 emissions from 11 500 electricity and heavy-industry facilities and allows them to trade allowances and reach emission objectives cost-effectively. The IEA recognises the pioneering role of the EU ETS. However this publication analyses the scheme’s short-term emission objectives and various implementation features, notably the treatment of plant closures and new entrants, as these may hinder its economic effectiveness.

How could emissions trading systems be expanded, both to other sectors in Kyoto Protocol’s industrialised countries and to new countries?

Among the original proposals examined in this study are the allocations of liability for emissions to fossil fuels importers and producers or to carmakers. Emissions trading could also be broadened to include the rapidly growing emissions of international aviation.

Uncertain future costs of CO2 reductions and economic growth concerns hamper the adoption of CO2 policies especially by developing countries. Consequently, this book suggests growth-indexed targets, “non-binding” emission targets and price caps as options for future international emissions trading. Sectoral targets are also considered in some details as pragmatic first steps.

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