Download Carbon Markets and New Market Mechanisms

Carbon Markets
and New Market
Mechanisms
By Reitumetse Molotsoane
Carbon Markets
The adoption of the Kyoto Protocol in 1997 created a new commodity
in the form of a carbon credit used both in compliance based and
voluntary carbon markets. The Kyoto Protocol is an international
agreement linked to the United Nations Framework Convention on
Climate Change. The Clean Development Mechanism (CDM) created
under the Kyoto Protocol is the most well known generator of carbon
credits traded in what is the largest carbon trading platform, the
European Union Emissions Trading System (EU-ETS).
The underlying principle of a carbon market is, as with any commodity
market, a platform for the exchange of goods. Carbon, in the context
of carbon markets, is a blanket term for six greenhouse gases, the
most ubiquitous of which is carbon dioxide. The defining feature of
carbon markets is that unlike most commodity exchange platforms,
carbon trading is a key policy tool created specifically to address the
pressing issue of climate change. Carbon markets have the potential
to stabilise current concentrations of atmospheric greenhouse gas
at levels that would prevent dangerous climate change. The stated
aims of a global carbon market are threefold. The primary purpose of
global carbon markets is to give carbon an economically quantifiable
value; the second is to ensure that this economic value is reflected
and accounted for in the pricing of goods and services in which
carbon is embedded; and finally to incentivise the economy-wide
adoption of low carbon technologies and practices.
Compliance based carbon markets, such as the EU-ETS, are created
and driven by international policy implemented on a national and
regional scale. The demand for approved carbon credits has been
created as a result of mandatory national, regional or international
carbon reduction regimes such as a carbon cap-and-trade system in
which sectors or individual companies are allotted a carbon budget,
one which they cannot exceed without a penalty of some sort. The
unused portion of an entity’s carbon budget may be sold to another
entity company, which has exceeded its own allotted budget or
merely wishes to purchase credits for use at a later date. In the case
of voluntary carbon markets, participation is not driven by carbon
budgets or legal regulations.
Unlike China, Brazil and India; South Africa has been exceptionally
slow to take advantage of CDM. By July 2011, China had a total
of 1,560 Chinese projects successfully registered with the CDM
Executive Board. This is effectively almost 50% of the world’s total
registered projects and accounts 64% of annual compliance based
carbon credits issued globally. South Africa in sharp contrast had only
21 registered projects as of June 2012 1. South Africa, along with
developing countries such as China, has effectively been shut out of
the largest compliance-based market, the EU-ETS as of 2013 because
of its classification as an advanced developed nation. Though the
opportunity still exists to use programmatic CDM, this form of CDM
is better suited to small scale projects in less developed countries
or regions. South Africa has missed an exceptionally significant
opportunity to reduce the carbon intensity of economic activity on
the scale needed to make any strides towards reducing the country’s
carbon emissions 2.
Where did it all begin?
Climate change is an economic issue, brought about by the
disturbance of the carbon cycle and consequent destabilisation in the
global climate. It was in the pursuit of economic development during
the industrial revolution, that climate change arose and; it is in the
current pursuit of economic development, steeped in the intensive
utilisation of fossil fuels and extensive deforestation that climate
change will continue to be the defining feature of our time. The
continued dependence on fossil fuels as the main driver of economic
growth and changes in land use serve only to exacerbate the severity
of climate change impacts and accelerate the onset of a climate
tipping point 3.
The regulation of climate by the global carbon cycle is one of the most
important ecosystem services. The distribution of carbon throughout
this cycle determines the degree and speed of climate change. The
historic and continued removal of the carbon stored in forests and
soils into the earth’s atmosphere through deforestation and other
forms of land use change including the extraction and combustion of
fossil fuels is the main driver of current and future climate change.
Payment for an ecosystem service, such as climate regulation,
requires the user of the service, irrespective of the form in which
it is provided or how oblique and tortuous the connection between
the final good and the underlying system is, to take on the costs
of ensuring that all the elements essential for the maintenance of
that system in the state required for the continued provision of
the services in question are present. Society, from the time of the
industrial revolution to the present, has incurred tremendous debt
for the climate regulation services provided by various ecosystems.
Climate change is essentially the result of a default on the debt owed
to all the ecosystems that regulate the carbon cycle. The challenge of
valuing ecosystems coupled with what has been a systemic disregard
of the importance of ecosystems as providers of indispensible
services, has resulted in what has been described as ‘the greatest and
widest-ranging market failure ever seen4.
The Key Issues
Common but differentiated Responsibilities and the
Polluter Pays Principles
The principles of common but differentiated responsibilities
(CDBR) and the polluter pays are the two most important principles
underpinning current efforts to draw up a legally binding climate
change treaty post 2020. Common but differentiated responsibilities
in the context of climate change places the bulk of the responsibility
for climate change mitigation on developed countries with the
expectation that these countries will take the lead and provide the
majority of funds needed to mitigate the levels of climate change
and the degree of impact particularly so for vulnerable countries and
communities.
In keeping with this principle, developed countries were expected
to take on legally binding carbon emissions targets, a condition
not extended to developing countries. The financial and economic
implications of legally binding emissions targets are significant and
several developed countries, of which the United States of America
is most prominent, have refused to take on legally binding carbon
emissions targets without the advanced developing countries, China
and India in particular, doing the same.
The Clean Development Mechanism (CDM) is driven by such a policy,
where carbon credits generated by the CDM are used to limit carbon
emissions in line with binding emissions targets. A second level of the
application of CDBR is imbedded in how CDM works in compliance
markets: the purchasing of carbon credits generated under CDM by a
developed country is equivalent to investing in the developing country
hosting the emissions reduction projects. Expecting developing
countries, advanced or otherwise, to purchase carbon credits along
the same lines as CDM, is effectively changing the CBDR principle to
one of common responsibility.
South Africa has traditionally aligned itself with China and other
major economies such as India and Brazil in its view that the
principle of ‘common but different responsibilities’ should underpin
any negotiations as a starting point for a global treaty which sets
legally binding obligations on countries to reduce carbon emissions.
However, in recent months, a significant shift away from the
strict adherence to the principle of common but differentiated
responsibilities has occurred. COP17, held in South Africa in
2011, represented a watershed moment in that for the first time,
widespread consensus was reached, that a global climate change
treaty with legally binding targets for all countries would be in place
by 2015 and come into force by 2020.
The question that comes to mind is whether developing countries,
particularly the advanced developing countries are being held equally
liable for current climate change as is with the developed countries?
How much do developed countries need to contribute to begin to
pay off the carbon debt incurred over the past two centuries and
for how long? Has the application of the CDBR principle changed
from retrospectively allocating the responsibility for current climate
change and the duty to pay off the carbon debt accrued over the
past two hundred years to the developed countries; to allocating
the responsibility for future climate change to both developed and
developing countries?
9
Carbon Markets and New Market Mechanisms
Implications for South Africa and Africa
It is at this point that the CDBR principle morphs into that of the
polluter must pay principle. A legal interpretation of the polluter must
pay principle allocates the cost of prevention of pollution and holds
the polluter liable for the environmental damage caused by his actions
as well as binding the polluter to compensate for the environmental
damage caused by his actions or business practices.
Future generations will attribute climate change and associated
impacts in their time to present business practices, resource utilisation
and consumption as well as large-scale deforestation. Present society
will be held accountable for the climate change experienced by future
generations. But unlike the present, where developed countries were
the major emitters, this position is being taken over by key advanced
developing countries such as China and India.
While it appears that the introduction of a post Kyoto international
climate change treaty in 2015 affective from 2020 will focus less on
the hotly contested CBDR principle, surely some acknowledgement
of the environmental damage caused by the developmental pathway
followed by today’s developed economies over the past 200 hundred
years is necessary, and recognising this damage some compensation
for the environmental damage is necessary; and equally, all countries
will be liable for the environmental damage caused by continuing on a
carbon intensive economic growth path.
Additionality
Additionality is one of the most important criteria for the certification
of carbon credits generated using the CDM; and it is upon this
certification that carbon credits are allowed into an emissions trading
scheme such as the EU-ETS. Additionality is context specific; it is
a judgment call on whether the financial or technological hurdle
of introducing or switching to low carbon technology relative to a
business as usual scenario is sufficiently large as to merit assistance
in the form of carbon revenue.
1. To protect the economic interests of the party purchasing carbon
credits: It is generally the case that technology used to generate
the emission reductions in which a developed country has invested
on behalf of the host party carries a premium. The technology
is more modern and efficient than established technology,
accelerates the host party’s transition to a low carbon economy and
leaves it well-positioned to compete in a carbon constrained world.
Additionality as a qualifier for carbon credits is meant to draw that
very fine line between assisting an emissions reduction project host
party to transition to low carbon economy through the sale of credits
10
rather than enabling the host party to invest in technology it should
and would have otherwise invested in even in the absence of revenue
gained from the sale of carbon credits.
2. T
o ensure that emissions reduction project is sufficiently ambitious
and bold as to make a significant contribution to long term climate
change mitigation, and have sufficient impact to direct an economy
onto a low carbon development trajectory.
The conceptions of additionality and principles of common but
differentiated responsibilities are inextricably linked; each identifying
and building in some measure of who is responsible for climate
change and who will lead efforts to mitigate climate change and
associated impacts.
Carbon Tax
South Africa will be introducing a carbon tax to be operational in
2014. The South African government has indicated that it regards the
use of a carbon tax as the most appropriate market-based mitigation
tool and is unlikely to introduce a compliance based cap and trade
system in the short term due to the nature of the South African
economy which is dominated by relatively few companies especially
those that are carbon intensive.
The use of carbon offsets, particularly those from voluntary carbon
markets does not preclude the introduction of a carbon tax, both
systems can work in tandem but to a very large extent have a different
focus. A voluntary carbon market promotes ownership of specific
projects, thereby empowering buyers and enabling them to identify
and monitor the direct impacts on communities or ecosystems of their
actions. A carbon tax, on the other hand, tends to be impersonal;
the National Treasury has indicated that it is unlikely to earmark the
revenues generated from carbon tax and instead these revenues
would go into the general fiscus.
The private sector and corporate in particular could become the
most important buyers of voluntary carbon credits, and therefore
an extremely important part of an effective voluntary carbon
market. The voluntary carbon market allows buyers of credits to
exercise choice in the types of projects they support. They have the
opportunity to support and align the development of specific offsetgenerating projects with their corporate social responsibility mandate,
thereby driving significant improvement of the socio-economic
conditions of a large number of South African communities.
What are the implications for South Africa in
relation to carbon markets?
Of the major advanced developing countries, South Africa has
made the least use of the international mechanisms such as
the CDM to reduce carbon emissions, particularly in the energy
intensive sectors so dominant in the South African economy. In
addition, when compared to its peers, South Africa lags far behind
countries such as China and India on the levels of climate change
related innovation and in the manufacturing of renewable energy
equipment and infrastructure. In many ways the countries with
whom South Africa shared a common position and benefited
substantially from its association, such titans as China, have made
better use of opportunities to prepare themselves for an increasingly
carbon constrained world. This shift has essentially resulted in a
misalignment of the climate change agenda of South Africa relative to
other advanced countries.Although considered to be very influential
relative to its size, a common stance with the likes of China, India
and Brazil has certainly enhanced South Africa’s negotiating power.
Without a direct alignment with powerful allies, South Africa is highly
exposed and vulnerable to punitive climate change related measures
and regulations at an international level, as well as a compromised
ability to compete economically.
In truth South Africa for the most part shunned the CDM, a tool to
reduce global carbon emissions while entrenching sustainable and
low carbon technologies into the South African socio-economic
landscape. In so doing, the country missed a stellar opportunity to
convert the carbon intensity of the economy into an asset rather
than a liability. There is still an opportunity to make better use of
the future market mechanisms as a host of them are proposed as
alternatives to the CDM. New market mechanisms such as sectoral
and regional emissions trading and nationally appropriate mitigation
actions (NAMA) have the potential to achieve economy-wide carbon
emissions reductions.
There are lessons to be learned particularly from China, in the way
that government and business have aligned and focussed themselves
to ensure that tools arising from international treaties designed to
support low carbon economic development are used to the fullest.
China has been able to use the CDM to modernise and increase
efficiency in carbon intensive sectors and has made great strides in
turning carbon liabilities into assets to give rise to a strong renewable
energy manufacturing sector.
The South African business sector needs to position itself now to
benefit from the mechanisms available or those being developed
to reduce industry related carbon emissions or risk being left
behind. There is considerable potential for the private sector to
align investment with large scale emission reduction projects,
typically those related to energy generation with NAMAs initiated by
government. In the past the business sector has looked to the national
government to give clarity and direction on climate change related
issues. The relative infancy of new market mechanisms, coupled with
a growing appreciation of the importance of responding to climate
change strategically by business places South Aafrica in a strong
strategic position to actively shape market mechanisms designed to
spur investment in low carbon technologies in a cost efficient way.
1
D
epartment of Energy. South Africa’s CDM Projects Portfolio 19 June 2012. Available
at South Africa’s CDM Projects Portfolio 19 June 2012
2
P
rogrammatic CDM is a form of the CDM which allows the addition of an unlimited
number of component projects to a registered programme of activities (PoA) without
undergoing the complete CDM project cycle
3
L
enton, T. 2011. Early Warning of Climate Tipping Points. Nature Climate Change (1):
201–209
4
Stern Review: The Economics of Climate Change. Executive Summary
5
h
ttp://www.treasury.gov.za/public%20comments/Discussion%20Paper%20
Carbon%2Taxes%2081210.pdf
Reitumetse Molotsoane
Senior Manager / Climate Change & Sustainability Services
Reitumetse has extensive experience undertaking and providing assurance of greenhouse gas inventories having worked on the greenhouse
gas inventories of local and international companies with operations worldwide. She is a technical assessor for the accreditation of carbon
accounting verification and validation bodies in South Africa.
11