Speech at The World of Article 6 – Local Markets, Global Linkages

Delivered at Carbon Forum North America, Westin Times Square in New York

Ladies and Gentlemen,

It is a pleasure to join you today and give an Asia-Pacific perspective on ‘The World of Article 6 – Local Markets, Global Linkages’.

The Asia-Pacific region will be pivotal in the future success of climate change mitigation, given its size, dynamism and growth prospects. Fortunately, governments and the private sector in our region recognize the value of carbon pricing. They see its transformative role as a cost mitigation measure, but also as a means of incentivizing investment in low-carbon technologies, driving behavioral change and shifting the burden of damage to those responsible.

Estimates show that carbon pricing could reduce the cost of climate change mitigation by a third up to 2030, and could help spur a wave of technological innovation needed to build low carbon economies. It plays a role in domestic resource mobilization. In 2017, carbon pricing revenues reached $52 billion from auctions, direct payments for compliance obligations and carbon tax receipts.1 These revenues can be recycled back to consumers, or used to finance sustainable development.2

Carbon pricing is again gaining ground, both globally and in the Asia-Pacific. In Asia-Pacific, in 2016, 26 countries were using or considering the use of market mechanisms to achieve their Nationally Determined Contributions (NDCs), and to scale up the ambition of their mitigation and adaptation actions. At least nine countries have operational national or subnational trading schemes. 3 ,4

Let me give you some examples.

  • China has successfully launched eight pilot carbon markets in key cities and provinces and is preparing to launch its nationwide ETS by the end of 2017, covering some 40 to 50 per cent of total emissions. With more than 8,000 companies participating, this will be the world’s largest carbon market.
  • In Japan, there are three subnational schemes operating covering 8 percent of total greenhouse gas emissions in the country. 5
  • South Korea launched its ETS market in 2015 covering 68 per cent of national emissions, and will be used to achieve around one-third of its emissions reduction target.
  • New Zealand has a national ETS since 2008, covering nearly half of the country’s emissions.
  • India operates a trading scheme for energy efficiency certificates known as Perform, Achieve and Trade.

Readiness work is also being undertaken in Thailand, Vietnam, and Indonesia ahead of a possible ETS, with a focus on establishing sound GHG data registries, setting baselines and pilots.

In this context, Article 6 offers our region additional voluntary avenues to raise ambition, while promoting sustainable development. It covers three components, the so-called ‘cooperative approaches’ (Article 6.2) a successor mechanism to the Clean Development Mechanism (Article 6.4), and the non-market approaches (Article 6.8).

On the cooperative approaches, we are seeing significant progress. A leading example of this is the Joint Crediting Mechanism, a bilateral mechanism of the Government of Japan to facilitate the diffusion of low carbon technologies into host countries to generate credits that contribute to Japan’s emissions reduction target. To date, eleven countries in our region host this mechanism.6 Another example is the Carbon Offsetting and Reduction Scheme for International Aviation agreed last year by the International Civil Aviation Organisation. Aircraft operators will be required to purchase offsets to account for the growth in carbon emissions above 2020 levels. Fifteen countries in the Asia-Pacific have already signed up to the voluntary pilot phase. In its second phase, it will cover all regional countries except those with special needs.

Linking mandatory systems with absolute caps on emissions offers numerous benefits, including reducing the cost of cutting emissions,7 increasing market liquidity, harmonizing carbon prices across jurisdictions to alleviate competitiveness concerns and strengthening regional cooperation on climate change. The Korean ETS allows for a limited amount of domestic credits from reduction activities of non-ETS entities that meet international standards such as the international Clean Development Mechanism. The New Zealand government is exploring carbon market partnerships with China and South Korea while China and the EU have related bilateral co-operation activities underway.

But to realize the full potential of cooperative approaches, the systems need to have compatible and robust accounting rules. This should be a priority.

In developing the new Sustainable Development Mechanism, there is great opportunity for the region to build on the capacity generated by the Clean Development Mechanism, especially on methodologies, standardized baselines, monitoring, reporting and verification activities. The regional non-State actor dialogue on Article 6 last year emphasized the need for the new Sustainable Development Mechanism to overcome some weaknesses in the Clean Development Mechanism, including delays in approving projects, bureaucratic procedures, high transaction costs, and to better incorporate sustainable development co-benefits. Finally, non-market approaches to achieve the NDCs such as finance, technology transfer and capacity-building, continue to be important for our region.8

To conclude, there are several messages I would like to leave you with.

First, the region should look to bringing its carbon pricing initiatives into line with the Paris Agreement and ensure prices reach meaningful levels that can lead to significant decarbonisation.

Second, international competitiveness of energy-intensive industries is always a concern and needs to be balanced against emissions reductions objectives. The Asia-Pacific region can learn from the evolving thinking on this issue. In the ongoing reform of EU ETS, the most efficient industrial installations will be protected through free allowances. The recent US Climate Leadership Council proposal of a carbon-tax and dividend solution introduces the notion of a border tax adjustment to deal with competitiveness concerns. This will need to be increasingly addressed at the regional or global levels.

Third, carbon markets must also address future supply glut. Carbon pricing systems do not operate in a policy vacuum. They operate side-by-side with policies on renewables and energy efficiency. The carbon reduction they achieve reduces the need for allowances, so it is important to adjust the architecture of carbon pricing systems to new realities.

Fourth, the region needs to receive significant support to strengthen the provision of quality data to ensure compliance. For example, implementing the aviation scheme I mentioned will be challenging in our region because emissions need to be monitored, reported and verified using harmonized rules and many national authorities lack this capacity.

Fifth, emissions trading works best when its scope is broad. There are enormous economic benefits in linking regional or national systems from which our region would benefit, but we require better and more harmonized accounting. Other regional countries might be more suited to carbon taxes. Countries in the region also need support to capture the revenue mobilization potential of carbon pricing. For example, ETSs can either be designed to raise maximum revenues using permit auctions or as hybrid systems combining allocations and auctions. Similarly, carbon taxes can achieve significant revenues or be revenue-neutral. Both systems can gain political support through revenue recycling toward sustainable development priorities.

Finally, carbon pricing goes beyond emissions trading and carbon taxes. Debates must also include eliminating the highly inefficient fossil fuel subsidies. Reforming fossil fuel subsidies, currently estimated at $244 billion in Asia and the Pacific9 , will be an important complementary measure to ensure carbon pricing schemes achieve their objectives.

I thank you.

1ICAP, 2017

2CPLC, 2016

3Australia, New Zealand, Kazakhstan, Afghanistan, China, South Korea, Japan and Thailand and India.

4Fialka, 2016.

5WB & Ecofys, 2014

6Mongolia, Bangladesh, Maldives, Vietnam, Laos, Indonesia, Palau, Cambodia, Myanmar, Thailand and the Philippines.

7According to the World Bank, an international carbon market by mid-century has the potential to reduce global mitigation costs by more than 50 percent. See WB & Ecofys, 2016.

6UNFCCC, 2017

9International Energy Agency, Fossil Fuel Subsidy Database