International carbon market
The international carbon market can play a key role in reducing global greenhouse gas emissions cost-effectively. It is likely to develop through "bottom-up" linking of emission trading systems.
The number of emissions trading systems around the world is increasing. Besides the EU ETS, national or sub-national systems are already operating or under development in Canada, China, Japan, Kazakhstan, New Zealand, South Korea, Switzerland and the United States.
Linking the EU ETS with other cap-and-trade systems
Linking compatible emissions trading systems with each other enables participants in one system to use units from another system for compliance purposes.
Linking offers several potential benefits, including:
- reducing the cost of cutting emissions
- increasing market liquidity
- making the carbon price more stable
- levelling the international playing field by harmonising carbon prices across jurisdictions, and
- supporting global cooperation on climate change.
The EU ETS legislation provides for the possibility to link the EU ETS with other compatible emissions trading systems in the world at national or regional level.
Conditions for linking include:
- system compatibility (the systems have the same basic environmental integrity, and a tonne of CO2 in one system is a tonne in the other system)
- the mandatory nature of the system, and
- the existence of an absolute cap on emissions.
The EU and Switzerland are currently negotiating the possibility of linking their systems, which would result in the mutual recognition of emission allowances. Switzerland would keep a separate system from the EU ETS. The final conclusion of the negotiations is dependent on the other components of the package under negotiation.
The EU and Australia also considered the possibility to link their systems. However, due to the repeal of the Australian system in 2014, the linking negotiations have not been pursued.
International climate negotiations
To encourage the development of the international carbon market, the EU would like to see recognition of the role of international markets in the Paris Agreement.
This could be achieved through:
- accounting rules enabling parties to take the international use of domestic markets into account in fulfilling their emissions reduction commitments (while ensuring that the integrity of commitments is not undermined by double counting), and
- a new market mechanism to facilitate participation in the international carbon market on the basis of a defined contribution to mitigation.
These provisions should build on approaches adopted under the Kyoto Protocol, such as the Clean Development Mechanism (CDM) and Joint Implementation (JI).
Moreover, the provisions should be adapted to the new context in which countries will be making a variety of contributions and emissions reduction commitments.
Accordingly, both CDM and JI should be reformed in order to improve their environmental integrity and efficiency, e.g. through an explicit recognition of the need for a contribution to mitigation, more use of standardised approaches, and alternative ways of assessing additionality.
International credits in the EU ETS
Participants in the EU ETS can use international credits towards fulfilling part of their obligations until 2020.
Credits are accepted from all types of CDM and JI projects, except nuclear energy projects, afforestation or reforestation activities, and projects involving the destruction of industrial gases. Acceptance of credits from JI or CDM hydroelectric projects exceeding 20 MW of installed capacity is subject to certain conditions.
Participants in the EU ETS used 1.058 billion tonnes of international credits in phase 2 (2008-2012). Unused entitlements have been transferred to phase 3 (2013-2020).
Market analysts expect that a total of around 1.6–1.7 billion credits will be available for use in phases 2 and 3 combined (2008-2020).
The initial international credit entitlements for each participant in the system for phase 2 and 3 combined are determined by Member States and then approved by the Commission in accordance with the relevant legislation.
In January 2014, a 3-year project was initiated by the European Commission in close cooperation with China to support the design and the implementation of emission trading in China.
The project provides technical assistance for capacity building. To this end, it not only supports the seven regional pilot systems already set up, but also supports the establishment of a nation-wide emission trading system in China as from 2016/17.
In the EU-China Joint Statement on Climate Change adopted at the EU-China Summit on 29 June 2015, the EU and China agreed to "further enhance existing bilateral cooperation on carbon markets, building upon and expanding on the on-going EU-China emission trading capacity building project and work together in the years ahead on the issues related to carbon emissions trading." Against this background, the Commission, in cooperation with China, is considering further activities.
The Korean emissions trading system (KETS), launched in 2015, covers around 66% of Korea's total greenhouse gas emissions. It is the first mandatory emissions trading system among non-Annex I countries under the UNFCCC.
The success of the KETS will be under close scrutiny, especially in the Asian region, and could trigger the expansion of emissions trading among emerging economies and developing countries.
The European Commission is considering a technical assistance project to support Korea in building the necessary capacity to assess and handle the experiences of the current first phase of the KETS.
The European Commission is a founding member of the International Carbon Action Partnership (ICAP), which brings together countries and regions that are actively pursuing the development of carbon markets through the implementation of mandatory cap-and-trade systems.
The ICAP provides a forum for sharing experience and knowledge and organises regular training courses on the development of emissions trading systems.
The Commission also supports the development of domestic carbon markets through the Partnership for Market Readiness (PMR). The PMR is a platform for the exchange of experience on carbon market instruments and assists some 17 countries in preparing and implementing these.