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EU recently decided to include shipping, meaning all intra-European shipping and 50% of extra-European voyages, in the EU Emissions Trading System (ETS) beginning in 2024. This article provides an early assessment of the impacts of the EU ETS on the shipping sector's potential reductions in greenhouse gas emissions for different types of ships. It further examines selected mitigation measures and the impact on modals split and costs. The study employs a mixed-methods approach combining quantitative estimates (based on data from the EU monitoring, reporting and verification system) with qualitative data and information from interviews with key actors and from previous literature. This approach aims to provide a comprehensive understanding of the impacts of the EU ETS. The inclusion of shipping in the EU ETS is expected to introduce significant incentives to reduce emissions. We estimate that switching to bio-methanol at an emissions allowance price of €90–100/tCO2 will be cost-effective for a minor share of shipping segments (representing about 0.5-5% of all ships), whereas at a price above €150/tCO2 it could be cost-effective for a considerable share (potentially 75%) of ships. In the short term, the costs incurred by the EU ETS will be passed on to transport customers as a surcharge. The increased cost may, unless properly addressed, drive carbon leakage. Meanwhile, a modal shift away from shipping may occur in the roll-on, roll-off (RoRo) and roll-on passenger (RoPax) segments due to direct competition with road and rail transport and the relative ease of shifting to other modes of transport. Integrating shipping into the EU ETS is an important step towards reducing GHG emissions in the sector but also will reduce emissions of NOX, SOX, and PM. CO2 emissions from shipping constitute about 8% of GHG emissions from all sectors in the EU ETS. The need to purchase allowances will increase operating costs, which will initially be passed on to transport customers as a surcharge. Interviews confirm that a modal shift away from shipping to road and rail may occur in the RoRo and RoPax segments. Switching to bio-methanol may be cost-effective mainly for some ships in the RoRo, RoPax and reefer segments at an allowance price below €100/tCO2, while for most ships (about 85–100% of ships) it will be cost-effective above €200/tCO2. [ABSTRACT FROM AUTHOR]

Carbon pricing is a key component of current climate policy agendas. There are a variety of societal and health impacts from carbon pricing interventions (e.g. from improved air quality). A better understanding of potential health impacts and how they depend on context and policy design is crucial to improve the political feasibility and fairness of carbon pricing. Recent reviews have synthesized evidence on the effectiveness, equity and perceptions of carbon pricing and on the health co-benefits of mitigation. This review provides a narrative structured synthesis of the health impacts of carbon pricing. We identified 58 relevant publications of which all were modelling studies. We classify review findings into policy-relevant categories, synthesizing information on how carbon pricing affects health outcomes when implemented in different contexts, in isolation or as part of policy mixes. Findings suggest that internalization of health co-benefits in optimal price level estimates could lead to substantial mitigation in some regions. There are also opportunities to design carbon pricing to improve health outcomes, including through progressive or targeted use of revenues to improve food security, subsidize healthier diets or promote active transportation. Revenue use, price differentiation, market size and permit allocation of emissions trading schemes (ETS), and interaction with other public health or mitigation policies all influence health outcomes. Overall, the health impacts of carbon pricing are highly context-specific and further evidence is needed, particularly on health inequalities and ex-post analysis. However, existing evidence suggests that it is possible to design health-beneficial carbon pricing policies, thus enhancing policy acceptability and feasibility. Key policy insights: Internalizing health co-benefits into optimal carbon pricing estimates could lead to substantial emission reductions in some regions, although additional action is needed to encourage price levels compatible with climate targets Health co-benefits can be boosted through key elements of policy design including price differentiation across commodities and regions, revenue use or ETS design Careful policy design can enhance health gains at a small or insignificant cost in terms of climate mitigation effectiveness and efficiency. The implementation of carbon pricing as part of broader policy mixes with a strong focus on progressivity and equity is crucial to achieving health co-benefits [ABSTRACT FROM AUTHOR]

We highlight a coordination problem between the EU Emissions Trading System (ETS) and the EU's offshore renewable energy strategy. We exemplify this coordination failure by analyzing carbon leakage effects associated with Denmark's planned North Sea energy island. The Danish energy island project will not start production before 2033, implying a long interval between project announcement and production. Using a dynamic model of the EU ETS, we show that the large time gap between announcement and production likely results in a 'Green Paradox', where the energy island increases aggregate EU ETS emissions. The mechanism leading to the emission increase is complicated and works through the Market Stability Reserve (MSR). The estimated 2050 leakage rate is 145 percent in our main scenario and not below 100 percent in any alternative scenario. We discuss how to improve the climate benefits of the energy island or similar large-scale renewable energy projects. This includes possible revisions to the EU ETS and the role of Power-to-X technologies. There is a coordination failure between the EU ETS and the EU's offshore renewable energy strategy, as projects intended to fulfil the offshore strategy are likely to result in substantial carbon leakage due to the EU ETS. In ETS-covered sectors, there are averse leakage effects associated with emission abatement projects with significant time lags between project announcements and emission abatement like the Danish North Sea energy island. For the North Sea energy island and similar projects, leakage effects can be diminished through policies that mitigate the impact on EU ETS allowance demand. The coordination failure can be eliminated by removing MSR cancellations or the entire MSR mechanism while adjusting the emission cap to hold expected emissions constant. However, removing MSR cancellations amplifies leakage effects for abatement projects with short time lags between announcements and emission abatement, which currently have weak leakage effects due to MSR cancellations. [ABSTRACT FROM AUTHOR]

The effectiveness of carbon price in emissions trading schemes (ETS) is an important issue in China in the context of its ambitious climate change goals. This paper adopts a staggered difference-in-differences model to estimate whether China's ETS reduced CO2 emissions while maintaining economic growth even under low carbon prices. The results indicate that despite the low carbon prices, the ETS effectively reduced CO2 emissions without undermining the economy. Specifically, an increase of $1 in the carbon price reduced CO2 emissions by 1.69% and increased the per capita GDP by $286. The carbon price primarily achieved emission reduction and promoted economic development through channels, such as technological innovation, foreign direct investment, energy mix, and industrial structure. Carbon leakage to neighboring regions was not evident. Heterogeneity analysis showed that the environmental effects of the carbon price were more pronounced in regions with higher levels of economic development and CO2 emissions. Conversely, the economic effects of the carbon price were more pronounced in regions with lower levels of economic development and CO2 emissions. The carbon price achieved significant economic effects in regions that solely adopted the free allocation mode of emission allowances, while regions that used a combination of free allocation and auctioning experienced substantial emission reduction effects. Despite low carbon prices, China's ETS effectively reduced CO2 emissions without compromising economic growth. This finding provides new empirical evidence for the effectiveness of carbon price as well as decision support for the future promotion of ETS. Technological innovation, FDI, energy mix, and industrial structure are crucial channels through which the carbon price achieves emission reduction and promotes economic development. The absence of carbon leakage to neighboring regions suggests that ETS is an internally effective mechanism for emission control. Heterogeneity analysis showed that regional characteristics and allowance allocation modes can influence the effectiveness of carbon price, thus emphasizing the importance of targeted policy design and appropriate allocation methods. [ABSTRACT FROM AUTHOR]

According to most climate mitigation scenario assessments, limiting global warming to 1.5–2°C in the long run will not be possible without the extensive deployment of carbon dioxide removal (CDR) from the atmosphere. CDR is required for drawing down and achieving net-zero CO2 emissions by mid-century. Thereafter, CO2 removals will likely need to exceed residual CO2 emissions, resulting in net negative emissions. A policy framework based on 'carbon removal obligations' (CROs) has been proposed to respond to concerns about the financial and fiscal viability, the lack of incentives for CDR uptake, as well as the physical and technological risks associated with any climate mitigation scenario that relies on large scale CDR. Here we propose an updated and improved CRO policy framework, consisting of two core elements: the 'principal CRO mechanism' obliges emitters of a tonne of CO2 to remove a tonne of CO2 at the time of maturity of the CRO. On top of this obligation, CRO holders need to pay a fee for the temporary storage of CO2 in the atmosphere. This 'CRO pricing instrument' is used by regulators to steer the carbon emissions and removals pathways independently. Our update suggests that markets for CDR under the CRO framework should operate independently from markets for emission reductions. We propose a blueprint for legal implementation where CROs are integrated akin to private financial borrowing and debt mechanisms. By aligning CROs with established financial systems, we leverage familiar institutional roles, seamlessly integrating climate mitigation into the core economy. The proposal applies the polluter pays principle to the costs of carbon removal from the atmosphere, whilst providing legal guarantees that the removals will materialize. By placing climate change mitigation pricing levers in the hands of the traditional managers of financial stability, that is, central banks, better account is taken of the externality of carbon emissions as part of core economic and financial management, with the corollary that climate change mitigation response management is better integrated into the economic mainstream. Establishing a standard for the creation of removal units by CDR projects facilitates a more efficient market by reducing transaction costs and enhancing price discovery. Early action by government to put in place legislative measures indicating the direction of policy, and a timetable for introducing CROs, would enhance private sector confidence and engagement in the CDR project sector. [ABSTRACT FROM AUTHOR]

Transitioning to a low-carbon economy while promoting sustainable development requires behavioural changes and mobilization of significant investments. Key instruments being used for that include carbon pricing initiatives, such as carbon taxes and cap-and-trade policies, and, more recently, green bonds. Although the literature has provided some evidence on emission reduction associated with carbon pricing initiatives, there is a lack of investigations on the environmental performance of green bonds; and only theoretical models describe the potential benefits of combining both. Aiming to fill this gap, this study uses regression analysis and annual data for 150 countries between 1990 and 2019 to assess how carbon pricing initiatives and green bonds relate to carbon dioxide (CO2) emissions. This paper makes two main contributions. First, it examines how two climate instruments, carbon pricing and green bonds, relate to CO2 emissions. Previous research has focused only on individual instrument assessments and mainly on carbon pricing. Second, this paper empirically analyses whether there are interaction effects of the two instruments, an assessment not previously undertaken. The results suggest that the implementation of nationwide carbon pricing initiatives is associated with an 11% reduction in CO2 emissions on average. By comparison, green bond issuances are associated with an average 14% reduction in CO2 emissions. Further, no statistically significant interaction effects between carbon pricing initiatives and green bonds were observed. The results must be cautiously interpreted and cannot be attributed solely to the instruments studied since heterogeneous effects, biases from distinct sources, and the existence of complementary policies might influence the results. Carbon pricing initiatives, such as carbon taxes and cap-and-trade schemes, and green bonds are being used to promote the transition to a low-carbon economy. Investigation into green bonds and their impact on emissions is scarce and to date, only theoretical models analysed potential interaction effects of their combination with carbon pricing. The results show an average of 11% reduction in CO2 emissions associated with carbon pricing initiatives and of 14% reduction in CO2 emissions associated with green bonds issuances. While the results show promise in the emission reduction performance of these two instruments, caution in interpreting these results is advised as complementary policies, biases from distinct sources, and evidence of heterogeneous effects make it challenging to disentangle the effect of individual policies. [ABSTRACT FROM AUTHOR]

As part of its 'Fit for 55' package to realize a previously agreed upon 55% reduction in greenhouse gas emissions by 2030 (as compared to 1990 levels) along with a net-zero by 2050 target, the European Commission has proposed a Carbon Border Adjustment Mechanism (CBAM) that phases out free allowances by 2035. Although most initial commentary has focused on potential conflict with the EU's international trading partners from this renewed effort to price carbon while managing 'carbon leakage', policymakers may face greater challenges in their efforts to withdraw the highly visible benefit of free permits from domestic industry. This Perspective analyzes key policy dynamics relating to the imposition of burdens on powerful producer interests, and identifies where obstacles to policy change in the issue-area of carbon border adjustments (CBAs) are most likely to arise. Policy conflict over CBAM appears likely to follow unfamiliar geopolitical or sectoral lines. Internationally, several major trading partners have signaled a willingness to align their own emissions trading policies more closely with those of the EU and may even end up 'racing to the top' in harmonization efforts. Domestically, EU industries have expressed relatively undivided reservations about the CBAM proposal. Targeted domestic sectors will likely be privately assured that burdens are minimal, or compensated by new subsidies or side payments, despite potential violations of international trade law principles of non-discrimination and national treatment. Nonetheless, if CBAM simply disregards exporting countries' carbon prices, or effectively subsidizes domestic heavy industry by providing them with free allowances at the same time that importers are charged with the adjustment, then international conflict is more likely. [ABSTRACT FROM AUTHOR]

Several EU countries have targets for the reduction of CO2e emissions that go beyond the target set by the EU. We study what would be the optimal carbon tax policy in such EU frontrunner countries, focusing on two questions: 1) How should national climate policy be coordinated with the European Emissions Trading System (ETS), and 2) How should an EU frontrunner country address the risk of carbon leakage? We show that these issues are closely linked and that the answers to the two questions depend on the following factors: i) The shadow cost assigned to carbon leakage, ii) The rates of carbon leakage in the ETS and non-ETS sectors, and iii) The price of ETS emission allowances relative to the domestic marginal abatement cost of attaining the desired reduction of domestic emissions. Our analysis shows that it is preferable for an EU frontrunner country to implement a national ETS sector carbon tax that results in a higher total carbon price in the national ETS sector compared to the national non-ETS sector. We illustrate how our theoretical model can be combined with a modified version of the GTAP-E general equilibrium model of the world economy to estimate the parameters of the optimal national carbon tax scheme in an EU frontrunner country, using Denmark as an example. We find that the ETS sector should pay a total carbon price that is between 33 and 78 percent above that of the rest of the economy depending on the aversion to carbon leakage. Key policy insights It is generally optimal for an EU frontrunner country – one with a domestic emission target beyond that set by the EU – to implement a national ETS sector tax. The total national carbon price should be higher in the ETS sector compared to the non-ETS sector. Data for Denmark indicate that the total national ETS sector carbon price should be at least 33 percent higher than that of the national non-ETS sector. [ABSTRACT FROM AUTHOR]

Emissions trading schemes (ETS) area is a leading climate policy instrument worldwide and have been widely discussed and researched. However, few studies to date focus on the nexus of ETS and income inequality, an important socioeconomic phenomenon. To fill this gap, taking China as an example, this paper discusses the influence of ETS on income inequality and its dynamic changes using a time-varying differences-in-difference model combined with a propensity score matching approach. The results demonstrate that China's pilot ETS has contributed to reducing income inequality. Various robustness tests support this conclusion. Moreover, the strength of ETS's contribution to reduction in income inequality gradually increases over time. We further analyze the mediating effects of carbon intensity, energy consumption, industrial structure, and technological innovation. ETS reduces income inequality by reducing coal consumption. The regional heterogeneity analysis shows that, unlike in other regions, ETS has a positive impact on income inequality (i.e. it increases it) in the eastern region in China due to its optimized energy structure and relatively complete, open, and flexible economy system. The paper discusses the above findings and their policy implications. It is also designed to promote research on ETS and to diversify research perspectives of income inequality from both theoretical and practical aspects. Evidence from China's pilot experience with ETS shows that it contributes significantly to balancing income distribution and alleviating the increasingly acute social conflicts caused by income inequality. This provides new theoretical and decision support for the promotion of ETS in the future. The energy revolution driven by ETS promotes income redistribution, which is conducive to income equality. Governments should enforce the constraints of ETS on power generation companies; guide capital to invest more in the non-thermal power industry, especially the renewable energy power sectors; and guide and regulate the income distribution in new power sectors. Governments' revenue from ETS can and should be used to further redistribution of income and to reduce income inequality. A higher number of free quotas and a lower carbon price could be imposed on low-profit or labor-intensive industries to reduce their emission costs. [ABSTRACT FROM AUTHOR]

Expanding the international emissions trading system is crucial to filling the existing mitigation gap for the 2°C climate target. Trustworthy emissions accounting is the cornerstone of such a system encompassing different jurisdictions. However, traditional emissions measuring, reporting, and verification, as well as data disclosure practices that support data authenticity in a regional emissions trading system, might not be compatible with data transparency requirements in a future international system that covers countries with gaps in governance and social trust. This transparency requirement can cause severe data security concerns. In this study, we propose a cryptographic framework for an authenticated and secure emissions accounting system that can resolve this dilemma. We demonstrate that integrating a sequence of cryptographic protocols can preserve data authenticity and security for a stylized multi-country emissions trading system. We call for more research to promote joint work by policy researchers and computer scientists to strengthen collaboration in future international climate governance. Data authenticity and security concerns are key issues that have hindered international cooperation in mitigating climate change. Modern cryptography can help preserve both data authenticity and security in a multi-country emissions trading setting. More research is needed to promote joint work by policy researchers and computer scientists on international climate governance. [ABSTRACT FROM AUTHOR]

Emissions trading, also known as cap-and-trade systems, has not yet fulfilled its function of mitigating overall global greenhouse gas (GHG) emissions. The reasons for this failure are manifold and have been broadly discussed at political and empirical levels in the last decades. However, much can still be said from a philosophical perspective. Such an analysis is not limited to the evaluation of cap-and-trade systems' lack of efficiency and the consequences arising from it but goes deeper into the moral questions underlying cap-and-trade systems. This is how this paper attempts to contribute to and expand the debate on emissions trading at different levels. By examining a popular analogy between traditional and climate commons, I challenge some of the economic and normative assumptions at the core of cap-and-trade systems. I argue that these assumptions lead to misguided conclusions in responding to the causes of climate change. This will partly explain why, although emissions trading is intended to fulfil a duty to mitigate greenhouse gases, we should not pin all our hopes on it just yet. Key policy insights The problems associated with free access to the traditional and climate commons can be conceived of in an analogous way, but the solutions to address them cannot. These include market-based policies focusing on the distribution of property rights over the atmosphere's capacity to absorb GHGs. Like other common resources, the atmosphere's capacity to absorb GHGs is limited and subject to deterioration due to free access and competing consumption. Unlike other common resources, there is no ability to restrict, control or sanction non-cooperative behaviour that continues to pollute the atmosphere. This poses a major challenge to the effectiveness of cap-and-trade systems. Emissions trading systems can be attractive mechanisms for pursuing GHGs targets by minimizing the costs of pollution while limiting the impact of mitigation on the overall economy. Nevertheless, even efficient emissions trading systems fail to fully address the moral concerns that lie at the heart of our current climate crisis. [ABSTRACT FROM AUTHOR]

Emissions trading systems (ETS) have been a widely-adopted policy instrument for global climate mitigation and a key choice in China's pledge for peaking emissions and carbon neutrality. Broader adoption and linkage of ETS programmes require a better understanding of whether, to what extent, and how existing regional programmes address carbon emissions at an aggregate level. Combining a synthetic control method and event studies, we adopt a comprehensive evaluation framework to investigate regional mitigation effects, pathways, and ancillary impacts in three Chinese regions with four independent pilot ETS programmes. The findings show economy-wide responses to pilot announcement even in non-ETS sectors, but enduring mitigation only within ETS sectors. Mitigation was achieved via improvement in energy efficiency and fuel switch, without impairing industrial activities. There were local air-pollution reduction co-benefits but no leakage or spillover. Bounded extrapolation from the pilots suggests 18%–20% reductions can be achieved in non-pilot regions by a national market, which could learn from pilots' experiences to broaden sector coverage and ensure policy consistency and transparency. Regional ETS were able to stabilize emissions with little cost, providing rationale for rapidly developing economies to adopt such systems. Key policy insights Despite being unlinked, regional ETS pilots delivered substantial climate mitigation and local air pollution reduction in China. Policy effects were initially driven by economy-wide mitigation due to policy expectations, followed by ETS-sector mitigation due to carbon pricing. Industries reduced CO2 emissions from energy efficiency improvements and fuel switch. Mitigation was accompanied by little emission leakage or impairment to the economy. Extrapolating mitigation rates in a national market suggests 18%–20% reduction of CO2. [ABSTRACT FROM AUTHOR]

Carbon leakage occurs in any carbon pricing regime that is not global, which means all of them so far. That is inherently unfair to sectors that are subject to a carbon price but compete with those that are not. The European Green Deal aims to rectify the problem in the EU Emissions Trading System (ETS) by moving beyond the current second (or third) best option, which allocates emissions quotas for free for industrial sectors, and by putting a price on carbon at the EU border for selected but not yet named sectors. Our recent model-based analysis compares the impact of a future border carbon adjustment (BCA) mechanism for the power sector with the option of extending the EU ETS to countries exporting power to the EU. We demonstrate how differences in the two policy tools translate into markedly different impacts. We conclude that expanding the geographical scope of the EU ETS is a more effective climate policy tool than a BCA. First, it would reduce emissions, while a BCA would not. Second, emission trading brings real competition: Regions neighbouring the EU will be better integrated into the EU single market with a level playing field and lower greenhouse gas emissions. On the other hand, the BCA would fence off the EU power sector and increase greenhouse gas emissions. Third, compared to a border carbon tax, expanding the ETS also yields more revenue to exporting neighbouring countries facing higher-than-average challenges to change their fossil-heavy power systems. Key policy insights The introduction of a new policy tool, the border carbon adjustment mechanism, which aims to create fair competition and trigger more ambitious climate policy action in trading partners, is a legitimate action of the European Union. However, the extension of EU ETS is a more effective climate policy tool than a border carbon adjustment mechanism as the latter increases overall emissions. The border carbon adjustment mechanism is rather a competition policy tool that provides a level playing field for electricity producers inside and outside the EU. The price impact of the policy tool choice merits attention: the extension of the EU ETS drives up prices in neighbouring countries (except the West Balkan region), but the additional quota revenues can be used to alleviate the burden on vulnerable social groups. [ABSTRACT FROM AUTHOR]

Under the Paris Agreement, most countries have communicated Nationally Determined Contributions (NDCs) with mitigation targets for a single year. Single-year targets present considerable challenges when countries use international carbon markets to achieve their NDCs. This paper assesses the environmental integrity implications of the two options that countries with single-year targets can use to account for internationally transferred mitigation outcomes (ITMOs) under Article 6 of the Paris Agreement: averaging and multi-year approaches. To assess the implications of these options, the paper considers a variety of scenarios for how two countries might engage with Article 6 and assesses how the choice of the accounting approach may affect aggregated emissions from the two countries. The paper finds that aggregated emissions could increase, decrease or remain unaffected, depending on: which of the two accounting approaches is chosen by the transferring and the acquiring country; whether the generation or use of ITMOs decreases, increases, or keeps constant over time; whether the countries' emissions in the target year are representative for the countries' emissions trend; and what course of action countries take in the case of a possible over- or under-achievement of their NDC targets. While averaging is simple to implement and does not require countries to establish multi-year trajectories or budgets, it can lead to higher or lower aggregated emissions from the cooperating countries, compared to the situation in which the countries achieved their targets without using Article 6. By contrast, under multi-year approaches, aggregated emissions do not change, as long as multi-year targets or trajectories are credibly defined. As countries have a free choice between averaging and multi-year approaches, they can strategically pick for each NDC implementation period the accounting approach which requires less effort to achieve a given NDC target. In aggregate, this can undermine environmental integrity. Accounting for ITMOs is most robust if all countries moved over time towards robustly defined multi-year targets or trajectories. The risk that countries may inflate multi-year trajectories could be addressed through international guidance and review on the establishment of such trajectories. [ABSTRACT FROM AUTHOR]

While ex-ante evaluations of climate mitigation policies predict that co-benefits of improved air quality will enable the aggregate benefits of climate mitigation policies to outweigh their costs, there is little empirical evidence to support this assertion. In this study, we use data on weekly smokestack emissions of sulfur dioxide (SO2) from firms participating in Shanghai's carbon dioxide (CO2) emissions trading scheme (ETS) to deliver one of the first ex-post evaluations on the co-benefits of China's ETS. Using a panel-regression model in which all firms' characteristics and seasonal effects are controlled, we find a significant negative association between CO2 emissions prices and industrial SO2 emissions (elasticity of −0.13). A closer examination reveals that most of these effects were driven by specific sectors (iron and steel) and during months in which firms were required to balance their annual CO2 emissions. To ensure our results are not driven by confounding factors and our model's assumptions, we conducted several falsification checks using SO2 emissions from non-ETS firms and firms from a nearby city, using various model specifications. Our findings suggest that co-benefits from climate mitigation policies should not be taken for granted, and that policy designs and types of sector sources of emissions are important determinants of co-benefits. Key policy insights The study provides empirical evidence for air pollution co-benefits of a CO2 ETS using weekly smokestack-level data from Shanghai, China Evidence from the Shanghai ETS shows that a 1% increase in CO2 prices in Shanghai is associated with a 0.13% decrease in SO2 emissions These co-benefits, however, are limited to specific sectors (e.g. ferrous metals), and are not found in other major CO2 emitting sources or sectors (e.g. power utilities) The relationship between CO2 prices and co-benefits is also stronger during months in which firms are required to balance their annual CO2 emissions using permits [ABSTRACT FROM AUTHOR]

Since fast-growing emissions from the aviation sector have become a major contributor to climate change, global efforts have been undertaken to reduce them effectively. The European Union Emissions Trading System (EU ETS) and the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA) are two existing market-based measures (MBMs) for addressing aviation emissions, whose implementation has been affected by the Coronavirus 2019 (COVID-19) pandemic. This article aims to examine challenges that the pandemic has posed on both systems by assessing the policy options for revising the EU ETS provisions on aviation, as well as the political debates regarding amendment to the CORSIA design in June 2020. From the environmental, economic and international perspectives, none of the six policy options proposed in the Inception Impact Assessment regarding future implementation of CORSIA alongside the EU ETS is optimal to achieving the EU's multiple goals in revising its ETS. This article recommends the adoption of a hybrid option, which would help maintain international intra-EU/European Free Trade Association (EFTA) flights under the EU ETS scope to achieve EU climate targets and at the same time still integrate some features of CORSIA's design in implementation. Concerning the reduction of free allowances for aviation, the swift phase-out option should be considered in conjunction with plans to develop sustainable aviation fuels (SAFs). While long-term effects of the pandemic on the effectiveness of CORSIA remain to be seen, its immediate impacts can be noticed in the weakening of this scheme's credibility and stability in implementation. [ABSTRACT FROM AUTHOR]

A question arising from the COVID-19 crisis is whether the merits of cases for climate policies have been affected. This article focuses on carbon pricing, in the form of either carbon taxes or emissions trading. It discusses the extent to which relative costs and benefits of introducing carbon pricing may have changed in the context of COVID-19, during both the crisis and the recovery period to follow. In several ways, the case for introducing a carbon price is stronger during the COVID-19 crisis than under normal conditions. Oil costs are lower than normal, so we would expect less harm to consumers compared to normal conditions. Governments have immediate need for diversified new revenue streams in light of both decreased tax receipts and greater use of social safety nets. Finally, supply and demand shocks have led to already destabilized supply-side activities, and carbon pricing would allow this destabilization to equilibrate around greener production for the long-term. The strengthening of the case for introducing carbon pricing now is highly relevant to discussions about recovery measures, especially in the context of policy announcements from the European Union and United States House of Representatives. Persistently low oil prices mean that consumers will face lower pain from carbon pricing than under normal conditions. Many consumers are more price-sensitive during the COVID-19 context, which suggests that a greater relative burden from carbon prices would fall upon producers as opposed to consumers than under normal conditions. Carbon prices in the COVID-19 context can introduce new revenue streams, assisting with fiscal holes or with other green priorities. Carbon pricing would contribute to a more sustainable COVID-19 recovery period, since many of the costs of revamping supply chains are already being felt while idled labour capacity can be incorporated into firms with lower carbon-intensity. [ABSTRACT FROM AUTHOR]

In the context of updating the 2015 Nationally Determined Contribution (NDC), the government of Chile has updated its estimates of compliance costs for a series of mitigation actions with an emphasis on the energy sector as the main source of its greenhouse gas emissions. Using the information developed in this process, we assess the impact on compliance costs of increasing the flexibility for sources by introducing different emissions trading schemes. For this we develop a detailed optimization model that represents the operational and investment decisions that could be taken by the energy generation, industrial and mining sectors if an Emissions Trading System (ETS) was implemented. An ETS with two cap and trade options is analysed together with an offset mechanism for sources not included in the ETS. Also, two policy goals are considered: a stringent 76% sectoral reduction goal in 2050 similar to Chile's current strict NDC, and a more lax 46% goal similar to Chile's initial 2015 NDC proposal. The results show that (i) cost reductions from increased flexibility for Chile's current strict NDC are significant, and that offsets can play an important role; (ii) the stringency of the reduction goal affects the magnitude of the cost savings related to flexibility and, surprisingly, total abatement costs are negative (i.e. there are benefits) for the 46% reduction goal. In this latter case, the most significant cost reductions result from compelling firms to comply with their allowances in each sector, not increased flexibility. These results highlight the policy relevance of case by case analysis using a modelling approach similar to the one we develop here. Key policy insights ETS implementation can help Chile meet its mitigation commitment for 2050. The compliance costs can vary significantly depending on the flexibility implemented in the emissions trading schemes. Optimization models can help decision-makers define the attributes of an ETS, such as the sectors that should participate, the cap, and the percentage of offsets. The proposed methodology also highlights and quantifies the offsets that can be acquired from sectors that are not part of an ETS, such as forestry, agriculture, and the waste sector. The possibility to acquire of offsets could reduce significantly the cost for industries that participate of an ETS. [ABSTRACT FROM AUTHOR]

The Australia-EU Emissions Trading System (ETS) linking negotiation was the first attempt to link ETSs with substantively different designs, and thus provides insights on the possibilities for heterogenous linking. It offers a case study of how emissions trading can enable cooperation between jurisdictions, while still being designed to fit local circumstances. This flexibility means that heterogeneous linking can accelerate the growth of international carbon markets, in turn enabling enhanced cooperation, reduced mitigation costs and therefore greater climate ambition. There is a range of drivers and facilitators of ETS-linking. Economic and political benefits drive cooperation, and this cooperation can be facilitated by geographic proximity, institutional compatibility, and cultural factors. In this paper, we use interviews with key policymakers from the European Commission and the Australian Government to assess the role of these factors in enabling cooperation. These interviews highlight the importance of domestic and international political considerations in driving cooperation in this case. Further, they show that mutual confidence in the quality of institutions and integrity of allowances was paramount to enabling the linking agreement. Cultural factors also contributed, with affinities built between technical experts facilitating policy and political problem-solving across jurisdictions. Ultimately, this case study shows that cooperation between highly diverse carbon markets is possible and may occur rapidly when the appropriate conditions are in place. Key policy insights Heterogenous linking facilitates cooperation between emissions trading systems and jurisdictions by providing scope for those individual jurisdictions to adopt design features appropriate to their unique local circumstances. There are distinct factors that drive and facilitate cooperation. Economic and political factors motivate cooperation but facilitating factors can include geographic links, institutional compatibility and cultural factors. The perceived credibility of an ETS is a key factor in identifying cooperative partners for linking, particularly important are measures to ensure environmental integrity and manage potential impacts on competitiveness. Aligning institutional elements, such as registry standards or cooperation between financial market regulators, may hasten linking arrangements once political circumstances are conducive to such an outcome. [ABSTRACT FROM AUTHOR]

The New Zealand Emissions Trading Scheme (NZ ETS) presents an opportunity to compare the theory of linked emissions trading with practice. From 2009 until October 2012 New Zealand was linked to the market under the 1997 Kyoto Protocol and there was no indication that this link would be broken. A series of events starting in late 2012 cast doubt on the future eligibility of Kyoto units in the NZ ETS, made the future of linking in New Zealand uncertain, and may have contributed to price divergence between offshore and domestic units. Delinking was officially confirmed by the New Zealand government in December 2013 to take effect from 31 May 2015. This raises the question of what the effect of delinking and announcements had on the carbon market. To study this effect, we used daily price data in a difference-in-differences model over the period 1 January 2011 to 1 January 2016. From this model, we found evidence that, even with differing pre- and post-time specifications, the government announcements in 2012 caused prices in the two markets – for New Zealand units (NZUs) and Kyoto units – to decouple and NZUs traded at a premium based on their projected scarcity. This is further backed up by the behaviour of the raw price data and the change in the types of units surrendered over this time period. The NZU price reaction to the government announcements (rather than delinking itself) shows strong evidence of a well-functioning market. Key policy insights The NZU price reaction to the delinking announcement shows strong evidence of the New Zealand carbon market reacting in the present to news about the future: a property of any well-functioning market. The long period of price divergence between the New Zealand and Kyoto markets has led to a large privately held bank that is a liability to the New Zealand Government and reduces the government's ability to auction NZUs. If the NZ ETS had delinked earlier from the Kyoto market it could have avoided a protracted period of arbitrage which significantly inflated the NZU bank. [ABSTRACT FROM AUTHOR]

The Paris Agreement calls on countries to pursue efforts to limit global average temperature rise to 1.5°C. We derive a 2016–2050 emission budget for the EU Emissions Trading System (EU ETS) based on cost-effectiveness criteria aimed at achieving the 1.5°C target with a 50%–66% probability, and translate it into a cap reduction path. We show that, under current ETS parameters, the vast majority of this budget will be consumed by 2030. Meeting the budget under current 2030 EU ETS parameters would require drastic – and probably unrealistic – additional efforts after 2030. We derive a cost-effective scenario delivering a smoother and more credible emission pathway. We show that recently increased EU targets for renewable energy and energy efficiency, along with national coal phase-out policies up to 2030 provide cap adjustment potential. If the cap is adjusted to reflect these policies and if phased-out coal capacities are fully substituted through renewable energy, emissions in ETS sectors could decline by 57% through to 2030. This approximates our cost-effective scenario and translates into a linear reduction factor (LRF) for the cap of 3.6% for the period 2021–2030. Key policy insights Paris Agreement-compatible emission budgets can serve as a guideline to define the minimum requirement for emission reductions in the EU ETS. The globally cost-effective emissions budget for EU ETS sectors in line with limiting global warming to 1.5°C is about 30 Gt CO2e for 2016–2050. During the next decade the annual emissions cap must decrease much faster than currently planned to meet the cost-effective budget. Achieving a globally cost-effective emissions path requires that the linear reduction factor (LRF) of the EU ETS cap for 2021–2030 is raised from currently 2.2% to at least 4%. Incorporating EU targets for renewable energy and energy efficiency, as well as national coal phase-outs, enables an increase of the LRF for 2021–2030 to 3.6% without an additional abatement burden on EU ETS installations. [ABSTRACT FROM AUTHOR]

As part of the European Green Deal, the EU is considering the introduction of a Border Carbon Adjustment (BCA) on imports as an alternative to free allocation of emission allowances to reduce the risk of carbon leakage under the EU's Emissions Trading System (EU ETS). While a BCA for exports is not categorically excluded, it is less likely to be consistent with World Trade Organisation rules and therefore less likely to be proposed than an import-only BCA. In this paper, we show that replacing free allocation by an import-only BCA would weaken the competitiveness of EU producers in foreign markets. Free allocation also helps support the cost competitiveness of domestic products that are exported to non-EU markets. Therefore, a move to import-only BCAs does not necessarily make redundant the continued use of free allocation to help safeguard overall industrial competitiveness. While combining an import BCA with free allocation for exports can increase the risk of legal challenges, such risks may be reduced with an appropriate design. More broadly, policymakers need to navigate a complex trade-off between competitiveness support, a stronger carbon price signal, and extra fiscal revenue. Key policy insights A BCA on imports levels the playing field in domestic EU markets but does not provide competitiveness support to exports Therefore, a move to an import-only BCAs does not obviate the need for free allocation to safeguard overall industrial competitiveness While combining an import-only BCA with free allocation for exports increases the risk of legal challenges, such risks may be reduced with an appropriate design [ABSTRACT FROM AUTHOR]

Emissions trading is a cost-effective climate policy for reducing greenhouse gas emissions. It could also be useful for addressing road transport emissions, especially given that this sector is the largest CO2 emitter in the transportation sector and its emissions continue to increase. However, emissions trading for road transport (ETS-RT) has rarely been implemented due to its complexity. This paper designs a novel and practical policy framework for an ETS-RT based on advanced blockchain technology, including all related entities upstream, midstream and downstream of the road transport sector. First, the government determines the cap and allocates the initial permits. Then, fuel producers, vehicle manufacturers, and vehicle users are involved as regulated entities with tradable emission permits. They are responsible for the three determinants of CO2 emissions in the road transport sector: fuel emission factors, vehicle fuel economy, and vehicle miles travelled, respectively. With all the regulated entities collaborating on compliance, the three determinants can be synergistically optimized so that the efficiency of the emissions abatement can be maximized. In addition, all trading, monitoring, reporting, and verification of the emission permits are automatically executed and recorded via a smart contract deployed on a decentralized blockchain. This approach can dramatically reduce administrative costs, improve transparency and traceability, and eliminate double counting and fraud. Finally, the proposed policy was evaluated using a multicriteria analysis method compared with other possible ETS-RT approaches. Key policy insights Fuel producers, vehicle manufacturers, and vehicle users – who are respectively responsible for fuel emission factors, vehicle fuel economy and vehicle miles travelled – should be synergistically regulated in an ETS-RT to maximize the efficiency of emissions abatement. This can be enabled by advanced blockchain technology, which can eliminate the need for a central authority, while enhancing transparency, traceability and cost-effectiveness. Blockchain technology could also be useful for monitoring, reporting and verification under the Paris Agreement. A blockchain-based ETS-RT is found to outperform other forms of ETS on criteria of acceptability, feasibility and environmental performance. [ABSTRACT FROM AUTHOR]

Swiss climate policy consists of three regulatory instruments for greenhouse gas emissions reduction: A CO 2 levy, the Swiss Emissions Trading System (CH EHS) and an additional program for medium-sized plants that is labeled 'nonEHS' and consists of command-and-control elements plus a sizeable abatement subsidy. Our paper informs about this tripartite climate policy, which is unique in the international context. Second, we estimate the differential impact of the CH EHS and the nonEHS program on plants' emissions. Our empirical strategy exploits a policy change in 2013 that instituted a mandatory emissions trading system for a subset of previously regulated plants. We find that the nonEHS outperforms the CH EHS for a minority of plants, but that on average, the two programs result in similar abatement efforts despite very different financial incentives. Plants that previously engaged in abatement efforts continue to do so even after the financial incentives were reduced by an order of magnitude. Key policy insights We find similar pollution abatement for plants regulated by an emissions trading system relative to plants receiving an abatement subsidy in Switzerland This is surprising given that the allowance price in the CH EHS is an order of magnitude lower than the abatement subsidy Emissions reductions in the ETS are especially pronounced for large plants, and for plants that had engaged in significant abatement in the past [ABSTRACT FROM AUTHOR]

The Paris Agreement establishes an international covenant to reduce emissions in line with holding the increase in temperature to 'well below 2°C ... and to pursue ... 1.5°C.' Global modelling studies have repeatedly concluded that such commitments can be delivered through technocratic adjustments to contemporary society, principally price mechanisms driving technical change. However, as emissions have continued to rise, so these models have come to increasingly rely on the extensive deployment of highly speculative negative emissions technologies (NETs). Moreover, in determining the mitigation challenges for industrialized nations, scant regard is paid to the language and spirit of equity enshrined in the Paris Agreement. If, instead, the mitigation agenda of 'developed country Parties' is determined without reliance on planetary scale NETs and with genuine regard for equity and 'common but differentiated responsibilities and respective capabilities', the necessary rates of mitigation increase markedly. This is evident even when considering the UK and Sweden, two nations at the forefront of developing 'progressive' climate change legislation and with clear emissions pathways and/or quantitative carbon budgets. In both cases, the carbon budgets underpinning mitigation policy are halved, the immediate mitigation rate is increased to over 10% per annum, and the time to deliver a fully decarbonized energy system is brought forward to 2035-40. Such a challenging mitigation agenda implies profound changes to many facets of industrialized economies. This conclusion is not drawn from political ideology, but rather is a direct consequence of the international community's obligations under the Paris Agreement and the small and rapidly dwindling global carbon budget. Key Policy Insights Without a belief in the successful deployment of planetary scale negative emissions technologies, double-digit annual mitigation rates are required of developed countries, from 2020, if they are to align their policies with the Paris Agreement's temperature commitments and principles of equity. Paris-compliant carbon budgets for developed countries imply full decarbonization of energy by 2035-40, necessitating a scale of change in physical infrastructure reminiscent of the post-Second World War Marshall Plan. This brings issues of values, measures of prosperity and socio-economic inequality to the fore. The stringency of Paris-compliant pathways severely limits the opportunity for inter-sectoral emissions trading. Consequently aviation, as with all sectors, will need to identify policies to reduce emissions to zero, directly or through the use of zero carbon fuels. The UK and Swedish governments' emissions pathways imply a carbon budget of at least a factor of two greater than their fair contribution to delivering on the Paris Agreement's 1.5-2°C commitment. [ABSTRACT FROM AUTHOR]

Unilateral climate policies have been unable to achieve intended emissions reductions. We argue that international harmonization of climate policy beyond the Paris Agreement is the only way forward and that global carbon pricing, either through a tax or market, is the best available instrument to manage this. A foundation has already been laid, as current carbon pricing initiatives cover about 20% of global CO2 emissions. Since it limits free-riding by countries/jurisdictions, global carbon pricing is, in principle, behaviourally easier to negotiate than other instruments, such as emission targets or technical standards. To overcome political resistance, we propose a dynamic strategy consisting of two parallel tracks and five transition phases. The first track entails assembly of a carbon-pricing coalition that expands over time and exerts moral and economic pressure on non-members to join. The second track involves refocusing UN intergovernmental climate change negotiations on carbon pricing, potentially involving initially heterogeneous prices reflecting distinct income levels of countries, which then gradually converge. The dual tracks are designed to reinforce one another, increasing the likelihood of a successful outcome. The proposal results in a transition trajectory consisting of two interactive tracks and five phases, with specific attention to inequity within and among countries. We illustrate how such an approach could function with either a carbon tax or market. Key policy insights International harmonization of climate policies is required to achieve the deep cuts in emissions needed to meet the Paris Agreement's 2°C or 1.5°C target. A focus on carbon pricing – either through taxation or emissions trading – has multiple strengths: it can be easily compared and harmonized among countries; it can be gradually strengthened over time; it moderates freeriding and fear of competitiveness losses; and it automatically generates revenues to compensate low-income households and countries. Formation of a carbon-pricing coalition would enable such a group to speak with a single, powerful voice at UN climate change conferences. It would put economic and moral pressure on non-members, stimulating them to join and show a constructive attitude in ongoing UN climate change negotiations. [ABSTRACT FROM AUTHOR]

This work analyses the economic implications of introducing an Emissions Trading System (ETS) in Colombia for compliance with emission reduction agreements. For this purpose, an emissions trading module was designed and incorporated into the general equilibrium model MEG4C. From this analysis, it was possible to identify two effects of an ETS: (i) the regulated sectors incorporate the marginal cost of emissions into production, which brings about a reduction in production, and (ii) the sectors substitute emission intensive goods, seeking to minimize the costs associated with the value of the emission permit, which leads to a reduction in emissions due to a change in intensity. Finally, it is observed that when the funds from the sale of permits are used to promote capital demand (to encourage investment), abatements are achieved at a lower cost to GDP, given that these resources contribute to economic transformation, sustainable development and the generation of other co-benefits. Key policy insights An emissions trading system in Colombia would allow mitigation targets under its nationally determined contribution (NDC) to be achieved cost-effectively. Modelling suggests the implementation of a full sector ETS would result in a reduction in the annual GDP growth rate of 0.8 percentage points, on average, versus the business as usual scenario. The option of recycling the revenues of the ETS into capital support, leads to long-term substitution for less emission intensive energy sources, negatively impacting production in the oil, coal and livestock sectors. The demand for capital increases in capital intensive sectors, even more so if they are low-emission sectors, while it decreases in all others. [ABSTRACT FROM AUTHOR]

Carbon offsets allow greenhouse gas emitters to comply with an emissions cap by paying others outside of the capped sectors to reduce emissions. The first major carbon offset programme, the United Nations' Clean Development Mechanism (CDM), has been criticized for generating a large number of credits from projects that do not actually reduce emissions. Following the controversial CDM experience, California pioneered a second-generation compliance offset programme that shifts the focus of quality control from assessments of individual projects to the development of offset protocols, which define project type-specific eligibility criteria and methods for estimating emissions reductions. We assess the ability of California's 'standardized approach' to mitigate the risk of over-crediting greenhouse gas reductions by reviewing the development of two California offset protocols – Mine Methane Capture and Rice Cultivation. We examine the regulator's treatment of three sources of over-crediting under the CDM: non-additional projects, inflated counterfactual baseline scenarios, and perverse incentives that inadvertently increase emissions. We find that the standardized approach offers the ability to reduce, but not eliminate, the risk of over-crediting. This requires careful protocol-scale analysis, conservative methods for estimating reductions, ongoing monitoring of programme outcomes, and restricting participation to project types with manageable levels of uncertainty in emission reductions. However, several of these elements are missing from California's regime, and even best practices result in significant uncertainty in true emission reductions. Relying on carbon offsets to lower compliance costs risks lessening total emission reductions and increases uncertainty in whether an emissions target has been met. Key policy insights Substantial and ongoing oversight by offset programme administrators is needed to contain uncertainty and avoid over-crediting. California's Mine Methane Capture Protocol may have influenced federal decisions not to regulate methane emissions from coal mines on federally-owned lands. Government priorities and methodological choices drive outcomes in carbon pricing policies with large offset programmes, contrary to the common perception that these policies delegate decision-making to private actors. Offsets are better understood as a way for regulated emitters to invest in an incentive programme that achieves difficult-to-estimate emission reductions, than as accurately quantified tons of reductions. [ABSTRACT FROM AUTHOR]

Many economists, businesses, and policymakers view carbon pricing as the single best policy approach to address climate change. Such optimism, however, tends to neglect the political conflicts surrounding climate policy and the necessity to accelerate the ongoing low-carbon energy transition. To unveil these conflicts, we analyze the responses of key actors to public consultations in 2015–16 concerning the EU emissions trading system (ETS) and the EU renewable energy directive. From this, we identify a prominent policy position contending that climate policy should focus on the ETS given its purported efficiency. Some actors who share this position use the ETS as a Trojan Horse – a strategy to divert attention from, and fend off, more ambitious climate action in the form of complementary renewable energy policies. Such political strategies do not just undermine carbon pricing but impede the energy transition at large. However, we also find energy industry incumbents that express support for a much stronger ETS and more effective climate policy. Therefore, it seems that the 'Trojan Horse strategy' may fail and the low-carbon transition might gain increasing support from a broad range of stakeholders. Even so, we argue that any singular climate policy approach risks political capture and that a mix of policies will be necessary to accelerate the ongoing transition. Key Policy Insights Major European industry actors tend to advocate the EU ETS as the primary climate policy instrument. Some European industry actors have used the EU ETS as a Trojan Horse – to fend off strict climate action and to slow down the low-carbon energy transition. Political conflicts surrounding individual climate policies reflect much larger struggles over the direction and pace of the energy transition. Climate policy should not rely too heavily on a single instrument but rather include a mix of measures that promote both low-carbon innovation and the decline of carbon-intensive industries, technologies and practices. [ABSTRACT FROM AUTHOR]

Emissions trading schemes have been increasing in popularity as a market-based instrument to meet CO2 reduction commitments. In this paper, we examine the emission trading schemes (ETS) of Kazakhstan and Korea, two emerging economies. We do so by using a policy success typology, which includes programme, process, political, temporal, distributional and capacity dimensions, and operationalizing criteria that the Partnership for Market Readiness and International Carbon Action Partnership have identified as key to effective ETS scheme design. We find that these criteria, or ETS success dimensions, align well with a typology of policy success. Using indicators developed to evaluate each ETS success dimension, we identify the positive and negative attributes of both Kazakhstan's and Korea's ETS and provide a qualitative ranking for each ETS success dimension. This evaluation and ranking allows us to identify necessary conditions for policy success in emerging market ETS: consultation with stakeholders in both the design and implementation stages; development of human and institutional home-grown capacity; mechanisms to solve illiquidity issues using market interventions; development of legitimacy from the perspective of business over time; implementation of policies that are complementary to an ETS; and flexibility to enable firms to manage periods of low revenues. Our findings provide important lessons for emerging economies planning to implement their own ETS, which may be more relevant than experiences from developed nations' ETS. Key policy insights ETS success requires more than political will and reaching programme goals. Identifying and involving key business and public stakeholders is necessary for ETS success. Capacity building within the public and private sectors should be implemented from the design stage of an ETS. In emerging economies, where increases in energy prices could lead to social unrest, complementary policies are necessary to ensure cost pass-through. Liquidity problems likely be experienced during the initial stages of an ETS need to be addressed. [ABSTRACT FROM AUTHOR]

The production of basic materials accounts for around 25% of global greenhouse gas emissions. Existing measures to reduce emissions from industry are limited due to a combination of competitiveness concerns and a lack of technological options available to producers. In this paper, we assess the possibility of implementing a materials charge to reduce demand for basic industrial products and, hence, also reduce industrial emission levels. The modelling shows that a charge equivalent to around €80/tCO2 could reduce the EU's total (energy plus process) CO2 emissions by up to 10% by 2050, depending on the substitution options available. The materials charge could lead to small GDP increases and a minor reduction in overall employment levels. Key policy insights Full carbon price pass through along the materials value chain creates incentives for resource efficiency and substitution in the value chain of material use. Most macroeconomic models ignore mitigation opportunities in the value chain, as do carbon pricing mechanisms for industrial emitters, which largely mute incentives for mitigation opportunities with free allowance allocation. Including consumption at a benchmark level in emission trading systems reinstates a full carbon price incentive for all mitigation opportunities while avoiding competitive distortions and carbon leakage risks. Macroeconomic modelling shows that this allows for an additional 10% emission reduction accompanied by a slight GDP increase and employment reduction. Long-term clarity on carbon leakage protection furthermore strengthens low-carbon investment frameworks. [ABSTRACT FROM AUTHOR]

The New Zealand Emissions Trading Scheme (NZ ETS) broke new ground in ETS design. Drawing from analysis of core policy documentation, this paper examines the rationale, outcomes, and outlook for three key innovations – broad sectoral coverage with some upstream points of obligation, the absence of a hard limit on system emissions, and a two-part cost containment mechanism – following the first decade of operation. It also provides comparative assessment with the European Union Emissions Trading System and California Cap-and-Trade Program. The NZ ETS was designed around the principle of least-cost compliance with international responsibility targets and a core assumption that the Kyoto Protocol emissions market would converge toward an efficient emission price aligned with rising global mitigation ambition. This assumption did not become a reality. As a result, the NZ ETS has produced a functional cross-sector trading market but little incentive for domestic mitigation to date. In late 2019, amendments were introduced to reform sectoral coverage, unit supply, and price management features so the system will better support New Zealand's targets under the 2015 Paris Agreement and 2019 Zero Carbon Act. However, substantial technical and political challenges remain to set near-term domestic mitigation ambition, phase out industrial free allocation, determine the mitigation contribution from the land sector, and design the agricultural emissions pricing regime. The evolution of the NZ ETS, relative to other systems and in response to national circumstances, offers insights that can inform the future development of emissions trading globally. Key policy insights Since 2008, the NZ ETS has successfully pioneered broad cross-sector emissions trading with upstream energy-sector obligations and deforestation obligations with afforestation crediting. Pricing of biogenic agricultural emissions is anticipated from 2025. The government's failure to adapt unit supply and cost containment mechanisms to changing market conditions has undermined incentives for domestic mitigation, resulted in a large bank of participant-held emission units, and subjected the market to long-term policy uncertainty. A cap on auctioning and new price management features will better equip the NZ ETS to support New Zealand's domestic emission reduction targets, but strategic questions remain about the future role of the land sector. [ABSTRACT FROM AUTHOR]

Several years of very low allowance prices in the EU emissions trading scheme (ETS) have motivated calls to introduce a price floor to correct potential underlying distortions and design flaws, including (i) the political nature of allowance supply and related credibility issues, (ii) potential myopia of market participants and firms, and (iii) waterbed and rebound effects resulting from policy interactions. In the wake of the recent EU ETS reform, allowance prices have sharply increased. This raises the question of whether the case for introducing a price floor in the EU ETS remains valid. We argue that such a price floor, also adopted in several other greenhouse gas cap-and-trade systems worldwide, remains an important improvement in the design of the system, as long as the above-mentioned distortions and design flaws persist. An EU ETS price floor can safeguard against these issues and provides more explicit guidance on the minimum allowance price policymakers consider acceptable. Either as a complement or substitute to the current Market Stability Reserve (MSR), a price floor would thus make the EU ETS less prone to future revision in case of unexpectedly low prices. We identify and confront four prominent arguments against the introduction of an EU ETS price floor. Key policy insights An EU ETS price floor would be an important institutional innovation enhancing political and economic stability, and predictability of the EUA price The recent Market Stability Reserve (MSR) reform has not removed the need for a carbon price floor. Introducing an element of price responsiveness into the so far purely quantitative design of the EU ETS would help to preserve its integrity In contrast to conventional wisdom, legal analysis reveals that an EU ETS price floor can be legally feasible Political support for a carbon price floor is gaining traction across Europe [ABSTRACT FROM AUTHOR]

The number of carbon pricing mechanisms implemented in developing countries is increasing. Even though there is regional fragmentation in terms of climate change strategies in Latin America, market-based initiatives are taking shape also in this region. Post-2020, combining these efforts towards carbon integration via an Emissions Trading Scheme (ETS) could be an option for Latin America to adhere to more cohesive and ambitious climate policy actions. Given the lack of quantitative studies, this paper aims to provide preliminary evidence on the appropriateness of this mitigation policy, highlighting potential environmental and economic outcomes in Latin America, as well as identifying trade patterns and the effects of revenue recycling for the region. Using a dynamic-recursive computable equilibrium model, a hypothetical Latin American ETS regulates only carbon emissions from the electricity generation and energy-intensive sectors. Regional carbon-integration among developing countries in this way demonstrates that it is possible to curb emissions at minimum cost. The distributional effect of linking shows a financial flow from Brazil and Mexico to the rest of Latin America, comprising a wider abatement effort within a shared carbon price. There are opportunities from revenue-recycling, which plays an important role in alleviating the additional costs from the policy. The advantage of this approach is to culminate in broad participation where competitiveness concerns may be addressed along with transformations of the energy system. However, to effectively address climate change, additional sectors should be considered for inclusion in the proposed ETS, in line with the region's energy and economic profiles. Key policy insights A regional carbon policy based on emissions trading in Latin America would expand opportunities for mitigation at lower cost. Brazil and Mexico would import allowances more cost-effectively from the rest of Latin America in the linked scenario. Further energy substitution towards low-carbon sources would be achieved with revenue recycling. A linked ETS system should include land use and forestry-related emissions. [ABSTRACT FROM AUTHOR]

Following the experience of high price instability and unpredictability in the European Emissions Trading Scheme (ETS), the management of carbon prices is a key concern for Chinese authorities. The objective is to avoid excessive price volatility in daily trading and stabilize the intrinsic price trend. Building on environmental economics and financial market theories, this study reviews the design of carbon price stabilization mechanisms in China's seven pilot ETSs and assesses their performance. The pilot ETSs have incorporated most price stabilization mechanisms recommended in the literature, including price ceiling–floor, intensity-based allocation, ex-post adjustment of allowances, intertemporal flexibility, and daily trading risk management. By examining this wide range of mechanisms, our analysis helps understand the different design options available to stabilize carbon prices. Furthermore, by decomposing carbon price data in the different pilot ETSs, our analysis helps evaluate the effectiveness of these mechanisms. Price ceiling–floor and intertemporal flexibility (update of ETS cap) are the most effective mechanisms for stabilizing the intrinsic price trend. Daily trading risk management mechanisms help control price volatility but have little impact on the intrinsic price trend. However, we are cautious about the desirability of regulatory intervention for influencing carbon market prices. Depending on the institutional context and their design, price stabilization mechanisms can cause regulatory uncertainty. The Chinese pilot ETSs provide unique input for understanding ETS regulations concerning price stabilization mechanisms and their effectiveness in achieving price stability. The details and sophistication of carbon price stabilization mechanisms can influence the performance of ETSs. Cap updates and price ceiling–floor mechanisms most significantly impact intrinsic price trends. To ensure the effectiveness of price stabilization mechanisms, it is important to separate mechanisms aimed at intrinsic price trends and at daily volatility. Excessive and unexpected regulatory intervention to stabilize prices may disturb market expectations and create uncertainty for investors. [ABSTRACT FROM AUTHOR]

The Paris Agreement establishes provisions for using international carbon market mechanisms to achieve nationally determined contribution (NDCs). In international negotiations on the rules governing the Agreement, an important question is whether and under which conditions mitigation outcomes that are not covered by the scope of NDCs should be eligible for international transfer and use by another country to achieve its NDC. Allowing the transfer and use of outside-scope mitigation could facilitate the identification of mitigation potential and reduce the costs of achieving NDCs. It could, however, also provide disincentives for countries to enhance the scope of their NDCs, be perceived as unfair towards countries with similar circumstances and economy-wide targets, reduce countries' incentives to ensure the quality of carbon market units generated, and lead to double counting. To address these concerns, international rules could: require transferring countries to account for such transfers by applying 'corresponding adjustments' even though the emission reductions occur outside the scope of NDCs, or to bring relevant sectors and greenhouse gases into the scope of their next NDCs; adopt safeguards for unit quality, e.g. through international oversight or strict additionality tests; impose other restrictions; and/or require countries to quantify and specify the scope of their NDC in terms of sectors and greenhouses gases covered. Key policy insights: Not allowing the transfer of outside-scope mitigation outcomes, or allowing such transfers without a corresponding adjustment by the transferring country, would both require determining whether a mitigation outcome occurs within or outside the scope of NDCs, which can be difficult in some instances. Requiring corresponding adjustments for outside-scope mitigation is more easily implemented than other options seeking to address possible disincentives for broadening the scope of NDCs but could discourage countries from engaging in outside-scope transfers. Providing temporary exemptions, accompanied by other safeguards such as international oversight and strict additionality tests, may therefore be an appropriate means of giving countries time to build capacity and gather data and to expand their NDCs in the future. Which exemptions apply, and for how long, are important policy choices when balancing different goals, perspectives and practical implementation challenges. [ABSTRACT FROM AUTHOR]

In theory, by establishing a price for greenhouse gas (GHG) emissions, an Emissions Trading System (ETS) promises to encourage a shift away from carbon-intensive electricity supply. It is generally assumed that this decarbonization effect requires the liberalization of electricity markets. However, amongst the more than 40 jurisdictions throughout the world that are now implementing, planning or considering an ETS to decarbonize electricity supply, few have adopted the electricity market liberalization textbook model. Economic agents are constrained in how they can respond to an ETS through various forms of electricity market regulation but, given the political sensitivity of electricity market reform and the urgency to decarbonize the electricity sector, it is unrealistic to advocate liberalization as a prerequisite to the introduction of an ETS. Building from regulatory theory on the design of electricity and environmental markets, we develop a conceptual framework to understand the interaction between ETS and electricity market regulation under different regulatory settings. Our analysis challenges the general assumption that the introduction of an ETS depends on electricity market liberalization. We argue that the ETS can be adjusted to the electricity market reality of many jurisdictions where governments limit price discovery, restrict price pass-through or place constraints on investment decisions, and discuss regulatory alternatives to address the efficiency losses that may emerge from specific forms of power sector regulation. Key policy insights Although an ETS will be most effective when it is implemented within a liberalized and competitive electricity market, it can also be introduced in a regulated electricity market environment, albeit with some efficiency losses. Where an ETS is implemented under power sector regulation, it is important to understand where barriers to mitigation exist, how much mitigation potential will be lost, and which other policies can target these areas of the economy. A proportion of the efficiency loss might be restored through innovative emissions trading policy design that overcomes the barriers to mitigation put in place through power sector regulation. This is a topic that deserves more academic research. [ABSTRACT FROM AUTHOR]

Carbon pricing, including carbon taxes and emissions trading, has been adopted by different kinds of polities worldwide. Yet, beyond the increasing adoption over time, little is known about what polities – countries as well as sub- and supranational entities – adopt carbon pricing and why. This paper explores patterns of adoption (both implemented policies and those scheduled to be) through cluster analysis, with the purpose of investigating factors that could explain polities' decisions to adopt carbon pricing. The study contributes empirically by studying carbon taxes and emissions trading together and by ordering the polities adopting carbon pricing into clusters. It also contributes theoretically, by exploring constellations of variables that drive the adoption of carbon pricing within individual clusters. We investigated 66 adopted policies of carbon pricing, which were divided into five clusters: early adopters, North-American subnational entities, Chinese pilot provinces, second-wave developed polities, and second-wave developing polities. The analysis indicates that the reasons for adopting carbon pricing have shifted over time. While international factors (climate commitments or influences from polities within the same region) are increasingly salient, domestic factors (including crises and income levels) were more important for the early adopters. Key policy insights Carbon pricing has become a global mainstream policy instrument. Economic and fiscal crises provide windows of opportunity for promoting carbon pricing. The international climate regime can support the adoption of carbon pricing through mitigation commitments and international financial and technical assistance. Learning between polities from the same region is a useful tool for promoting carbon pricing. Carbon intensive economies tend to prefer emissions trading over carbon taxes. [ABSTRACT FROM AUTHOR]

This paper employs a computable general equilibrium model (CGE) to analyse how a carbon tax and/or a national Emissions Trading System (ETS) would affect macroeconomic parameters in Turkey. The modelling work is based on three main policy options for the government by 2030, in the context of Turkey's mitigation target under its Intended Nationally Determined Contribution (INDC), that is, reducing greenhouse gas (GHG) emissions by up to 21% from its Business as Usual (BAU) scenario in 2030: (i) improving the productivity of renewable energy by 1% per annum, a target already included in the INDC, (ii) introducing a new flat rate tax of 15% per ton of CO2 (of a reference carbon price in world markets) imposed on emissions originating from carbon-intensive sectors, and (iii) introducing a new ETS with caps on emission permits. Our base path scenario projects that GHG emissions in 2030 will be much lower than Turkey's BAU trajectory of growth from 430 Mt CO2-eq in 2013 to 1.175 Mt CO2-eq by 2030, implying that the government's commitment is largely redundant. On the other hand, if the official target is assumed to be only a simple reduction percentage in 2030 (by 21%), but based on our more realistic base path, the government's current renewable energy plans will not be sufficient to reach it. Turkey's official INDC is based on over-optimistic assumptions of GDP growth and a highly carbon-intensive development pathway; A carbon tax and/or an ETS would be required to reach the 21% reduction target over a realistic base path scenario for 2030; The policy options considered in this paper have some effects on major sectors' shares in total value-added. Yet the reduction in the shares of agriculture, industry, and transportation does not go beyond 1%, while the service sector seems to benefit from most of the policy options; Overall employment would be affected positively by the renewable energy target, carbon tax, and ETS through the creation of new jobs; Unemployment rates are lower, economic growth is stronger, and households become better off to a larger extent under an ETS than carbon taxation. [ABSTRACT FROM AUTHOR]

We study the interactions between a CO2 emissions trading system (ETS) and renewable energy subsidies under uncertainty over electricity demand and energy costs. We develop an analytical model and a numerical model applied to the European Union electricity market in which renewable energy subsidies are justified only by CO2 abatement. We confirm that in this context, when uncertainty is small, renewable energy subsidies are not welfare-improving, but we show that when uncertainty is large enough, these subsidies increase expected welfare because they provide CO2 abatement even in the case of over-allocation, i.e. when the cap is higher than the emissions which would have occurred without the ETS. The source of uncertainty is important when comparing the various types of renewable energy subsidies. Under uncertainty over electricity demand, renewable energy costs or gas prices, a feed-in tariff brings higher expected welfare than a feed-in premium because it provides a higher subsidy when it is actually needed i.e. when the electricity price is low. Under uncertainty over coal prices, the opposite result holds true. Key policy insights Due to the possibility of over-allocation in an ETS, subsidies to renewable energies can increase expected welfare, even when climate change mitigation is the only benefit from renewables taken into account. In most cases studied, a feed-in tariff brings a higher expected welfare than a feed-in premium. The European Commission guidelines on State aid for energy, which incentivize member States to replace feed-in tariffs by feed-in premiums, should be reconsidered based on these results. [ABSTRACT FROM AUTHOR]

Most countries implementing an emissions trading system (ETS), such as EU member states, California in the US, or South Korea, are generally targeting large sized companies, which consume energy above a specific threshold. However, previous studies using computable general equilibrium (CGE) models have analyzed climate policies without considering company size. This may have led to inaccurate results because the impacts of climate policy would differ depending on the coverage of regulated companies. Accordingly, this study examines the environmental and economic impacts of greenhouse gas emission reduction policies, assuming policy results vary by firm size, as covered by the Korean emission trading system. To this end, a CGE model with a separate social accounting matrix based on company size is used to compare three scenarios that reflect different types of carbon pricing methods. The results show that greenhouse gases will be reduced to a lower extent and utility will decrease more if mitigation policies are only imposed to large companies. Key policy insights Carbon pricing policies should consider the different impacts on companies of different sizes and industry sectors. Without considering the different sizes of companies covered by an ETS, the expected carbon price and its economic impact will be underestimated. Small and medium-sized companies will face more negative impacts than large companies in some industry sectors under an ETS, even if the mitigation burden is only faced by large companies. [ABSTRACT FROM AUTHOR]

Aviation constitutes about 2.5% of all energy-related CO2 emissions and in addition there are non-CO2 effects. In 2016, the ICAO decided to implement a Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA) and in 2017 the EU decided on faster emission reductions in its Emissions Trading System (EU ETS), which since 2012 includes the aviation sector. The effects of these policies on the expected development of air travel emissions from 2017 to 2030 have been analyzed. For the sample country Sweden, the analysis shows that when emissions reductions in other sectors are attributed to the aviation sector as a result of the EU ETS and CORSIA, carbon emissions are expected to reduce by −0.8% per year (however if non-CO2 emissions are included in the analysis, then emissions will increase). This is much less than what is needed to achieve the 2°C target. Our analysis of potential national aviation policy instruments shows that there are legally feasible options that could mitigate emissions in addition to the EU ETS and CORSIA. Distance-based air passenger taxes are common among EU Member States and through increased ticket prices these taxes can reduce demand for air travel and thus reduce emissions. Tax on jet fuel is an option for domestic aviation and for international aviation if bilateral agreements are concluded. A quota obligation for biofuels is a third option. Key policy insights Existing international climate policies for aviation will not deliver any major emission reductions. Policymakers who want to significantly push the aviation sector to contribute to meeting the 2°C target need to work towards putting in place tougher international policy instruments in the long term, and simultaneously implement temporary national policy instruments in the near-term. Distance-based air passenger taxes, carbon taxes on jet fuel and quota obligations for biofuels are available national policy options; if they are gradually increased, and harmonized with other countries, they can help to significantly reduce emissions. [ABSTRACT FROM AUTHOR]

This paper analyses the rules for free allocation in the EU Emissions Trading System (EU ETS). The analysis draws on the empirical evidence emerging from two literature strands. One group of studies sheds light on the following questions: how efficient are free allocation rules in minimizing the risk of carbon leakage? Have they become more efficient over the trading periods? What are the technical limits to making them more efficient? Further: is firm behaviour affected by allowance allocation? Did specific provisions induce strategic behaviour with unintended effects? Studies from the second group estimate sectoral pass-through rates for the costs imposed by the EU ETS. Taking cost pass-through into account is necessary for properly targeting free allocation. The difficulty of accurately quantifying sectoral differences in cost pass-through ability, especially in manufacturing sectors (due to limited data availability and market heterogeneity), is the main hindrance to achieving further efficiency in allowance allocation. The new rules defined in the reform for Phase IV (2021-2030) nevertheless make some progress in this direction. Key policy insights The difficulty of accurately quantifying sectoral differences in cost pass-through ability is the main hindrance to efficient free allocation in minimizing carbon leakage risk. In Phase IV (2021-2030), carbon leakage risk will be assessed more accurately thanks to: a) carbon intensity and trade intensity considered together through a combined indicator; b) possible use of more disaggregated data, and c) possible consideration of complementary qualitative assessments of abatement potential, market characteristics and profit margins. It is expected that benchmarked allocation introduced in Phase III (2013-2020) has induced additional emission abatement, but there is still a lack of empirical evidence. [ABSTRACT FROM AUTHOR]

There is a substantial literature on optimal emissions trading system (ETS) designs, but relatively little on how organized political interests affect the design and operation of these economic instruments. This article looks systematically at the political economy of the diffusion of ETS designs and explores the implications for carbon-market linking. Contrary to expectations of convergence - as has been observed in many areas where economic policy diffuses across markets - we found substantial divergence in the design and implementation of ETS across the nine systems examined. The architects of these different systems are aware of other designs, but they have purposely adjusted designs to reflect local political and administrative goals. Divergence has sobering implications for visions of ubiquitous linkages and the emergence of a global carbon market that, to date, have been predicated on the assumption that designs would converge. More such 'real world' political economy analysis is needed to understand how political forces, mainly within countries, act as strong intervening variables that affect instrument design, implementation and effectiveness. Key policy insights Our finding of design divergence indicates that policy efforts aimed at achieving integrated international markets are unlikely to be successful. Visions of carbon market linkage will need to confront the reality that there are well-organized political coalitions, anchored in the status quo, that prefer divergence. In linking ETS, policy-makers should devote more attention to preventing excessive capital flows that can undermine political support for linkage, while also creating incentives for convergence in trading rules over time. [ABSTRACT FROM AUTHOR]

Upon completion, China's national emissions trading scheme (C-ETS) will be the largest carbon market in the world. Recent research has evaluated China's seven pilot ETSs launched from 2013 on, and academic literature on design aspects of the C-ETS abounds. Yet little is known about the specific details of the upcoming C-ETS. This article combines currently understood details of China's national carbon market with lessons learned in the pilot schemes as well as from the academic literature. Our review follows the taxonomy of Emissions Trading in Practice: A Handbook on Design and Implementation (Partnership for Market Readiness & International Carbon Action Partnership. (2016). Retrieved from www.worldbank.org): The 10 categories are: scope, cap, distribution of allowances, use of offsets, temporal flexibility, price predictability, compliance and oversight, stakeholder engagement and capacity building, linking, implementation and improvements. Key policy insights Accurate emissions data is paramount for both design and implementation, and its availability dictates the scope of the C-ETS. The stakeholder consultative process is critical for effective design, and China is able to build on its extensive experience through the pilot ETSs. Current policies and positions on intensity targets and Clean Development Mechanism (CDM) credits constrain the market design of the C-ETS. Most critical is the nature of the cap. The currently discussed rate-based cap with ex post adjustment is risky. Instead, an absolute, mass-based emissions cap coupled with the conditional use of permits would allow China to maintain flexibility in the carbon market while ensuring a limit on CO2 emissions. [ABSTRACT FROM AUTHOR]

International carbon markets can be an important tool in achieving countries' mitigation targets under the Paris Agreement, but they are subject to a number of environmental integrity risks. An important risk is that some countries have mitigation targets that correspond to higher levels of emissions than independent projections of their likely emissions. If such 'hot air' can be transferred to other countries, it could increase aggregated emissions and create a perverse incentive for countries not to enhance the ambition of future mitigation targets. Limits to international transfers of mitigation outcomes have been proposed to address this risk. This article proposes a typology for such limits, explores key design options, and tests different types of limits in the context of 15 countries. Our analysis indicates that limits to international transfers could, if designed appropriately, prevent most of the hot air contained in current mitigation targets from being transferred, but also involve trade-offs between different policy objectives. Given the risks from international transfer of hot air and the uncertainty over whether other approaches will be effective in ensuring environmental integrity, we recommend that countries take a cautious approach and pursue a portfolio of approaches to ensure environmental integrity, in which case limits could provide for additional safeguards. Key policy insights Limits to international transfers involve trade-offs between different policy objectives, in particular reducing the risk that countries transfer hot air and enabling participation in carbon markets. Under 'relative' limits a country may transfer mitigation outcomes to the extent that its actual emissions are below the limit. Relative limits derived from historical emissions data have significant limitations, and none of the tested approaches was found to be effective for all countries. Relative limits based on emission projections could be a more valid approach, although they are also technically and politically challenging. Under 'absolute' limits a country could only issue, transfer or acquire a certain amount of mitigation outcomes. Absolute limits set at sufficiently low levels could prevent countries from transferring large amounts of hot air, but are bluntly applicable to all countries, whether or not they have hot air. [ABSTRACT FROM AUTHOR]

Environmental policies may have important consequences for firms' competitiveness or profitability. For the European Union Emissions Trading System (EU ETS) the empirical literature documents that significant emissions reductions have resulted from it. Surprisingly, however, the literature shows that there have been hardly any concurrent negative effects on firms' competitiveness during the first two phases of the scheme (2005-2012). We show that the main explanations for the absence of negative impacts on competitiveness are a large over-allocation of emissions allowances leading to a price drop and the ability of firms to pass costs onto consumers in some sectors. Cost pass-through combined with free allocation, in turn, partly generated windfall profits. In addition, the relatively low importance of energy costs indicated by their average share in the budgets of most manufacturing industries may have limited the impact of the EU ETS. Finally, small but significant stimulating effects on innovation have been found so far. Several factors suggest that over-allocation is likely to remain substantial in the upcoming periods of the scheme. Therefore, we expect to see no negative competitiveness effects from the EU ETS in Phases III and IV (2013-2030). Key policy insights Empirical literature on the EU ETS shows that there have been hardly any effects on firms' competitiveness or profitability. One main explanation is a large over-allocation of emissions allowances leading to a price drop. This reduced incentives for innovation. Moreover, firms were able to pass costs on to consumers in some sectors which partly generated windfall profits. Innovation effects have so far been small but positive. We expect to see no negative competitiveness effects on regulated firms in the near future suggesting that no further reliefs for regulated firms are required. [ABSTRACT FROM AUTHOR]

The Paris Agreement establishes provisions for using international carbon market mechanisms to achieve climate mitigation contributions. Environmental integrity is a key principle for using such mechanisms under the Agreement. This paper systematically identifies and categorizes issues and options to achieve environmental integrity, including how it could be defined, what influences it, and what approaches could mitigate environmental integrity risks. Here, environmental integrity is assumed to be ensured if the engagement in international transfers of carbon market units leads to the same or lower aggregated global emissions. Four factors are identified that influence environmental integrity: the accounting for international transfers; the quality of units generated, i.e. whether the mechanism ensures that the issuance or transfer of units leads to emission reductions in the transferring country; the ambition and scope of the mitigation target of the transferring country; and incentives or disincentives for future mitigation action, such as possible disincentives for transferring countries to define future mitigation targets less ambitiously or more narrowly in order to sell more units. It is recommended that policy-makers combine several approaches to address the significant risks to environmental integrity. Key policy insights Robust accounting is a key prerequisite for ensuring environmental integrity. The diversity of nationally determined contributions is an important challenge, in particular for avoiding double counting and for ensuring that the accounting for international transfers is representative for the mitigation efforts by Parties over time. Unit quality can, in theory, be ensured through appropriate design of carbon market mechanisms; in practice, existing mechanisms face considerable challenges in ensuring unit quality. Unit quality could be promoted through guidance under Paris Agreement Article 6, and reporting and review under Article 13. The ambition and scope of mitigation targets is key for the incentive for transferring countries to ensure unit quality because countries with ambitious and economy-wide targets would have to compensate for any transfer of units that lack quality. Encouraging countries to adopt ambitious and economy-wide NDC targets would therefore facilitate achieving environmental integrity. Restricting transfers in instances of high environmental integrity risk - through eligibility criteria or limits - could complement these approaches. [ABSTRACT FROM AUTHOR]

Reducing GHG emissions and mitigating climate change would require significant investments in renewable energy technologies. Foreign direct investments (FDI) in renewable energy (RE) have increased over the last years, contributing to the diffusion of RE globally. In the field of climate policy, there are multiple policy instruments aimed at attracting investments in renewable energy. This article aims to map the FDI flows globally including source and destination countries. Furthermore, the article investigates which policy instruments attract more FDI in RE sectors such as solar, wind and biomass, based on an econometric analysis of 137 Organisation for Economic Co-operation and Development (OECD) and non-OECD countries. The results show that Feed in Tariffs (FIT) followed by Fiscal Measures (FM), such as tax incentives and Renewable Portfolio Standards (RPS), are the most significant policy instrument that attract FDI in the RE sector globally. Regarding carbon pricing instruments, based on our analysis, carbon tax proved to be correlated with high attraction of FDI in OECD countries, whereas Emissions Trading Schemes (ETS) proved to be correlated with high attraction of FDI mainly in non-OECD countries. Key policy insights Feed in Tariffs is the most significant policy instrument that attracts FDI in the Renewable Energy sector globally. Fiscal Measures (FM), such as tax incentives, show a significant and positive impact on renewable energy projects by foreign investors, and particularly on solar energy. Carbon pricing instruments, such as carbon taxation and emissions trading, proved to attract FDI in OECD and non-OECD countries respectively. Public investments, such as government funds for renewable energy projects, proved not as attractive to foreign private investors, perhaps because public funds are not perceived as stable in the long run. [ABSTRACT FROM AUTHOR]

Carbon leakage is central to the discussion on how to mitigate climate change. The current carbon leakage literature focuses largely on industrial production, and less attention has been given to carbon leakage from the electricity sector (the largest source of carbon emissions in China). Moreover, very few studies have examined in detail electricity regulation in the Chinese national emissions trading system (which leads, for example, to double counting) or addressed its implications for potential linkage between the EU and Chinese emissions trading systems (ETSs). This article seeks to fill this gap by analysing the problem of ‘carbon leakage’ from the electricity sector under the China ETS. Specifically, a Law & Economics approach is applied to scrutinize legal documents on electricity/carbon regulation and examine the economic incentive structures of stakeholders in the inter-/intra-regional electricity markets. Two forms of ‘electricity carbon leakage’ are identified and further supported by legal evidence and practical cases. Moreover, the article assesses the environmental and economic implications for the EU of potential linkage between the world’s two largest ETSs. In response, policy suggestions are proposed to address electricity carbon leakage, differentiating leakage according to its sources. Key policy insights Electricity carbon leakage in China remains a serious issue that has yet to receive sufficient attention. Such leakage arises from the current electricity/carbon regulatory framework in China and jeopardizes mitigation efforts. With the US retreat on climate efforts, evidence suggests that EU officials are looking to China and expect an expanded carbon market to reinforce EU global climate leadership. Given that the Chinese ETS will be twice the size of the EU ETS, a small amount of carbon leakage in China could have significant repercussions. Electricity carbon leakage should thus be considered in any future EU-China linking negotiations. [ABSTRACT FROM AUTHOR]