In order to move to a low carbon future and limit global average temperatures to 2°C, a number of steps are required. Decarbonising electricity production, switching to cleaner fuels, improving energy and resource efficiency, and shifting investment patterns are among them.

According to a joint handbook produced by the International Carbon Action Partnership and the Partnership for Market Readiness, published by The World Bank, carbon pricing is now a key part of the move to a low carbon future. This handbook entitled ‘Emissions Trading in Practice: A Handbook on Design and Implementation’ was produced to help decision/policy makers and stakeholders design an emissions trading scheme (ETS) that is effective, credible and transparent. It draws on lessons from ETSs around the world including the European Union, several provinces and cities in China, Quebec, California, the Northeastern United States, and New Zealand. It discusses the creation of an ETS in ten steps.

Currently operating in 35 countries, 13 states/provinces and 7 cities (covering 40% of global GDP) an ETS is a policy tool that can achieve a range of environmental, economic and social outcomes. Before one is designed, a Government must decide how much an ETS will contribute to its emissions reductions targets, the rate at which it will decarbonise its economy, and how the costs and benefits will be distributed. Other important considerations include a target area’s current and evolving emissions profile, existing regulatory environment and size, concentration, growth, and economic volatility.

The Emissions Trading in Practice handbook was published earlier this month

The Emissions Trading in Practice handbook was published earlier this month and contends that a carbon price can direct the flow of private capital, promote actions to reduce and mitigate emissions, and inspire creativity in developing low carbon products. It further outlines ten steps for creating an ETS as follows:

1) Decide on the scope of the scheme

  • Which sectors and gases will be covered
  • Which industries and companies will be included
  • What thresholds will be set

2) Set the emissions cap

  • Create a baseline dataset to determine the cap
  • Determine the level and type of cap
  • Choose a timeline for setting the cap and provide a long term cap trajectory

3) Distribute allowances

  • Match emissions reduction allocation methods to policy objectives
  • Define eligibility
  • Methods for free allocation and balance with auctions over time

4) Consider the use of offsets

  • Decide whether or not to accept offsets from industries and companies not included in the scheme from within and/or outside the geographical area covered by the ETS
  • Choose eligible sectors, gases and activities
  • Decide limits on the use of offsets and establish a system for monitoring, reporting, verification and governance

5) Determine temporal flexibility

  • Set rules for banking allowances
  • Define the terms for borrowing allowances and early allocation
  • Confirm the length of reporting and compliance periods

6) Address price predictability and cost containment

  • Establish the rationale for (and risks associated with) market intervention
  • Choose whether or not to intervene to address low prices, high prices or both
  • Decide the appropriate instrument for market intervention and the degree of delegation for market oversight

7) Ensure compliance and oversight

  • Identify the regulated companies and monitor their reporting systems, plus manage the performance of emissions reduction verifiers
  • Establish and oversee the ETS registry as well as the market for ETS emissions units
  • Design and implement the penalty and enforcement approach

8) Engage stakeholders, communicate, and build capacities

  • Map stakeholders and respective positions, interests and concerns; coordinated across departments for a transparent decision making process
  • Design an engagement strategy for consultation with stakeholder groups specifying format, timeline and objectives in view to creating a communication strategy that resonates with local and immediate public concerns
  • Identify and address ETS capacity building needs

9) Consider linking one Government’s ETS to another’s to broaden access to lowest cost emissions mitigation

  • Determine linking objectives and strategy, and identify linkage partners
  • Confirm the types of link and align key program design features
  • Form and govern the links

10) Implement, evaluate and improve

  • Decide on the timing and process of ETS implementation
  • Establish the process and scope for reviews
  • Evaluate the ETS to support reviews

Read the ‘Emissions Trading in Practice: A Handbook on Design and Implementation’ here

These ten steps to creating an ETS as outlined in the handbook are straightforward and discussed in excellent detail. Given that the Emissions Trading in Practice is based on experiences of ETSs from around the world, I would like to think that any Government considering adopting an ETS would review this handbook and make good use of the ten steps to implement it. With each new report written and published on ETSs and the environmental, economic and social outcomes being achieved there is little excuse not to consider adopting an ETS as part of moving to an inevitable low carbon future.

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