GLOBALLY NETWORKED CARBON MARKETS COMMON FRAME OF REFERENCE AND APPROACH FOR CLIMATE CHANGE MITIGATION VALUE

Size: px

Start display at page:

Download "GLOBALLY NETWORKED CARBON MARKETS COMMON FRAME OF REFERENCE AND APPROACH FOR CLIMATE CHANGE MITIGATION VALUE"

Imogen Townsend
5 years ago
Views:

1 1 GLOBALLY NETWORKED CARBON MARKETS COMMON FRAME OF REFERENCE AND APPROACH FOR CLIMATE CHANGE MITIGATION VALUE February 2014 Wendy Hughes, World Bank

2 2 Outline: Looking ahead efforts to link markets will be valuable in a range of policy scenarios. What is needed to connect heterogeneous markets? Fungibility based on relative climate change mitigation value o Common Frame of Reference o Rating o Exchange rates Value of these elements beyond linking markets. Possible Next Steps.

3 3 Looking Ahead: General expectation: most countries will take on some level of selfambition. A successful Paris 2015 would have many (perhaps most) countries taking on an increased level of self-ambition. Level of ambition will grow over time. a range of policy tools across countries and across sectors: conventional carbon markets (ETS), other market approaches not directly carbon, tax and regulation. Longer term expectation: all countries have to get to low carbon at some point there is a question about the rate at which the transition will happen potential role for markets.

4 Possible Directions for Global Climate Change Policy Regime 4 price on carbon: significant international carbon market driven by goals of cost efficiency Combination of the above Long-lasting domestic policies that include heterogeneous measures basis for and pledge and review underlying challenge is the same: actions of one jurisdiction depend on the ability to evaluate and project actions of other jurisdictions o so mechanisms to evaluate, project and coordinate levels of effort across countries and time will be useful. o Wide range of policy pathways would all benefit from efforts to link different carbon markets

5 5 Connecting Heterogeneous Markets The Idea: Globally-Networked Carbon Markets The Challenge: A bottom-up, rather than a top-down mandate The bottom-up approach has dual drivers climate change and other domestic priorities Leading to heterogeneous, fragmented markets Independent rating system and independent rating agencies - risk-based approach to rate the climate change mitigation value of carbon assets in the international market. International Carbon Reserve - convert ratings into exchange rates; help in addressing market risks and failures. International Settlement Platform - track cross-border trades and possible clearing house function.

6 Principles Underpinning Globally-Networked Carbon Markets 6 Opt-in approach: jurisdictions participate if they see value. Respect Sovereignty: facilitate the most efficient trading up to the level that each jurisdiction chooses to engage. Compatible with UN process. Encourage participation: learning by doing, and race to the top. Private sector friendly. Environmental integrity.

7 7 Idea: Globally-networked Carbon Markets Jurisdiction B Jurisdiction C Jurisdiction A A A B F E A B C D Ratings Opt-In Independent Private Rating Agency 1 Independent Private Rating Agency 2 Opt-In Ratings of assets Independent Private Rating Agency 3 D C Ratings Information Jurisdiction D A B Opt-In (Carbon assets or $$$) International Carbon Reserve (ICAR) International Settlement Platform Opt-In Rules: Use rating as basis for Carbon exchange rate Benefits of ICAR available to opt-in jurisdictions All international trading registered in the International Settlement Platform Asset / $ Flow Information Flow A Carbon Asset Class

8 Fungibility: requires relative value of different assets from a climate change mitigation perspective. 8 mitigation value comes from the emission reduction associated with an asset. Reduction relative to what? From a domestic perspective: Emission reduction relative to what would have been emitted (sector baseline). From an international perspective: emission reduction relative to target jurisdiction-level reduction is also important. The value of an asset in an international market has elements of both program and jurisdiction considerations

9 t CO2 emitted t CO2 emitted 9 Example: relative value of allowances from two ETS systems Program level comparison asset value associated with emission reduction System X System Y c b Baseline emission trajectory t CO2 reduced Baseline emission trajectory c t CO2 reduced a Capped emission trajectory t CO2 emitted d a Capped emission trajectory t CO2 emitted years years If design, scope or cap are different, reduction relative to domestic sector baseline that is associated with an allowed emission is different in the different jurisdictions

10 t CO2 emitted t CO2 emitted 10 Example: relative value of allowances from two ETS systems Jurisdiction-Level Comparison Country X Emission Reduction Own-Target and Sector Sub-targets target Actual / projected target years REDD program Fuel efficiency standards Building efficiency program ETS power sector years Reduction from ETS on track In terms of the relative value in an international market, what is happening at the jurisdiction level would matter as well, both credibility relative to owntarget.

11 t CO2 emitted t CO2 emitted 11 Example: relative value of allowances from two ETS systems Jurisdiction-level Comparison Country X Emission Reduction Own-Target Compared to International Expectations Own-target Own-target International expectation years REDD program Fuel efficiency standards Building efficiency program ETS power sector years and whether own-target is good enough

12 12 Fungibility in the International Market Requires: Approach to rate likelihood of achieving targets: RATING o Significant element of ex-ante: risks and probability move from domain of evaluation was it achieved to the domain of rating what is the risk of non-delivery / default? o Rating Characteristics: built in incentive for credibility maximum independence from political process Common Frame of Reference Against which to compare Jurisdiction-level targets Is its own target good enough? Options for Common Frame of Reference domestic price? - national pledges? - ambition index?

13 13 What Goes into a Rating? Program level Rating: what is the risk that the program will not achieve its stated reduction target? Credibility Rating of jurisdiction s own stated climate change mitigation target or pledge: what is the risk that the jurisdiction will not meet its stated mitigation target? Ambition adjustment Rating = f {program rating, credibility rating, ambition adjustment}

INSTRUMENT TYPE Possible Rating Landscape 14 REGULATORY GHG Performance standards Technology standards Fuel standards PRICE Carbon tax Capital subsidies Feed-in Tariffs Energy Efficiency

14 INSTRUMENT TYPE Possible Rating Landscape 14 REGULATORY GHG Performance standards Technology standards Fuel standards PRICE Carbon tax Capital subsidies Feed-in Tariffs Energy Efficiency Tariffs QUANTITY Cap and Trade Offsets Credit and baseline Clean Energy Standard RECs DNV NAMA Rating Protocol Ex-ante Ex-post Program Credibility Ambition Adjustment GHG RISK GHG CONTRIBUTION

15 15 Program rating: Who would use the Rating? Outside the context of Carbon Markets o Investors: guide the flow of financing to programs with strong prospects ex-ante; o Development aid: to guide / attract non-market support Credibility rating: o investors: is there a stable outlook for low carbon policy; o International negotiators: input beyond effectiveness of current policy portfolios - outlook for political and economic factors o Sellers: could signal the prospect of new demand Ambition index / ambition adjustment: o investors in any sector (not only low carbon): is the economy robust against a carbon shock? o Could impact overall sovereign risk rating and attractiveness of a country as an investment destination in general.

16 16 Ad Hoc / Bilateral Markets: Who would use the Rating? In the context of Carbon Markets o Investors could help direct investment to most successful low carbon opportunities o Domestic regulators: to make decisions on whether or not certain assets could be used for compliance either by regulated entities or by governments making up a gap ad hoc, bi-lateral; Globally-networked carbon markets: o ICAR and participants opting into Globally-Networked Carbon Markets approach: rating as the basis for climate change mitigation value exchange rates across different assets necessary for partial linking across multiple jurisdictions.

17 17 International Carbon Reserve (ICAR) International Carbon Reserve would: Convert the independent rating information to determine the exchange rates at which it would manage and trade assets from participating jurisdictions. Be the mechanism for opting in to the globally-networked carbon market. Provide performance feedback via ratings impact on exchange rates of units deposited in the reserve. Have rules / conditions which jurisdictions would agree to when opting in (including willingness to use ratings as basis for exchange rates)

18 18 International Carbon Reserve (ICAR) International Carbon Reserve could: Provide functions that help manage certain market risks and market failures, in conjunction with jurisdiction-level mechanisms Provide a source of liquidity and a liquidity and shared high price buffer function might be important for smaller, emerging carbon markets; Provide a back-up for domestic reserves in some of the larger markets; Provide a market maker function might be of interest to jurisdictions intending to focus on offset assets. Provide market surveillance and information Other?

19 2014/ Post Roadmap Pilot Rating / Reserve Fund 3-5 Countries -establishes rating approach, -market maker for new assets - Possibly housed at World Bank or IFC Pre-Reserve More countries - a track record for rating Possibly still housed at the World Bank or IFC ICAR Large enough to make an impact in terms of providing a Reserve Function Housed outside the World Bank Group Global Agreement International allowance units replace offsets and allowances Rating is a measure of risk re activity and credibility (because now all country targets are based on agreed allocations - no difference between country targets and what target should be - only a question of whether the country is on track to meet the target - ICAR assets either retired (end of game) or converted to international allowance units if international reserve function is deemed useful.

20 20 Next Steps with input / active involvement from WG members: Further work on developing and testing the rating protocol Progress the development of an Ambition Index Advance thinking and modeling of options / costs / benefits for an ICAR. Pilot ratings approach with a pilot market maker fund launching in 2014 / 2015.

21 THANK YOU. 21

GLOBALLY NETWORKED CARBON MARKETS

1 GLOBALLY NETWORKED CARBON MARKETS December 2013 Chandra Shekhar Sinha, World Bank CSinha@worldbank.org 2 Are the benefits of a Global Carbon Market beyond reach? Global Carbon Market Widely-used price