CARBON MARKETS

1. CARBON MARKETS

2. OVERVIEW • WHAT IS A CARBON MARKET? • WHY USE MARKETS TO REGULATE? • IDENTIFYING THE ENVIRONMENTAL PROBLEM • THE HIGH PROFILE OF CARBON MARKETS IN ENVIRONMENTAL LAW • EU EMISSIONS TRADING SCHEME (EU ETS)

3. I. WHAT IS A CARBON MARKET?

4. WHAT IS A CARBON MARKET? From economics to law: • A policy mechanism … • …Controlling pollution… • …By providing economic incentives to do so

5. WHAT IS A CARBON MARKET? • A government authority establishes a capthat limits the total amount of pollution allowed • Allowances are distributed (‘licenses to pollute’), which can be traded as private property • The amount of greenhouse gas emissions permitted declines each year, creating demand • When offered enough money (or faced with high enough costs), polluters who own allowances (or need allowances) will reduce their emissions. • These trades establish a market price for allowances

6. WHAT IS A CARBON MARKET?

7. WHAT IS A CARBON MARKET? Emissions ‘Business as usual’ emissions Tradable emission reduction credits Emission reduction project Time Year 1 Year 2

8. II. WHY USE MARKETS AS A REGULATORY SYSTEM?

9. WHY A CARBON MARKET? Cost-effectiveness • It doesn’t matter where emissions are reduced; the market will find the cheapest options Technological innovation • Companies will innovate in order to sell more allowances Flexibility • emissions can be reduced in different geographic locations, at different times, and through different sources Ideology • it’s democracy-enforcing and thus neutral Predictability • the cap provides certainty about the environmental outcome

10. WHY A CARBON MARKET? Its construction and management is simple!

11. III. IDENTIFYING THE ENVIRONMENTAL PROBLEM

12. TRAGEDY OF THE COMMONS http://www.youtube.com/watch?v=EZFkUeleHPY&feature=related

13. GENERAL IDEA OF THE ENVIRONMENTAL ISSUE • Climate change has been ‘human induced’ • Carbon markets are used to alter our consumption patterns • In other words; control the use and access to the commons

14. IN WHICH END TO START? See Malloy and the different perceptions of the problem and the solution(i.e. the market) • Human behaviour • Population • Internalise externalities (‘market failure’ – Keohaneand Olmstead) • Re-examine justice (John Broome) • State control and management • Ineffective laws / status quo

15. IN THE EYES OF THE BEHOLDER: DIFFERENT CARBON MARKETS Economic Efficiency Model Command-and-ControlModel Private Property Rights Model See Satz and also R Epstein, 'The Allocation of the Commons: Parking on Public Roads' (2002) 31 The Journal of Legal Studies 515

16. III. THE HIGH PROFILE OF CARBON MARKETS IN ENVIRONMENTAL LAW

17. IT STARTED WITH A MASTER THESIS • R Coase, 'The Problem of Social Cost' (1960) 3 Journal of Law and Economics 1 • B Ackerman and R Stewart, 'Reforming Environmental Law' (1985) 37 Stanford Law Review 1333 • US Clean Air Act 1990 • ‘the holy grail of environmental policymaking’ • Environmental markets promoted ‘for nearly every pollution problem’ but also for: • Overfishing • Conserve biodiversity • Water management • Resolve land use

18. IN SUM: THE JOURNEY OF ETS FROM THEORY TO ‘JEWEL IN THE CROWN’ Theory Practice

19. THE INTERNATIONAL CLIMATE CHANGE REGIME • Intergovernmental Panel on Climate Change • UN Framework Convention on Climate Change (UNFCCC) • Kyoto Protocol (1997)

20. THE KYOTO PROTOCOL: ‘FLEXIBLE MECHANISMS’ Joint Implementation: projects between Annex B countries CDM: projects between Annex B and non-Annex B countries International emissions trading: trading between Annex B countries

21. CDM IN A NUTSHELL Finance & technology Carbon credits

22. GOALS AND ADVANTAGES WITH CDM / JI • Accelerate transfer of climate-friendly technologies • Experience and build capacity in implementing climate-friendly projects • Significant source of revenues for developing countries • Cost-effective compliance for industrialised countries • Contribution to sustainable development in developing countries • Contribute to global emission reductions through incentives to commit to more stringent target

23. CRITICISM OF USING OFFSETS :

24. OFFSETS: THE MAGIC FORMULA?

25. III. EU EMISSIONS TRADING SCHEME

26. RELEVANT LEGAL BASIS • Art. 191(1)-(2) TFEU: ’combating climate change’ • Art. 194(2) TFEU: integration in energy policy • Title XXI: energy policy

27. RELEVANT LEGAL BASIS • Art. 4(2)(e) and (i): • shared competence • Art. 216 TFEU • the Union may conclude an agreement with 3rd countries/ intorganisations where the Treaties so provide or where the conclusion of an agreement is necessary • Art 191(4) TFEU • Rights to cooperate with 3rd countries and organisations • Art 18 TEU • High Rep. of Foreign Affairs can negotiate env agreements • ‘Mixed agreements’

28. BURDEN SHARING AGREEMENT

29. EMISSIONS TRADING TAKES THE SCENE 1990-1997 EU skeptical of emissions trading 1998 First discussion by Commission 2000 Green Paper on emissions trading 2001 Proposal emissions trading Directive 2003 Emissions trading Directive adopted 2005 EU ETS launched

30. SO WHAT HAPPENED/CHANGED? • Theoretical attractiveness emissions trading – academic support • US success story • Failure of other policy instruments – carbon tax • Adoption of Kyoto Protocol in 1997 • United States’ rejection of Kyoto in 2001 • Lisbon Strategy 2000 • Role European Commission • US/EU exchange of expertise • Business and NGO support

31. LESSONS LEARNED FROM THE U-TURN • Emissions trading is an attractive instrument for EU climate policy – no unanimity requirement • Large policy changes in the EU can happen rapidly, despite different viewpoints of Member States • ‘Policy entrepreneurs’ can play a crucial role in development of EU environmental policy

32. THE EU ETS – LEGISLATIVE OVERVIEW • 2003 Emissions trading Directive • Phase 1: 2005-2007 (‘trial’ period – getting started) • Phase 2: 2008-2012 (Kyoto commitment period) • 2004 Linking Directive • Establishes links with Kyoto Protocol flexibility mechanisms • Step toward a global carbon market • Directive 2008/101 • Includes emissions from aviation • 2009 Revised emissions trading Directive • Significant revisions for Phase 3 (2013-2020)

33. EU ETS: COVERAGE AND SCOPE • Covers the biggest industrial carbon dioxide (CO2) emitters across the EU Member States • (Large) power producers • Energy-intensive industries: iron and steel, cement and pulp and paper sectors • From 2012: Aviation

34. CREATING THE EU ETS: SETTING THE CAP (I) Two Steps: • National Level: National Authorities and Installations • MS vested with granting emissions permits, monitoring, reporting, and verification responsibilities • Union Level: Commission and National Authorities • Article 9(1): each NAP shall be based on ‘objective and transparent criteria’, including those listed in Annex III

35. SETTING THE CAP (II)

36. THE CAP • Why is it important to get the cap ‘right’? • Sets the environmental objective – policy objective • Incentive to trade • Legitimises the trading scheme • Why at MS level? • Political compromise • Legal context

37. SETTING THE CAP: EFFECTS • Decentralised Approach • 27 caps • Administratively burdensome • Over-allocation – carbon crash in 2006 • Litigation

38. EU ETS LITIGATION • Articles 263 (2), (4) TFEU – annulment actions • Most of the case law • Article 276 TFEU – preliminary reference • Increasing in case law • Article 258 TFEU – infringement proceedings

39. ALLOCATION • Free allocation • ‘grandfathering’ • subsidy concerns • Alternative: Auction • Preference from economists • Polluter pays principle compliance • Revenue issues • Revised EU ETS Directive

40. ENFORCEMENT • Penalties for excess emissions • € 40 in Phase 1 (plus compensation of excess) • € 100 in Phase 2 • Case C-203/12 Billerud (preliminaryreference re fine)

41. EU ETS DIRECTIVE REVISED • Centralised cap • Uniform rules on monitoring and verification methods • Full auctioning for power sector • Other sectors move to full auctioning by 2027, except sectors exposed to ‘carbon leakage’ • Revenues earmarked for ‘climate change programs’ • Free allocation through benchmarking rather than grandfathering • Joined cases C-566/11 Iberdrola SA

42. Directive 2008/101 • Function: • Demands that each aircraft operators taking off or landing at an EU airport to hold and surrender emissions allowance for each tonne of CO2 generated during the flight • Origin: • 6th Environmental Action Programme (aviation increase) • International Civil Aviation Authority (ICAO) • Set up against global institutional failure

43. IV. LOOKING AHEAD: CHALLENGES AND PROSPECTS

44. MARKETS ARE HERE TO STAY Extending the time frame: • Directive 2009/29 (2013-2020) • UNFCCC Decision of 11 December 2011

45. CHALLENGE (1): LINKING

46. LINKING IN SIGHT • California + EU ETS • Linking plans agreed on: NSW + EU ETS • Action 24 July 2013, Commission v Council • Re Council Decision authorising the openingofnegotiations on linking the EU emissions trading schemewith an emissions trading system in Australia

47. CHALLENGE (2): COMPETITION • ‘Carbon leakage’ • Increase of emissions in other countries due to implementation of climate policies in EU • Competitiveness effects • Distortion of level playing field • ‘Unfair’ advantage for industries in developing countries (the ‘China’ syndrome)

48. CHALLENGE (3): LEADERSHIP • Aviation: an international or EU question? • Competition concerns • Environmental concerns • Roleof EU leadership? • Gecko-effect or Brussel-impact?