Future carbon market: The Far East

Taiwan's capital city, Taipei. [sese_87/Flickr]

This article is part of our special report Crunch time for COP21.

SPECIAL REPORT / While the price of carbon remains low, support for pricing schemes is growing. Asia will soon overtake Europe as the home of the world’s biggest carbon markets. EURACTIV France reports

One of the big achievements of the COP21 so far has been to broaden the appeal of carbon markets beyond Europe’s borders, and deepen their acceptance as a mechanism for the management of CO2 emissions. But a study published by the OECD on 7 December showed that prices will have to rise for the desired effects to be achieved, and for now they remain stubbornly low.

In 90% of cases, the effective price of CO2 across the 41 countries studied, including members of the OECD and the G20, is less than €30 per tonne; the minimum cost of tackling the environmental damage caused by one tonne of CO2.

>>Read: Developing countries eye EU carbon quota sales to fuel growth

“The carbon price depends directly on ambition. If the ambition is not there, if the issue is used as a political football, of course we will have problems,” warned Rachel Kyte, the World Bank Group’s Special Envoy for Climate Change.

Today, around 60% of global emissions are not subject to any kind of carbon pricing, whether in the form of a tax or a market. But half of the 195 Parties to the COP21 refer to a carbon price in their national contributions (INDCs), often with a view to implementing a carbon pricing mechanism in the near future.

General approval, despite problems

Despite the restricted coverage of carbon markets, many of their users have showcased their satisfaction with the mechanisms at the COP21. They feel a new dawn for carbon trading is just around the corner, after a long period of dormancy for many markets.

In Europe, the price of carbon quotas has been held down by their overabundance. From a peak of €30 per tonne, the tonnage price of CO2 fell to just a few euros in 2014.

A tonne of CO2 currently costs just €9, which is far too little to have any significant effect on emissions reduction. But despite these setbacks, the European market has been emulated in other regions.

>>Read: COP21 will end a decade of failed climate finance

François Hollande and Angela Merkel opened the Paris Climate Conference by calling for a global carbon price, while defending the market created in the European Union a decade ago.

“The carbon market is undermined by the fact that we have different mechanisms, different taxes, and that we did not include all industries. But it exists, even if we are rather lonely in this regard,” the German Chancellor said.

But the loneliness of the European market should soon be a distant memory.

To the East

The European carbon market may be the biggest, but others exist in the United States, Canada, South Korea and China. These markets are expanding rapidly, and by 2017, the most important CO2 trading mechanisms in the world will be in Asia.

China plans to extend its experimental markets across the whole country in 2017, which will take it to the global top spot overnight with a carbon market double the size of Europe’s.

For the Chinese, this is also an investment in the future of the economy.

“The seven carbon market pilot projects are transforming the economy little by little, and creating jobs,” said Dr Qimin Chai, from the Chinese National Climate Change Strategy Research and International Cooperation Centre (NCSC).

The tonnage price of CO2 in China has risen from 60 to 100 yuan (€14) in response to the collapse of the price of coal. Energy producers have been forced to buy large quantities of CO2 quotas as they have increasingly turned to the most carbon intensive fossil fuel.

According to Jeff Swartz, from the International Emissions Trading Association (IETA), the Chinese market was very well conceived and exemplifies “the willingness of the Chinese government to bring about a real market price”. For him, the fact that China was party to the Clean Development Mechanism (CDM) under the Kyoto Protocol facilitated the integration of the carbon market into the Chinese economy.

Grand plans in Taiwan

In Taiwan, where plans to establish a carbon market are being developed, the conditions for a successful and effective market have been the subject of careful consideration. Despite its small size, the island, which imports 98% of its energy, is the world’s 31st biggest emitter of CO2.

In this context, achieving serious emissions reductions is no easy task. The country, which is not a member of the United Nations Framework Convention on Climate Change (UNFCCC) and is therefore not taking part in the COP21, initially plans to reduce its emissions using credits from the CDM.

But its long-term vision is to establish its own carbon market. Taiwan submitted a national contribution ahead of the COP21, although as it has not signed the UNFCCC, it was not obliged to do so. The island state hopes to reduce its CO2 emissions by 50% by 2050, compared to 2005 levels.

“We will concentrate on international cooperation to develop this market,” said the Director of Taiwan’s Environmental Protection Administration, Dr Huichen Chien.

The long-term success of these developing Asian carbon markets will doubtless hinge on their interconnectivity: South Korea stated in its INDC that it wants to open its carbon market to other quota exchange systems, like the Chinese carbon market. 

United Nations conference on climate change

The United Nations Framework Convention on Climate Change (UNFCCC) was adopted during the Rio de Janeiro Earth Summit in 1992. This Framework Convention is a universal convention of principle, acknowledging the existence of anthropogenic (human-induced) climate change and giving industrialized countries the major part of responsibility for combating it.

The adoption of the Kyoto Protocol at the Earth Summit in Rio de Janeiro, Brazil, in 1992 was a milestone in the international negotiations on tackling climate change.

For the first time, binding greenhouse gas emissions reduction targets were set for industrialised countries. The protocol, which entered into force in 2005, was intended to cover the period 2008-2012.

A longer-term vision was introduced by the Bali Action Plan in 2007, which set timelines for the negotiations towards reaching a successor agreement to the Kyoto Protocol, due to expire in 2012. It was expected that an agreement would be reached by December 2009.

Although Copenhagen, Denmark, did not result in the adoption of a new agreement, COP15/CMP5 recognised the common objective of keeping the increase in global temperature below 2°C. Furthermore, industrialised countries undertook to raise $100 billion per year by 2020 to assist developing countries in climate-change adaptation and mitigation. Cancún, Mexico, in 2010 made the 2°C target more tangible by establishing dedicated institutions on key points, such as the Green Climate Fund.

The willingness to act together was reflected in the establishment, in 2011, of the Durban Platform for Enhanced Action (ADP), whose mandate is to bring all countries, both developed and developing, to the table to develop “a protocol, another legal instrument or an agreed outcome with legal force” applicable to all the States Parties to the UNFCCC. This agreement should be adopted in 2015 and implemented from 2020.

In the interval until a legally binding multilateral agreement is implemented in 2020, the Doha Conference (Qatar) in 2012 established a second commitment period of the Kyoto Protocol (2013-2020), which was ratified by a number of industrialised countries, and terminated the Bali track.

The Climate Change Conferences in Warsaw, Poland, in 2013 and Lima , Peru, in 2014 enabled essential progress towards COP21 in Paris in 2015. All the states were invited to submit their Intended Nationally Determined Contributions (INDCs) towards reducing greenhouse gas emissions ahead of COP21

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