Implementing CDM Limits in the EU ETS: A Law and Economics Approach

The EU Emissions Trading Scheme (EU ETS) is the main instrument to reduce greenhouse gas emissions in Europe. Subject to a country specific limit, installations in the EU ETS can use EU allowances (EUA) and certified emissions reductions (CERs) generated through the Clean Development Mechanism (CDM) to fulfil their emission reduction target. The CDM encourages and finances emission reduction projects in developing countries. The basis for the implementation of a CDM usage limit is the supplementarity criteria, which was established to ensure that developed countries only cover part of their compliance obligations with emissions reductions abroad. The CDM limits are differentiated between EU member states to cater to the different levels of emission reduction ambitions, the progress made when the limits were established and the ability of the Member State to reduce emissions. The binding limits created substantial arbitrage rents, due to the CER-EUA spread in the range of 200 million Euro for the year 2008. This paper discusses different options for the allocation of this rent. The paper finds that making the right to use CERs tradable or the regulator precommitting to buying CERs at the level of the limit reduces the inefficiencies connected to the current regulation. Auctioning these CER usage rights furthermore shifts the rents created through the CER-EUA spread to the state. Both the EU ETS and the CDM are scrutinised by academics, industry and non-governmental institutions according to their efficiency and environmental effectiveness. The debate about wind-fall profits has shown that climate policies need to be designed carefully. In light of improving the EU ETS, the use of CDM and in light of upcoming regional emissions trading schemes in other developed economies, this paper shows how CDM limits can be designed more efficiently.Clean Development Mechanism, Emissions Trading, Climate Policy, Efficiency

Implementing CDM limits in the EU ETS: A law and economics approach

The EU Emissions Trading Scheme (EU ETS) is the main instrument to reduce greenhouse gas emissions in Europe. Subject to a country specific limit, installations in the EU ETS can use EU allowances (EUA) and certified emissions reductions (CERs) generated through the Clean Development Mechanism (CDM) to fulfil their emission reduction target. The CDM encourages and finances emission reduction projects in developing countries. The basis for the implementation of a CDM usage limit is the supplementarity criteria, which was established to ensure that developed countries only cover part of their compliance obligations with emissions reductions abroad. The CDM limits are differentiated between EU member states to cater to the different levels of emission reduction ambitions, the progress made when the limits were established and the ability of the Member State to reduce emissions. The binding limits created substantial arbitrage rents, due to the CER-EUA spread in the range of 200 million Euro for the year 2008. This paper discusses different options for the allocation of this rent. The paper finds that making the right to use CERs tradable or the regulator precommitting to buying CERs at the level of the limit reduces the inefficiencies connected to the current regulation. Auctioning these CER usage rights furthermore shifts the rents created through the CER-EUA spread to the state. Both the EU ETS and the CDM are scrutinised by academics, industry and non-governmental institutions according to their efficiency and environmental effectiveness. The debate about wind-fall profits has shown that climate policies need to be designed carefully. In light of improving the EU ETS, the use of CDM and in light of upcoming regional emissions trading schemes in other developed economies, this paper shows how CDM limits can be designed more efficiently

The Role of CDM Post-2012

Installations covered by the European Emission Trading Scheme (EU ETS) can use credits from the Clean Development Mechanism (CDM) to cover a share of their emissions. The CDM credits are generated by low-carbon projects in developing countries that require the CDM support to become financially viable. We review the objectives that are pursued by the EU and by CDM host countries with the CDM, and assess the performance of the mechanism in reaching these objectives: Additionality Additionality is a key premise of the CDM – only projects that would not have been possible otherwise should be supported by the CDM. Studies have found, however, that between one-fifth1 and twothirds 2 of registered projects are non-additional; reasons include insufficient demonstration criteria and the ineffectiveness of Designated Operational Entities (DOE)3 in filtering non-additional projects. Assuming these estimates are valid, non-additionality could have contributed 30 to 106 million tons of CO2eq to global emissions increases through the use CDM credit in the EU ETS in 2008-2009. Efficient use of EU mitigation funds CDM may not be a cost-effective mechanism for mitigation. For example, yearly costs for abating all developing HFC-23 would cost about €26 million, but through the CDM, Annex I buyers pay between €250 and €750 million in total.4 Sustainable Development The definition of sustainable development is controversial and there is no agreement on how it should be measured. Within this context, it is difficult to determine whether CDM aids sustainable development or not. Some CDM experts go so far as to suggest – using their sustainable development criteria - that the additionality requirements of CDM actually reduce the number of sustainable projects available for CDM investment. Low-carbon development – In developing countries In developing countries, the authors find that the CDM has not facilitated technology transfer, does not support a shift to low-carbon technologies, can discourage the development of domestic lowcarbon policies such as Nationally Appropriate Mitigation Actions (NAMAs), does not achieve sustainable development criteria, and, in fact, can support carbon-intensive activities. Low-carbon development – in Europe Overall, the CDM negatively impacts EU ETS abatement. This study shows that with an EU ETS target of 20%, the CDM decreases the required GHG emissions reductions from 13.8% to 7.5% by 2020 (relative to 2005).5 The right to use CDM has been extended to the period 2013-2020. As a result, averaged over the period 2008-2020, EU ETS emissions can exceed the EU ETS cap by 7.3%. 1 Michaelowa & Purohit, 2007 2 Wara and Victor, 2008 3 In the CDM context, the term DOE stands for validators of CDM project proposals. In the US, the term DOE stands for Department of Energy. 4 Wara, 2008 5 EU Community Independent Transaction Log (CITL) data. See section 2.1 and Annex 1 The Role of CDM Post-2012 January 2011 Carbon Pricing for Low-Carbon Investment Project 4 Thus the degree of abatement undertaken in Europe is heavily influenced by the use of CDM credits. With a 30% target, the effects are even more pronounced, with emission reductions delivered domestically of 23.9% without CDM use to 12.6% with CDM use.6 Even without the use of CDM, the current 20% emissions trajectory results in emissions abatement of 51% below 1990 levels by 2050, which falls well short of the commitment of 80-95%, formulated by the EU and its Member States at the EU Summit in October 2009.7 Future volumes of CER inflows are determined by various factors inherent in the choice of project and technology, and are also determined by political decisions made at the UN, EU, and project host country level. This makes the volumes of CERs generated difficult to predict, despite careful monitoring by market participants and analysts of international carbon market developments. CDM in the case of a 30% EU emissions reduction target If the EU moves to a 30% target, the Directive currently envisages that half of the additional emissions reductions could be covered with CDM credits. Policy makers may consider, whether the performance of the CDM mechanism to date justifies such an expansion, or the focus should be shifted on alternative mechanisms for international climate cooperation. Should the increased use of CDM still proceed, this might trigger a discussion about who receives the right to use the CDM credits and can capture the rents from the price spread between EU allowances and CERs. This could repeat the lengthy debate between industry and the European Commission on the definition of benchmarks for free allowance allocation. This paper explores and discusses different options for how market-based mechanisms could be used instead, to allocate the right for the use of CER credits

Impact of Reductions and Exemptions in Energy Taxes and Levies on German Industry

Between 2002 and 2007, Germany introduced its National Strategy for Sustainable Development and its Integrated Climate Protection Program, which both defined clear energy and climate-related objectives, setting an emissions reduction trajectory of 40% below the 1990 level by 2020. This spurred the development and refinement of a set of policies to create incentives for energy efficiency improvements, to reduce labour costs, and to raise funds to finance energy security and climate policy objectives. Special tax and levy reductions and exemptions were introduced for each policy for a transitional period. In this report, CPI presents a tool that it developed to help analyze the impact of tax exemptions and levy reductions on energy prices, which in turn impact energy efficiency and climate related goals. In developing this tool, we studied the impact of four major sets of energy policies and their related exemptions to determine the net impact on industry players, differentiated by the size of the industrial concern (as expressed by energy usage) and by the industrial sub-sector. The four energy policies are: • The Environmental Tax Reform; • The Combined Heat and Power Act; • The EU Emission Trading Scheme; and • The Renewable Energy Act

Auswirkungen der Entlastungsregelungen von Energiesteuern und -abgaben auf die deutsche Industrie

Zwischen 2002 und 2007 verabschiedete die Bundesregierung die Nationale Nachhaltigkeitsstrategie und das Integrierte Energie- und Klimaprogramm. Beide Programme enthalten klare energie- und klimapolitische Zielsetzungen: So sollen die Treibhausgasemissionen bis zum Jahr 2020 um 40% gesenkt werden – verglichen mit dem Stand im Jahr 1990. Um dieses Ziel zu erreichen, wurden verschiedene energiepolitische Instrumente eingeführt, die Anreize für die Verbesserung von Energieeffizienz schaffen und gleichzeitig Gelder für die Finanzierung von Energiesicherheit und klimapolitischen Zielen bereitstellen sollen. Bei Einführung der Instrumente wurden Unternehmen des Produzierenden Gewerbes verschiedene Entlastungen von Steuern und Abgaben eingeräumt, um deren internationale Wettbewerbsfähigkeit nicht zu gefährden und den Unternehmen Zeit für Anpassungsmaßnahmen an die veränderten Rahmenbedingungen zu geben. Im vorliegenden Bericht präsentiert CPI eine selbst entwickelte Methode als Hilfestellung für die Untersuchung der Nettoauswirkungen von derartigen Steuerentlastungen und Abgabenausgleichen auf die Energiepreise der Industrie. Bei der Entwicklung dieser Methode untersuchten wir die folgenden vier wichtigen energiepolitischen Instrumente: • die Ökosteuerreform; • das Kraft-Wärme-Kopplungsgesetz (KWKG); • das Emissionshandelssystem der EU (EU-ETS); • das Erneuerbare-Energien-Gesetz (EEG). Die Akteure im Industriesektor wurden für die Analyse nach Konzerngröße (definiert durch Energieverbrauch) sowie nach Wirtschaftszweig unterschieden

Adolescent Tuning of Association Cortex in Human Structural Brain Networks

Motivated by prior data on local cortical shrinkage and intracortical myelination, we predicted age-related changes in topological organization of cortical structural networks during adolescence. We estimated structural correlation from magnetic resonance imaging measures of cortical thickness at 308 regions in a sample of N = 297 healthy participants, aged 14–24 years. We used a novel sliding-window analysis to measure age-related changes in network attributes globally, locally and in the context of several community partitions of the network. We found that the strength of structural correlation generally decreased as a function of age. Association cortical regions demonstrated a sharp decrease in nodal degree (hubness) from 14 years, reaching a minimum at approximately 19 years, and then levelling off or even slightly increasing until 24 years. Greater and more prolonged age-related changes in degree of cortical regions within the brain network were associated with faster rates of adolescent cortical myelination and shrinkage. The brain regions that demonstrated the greatest age-related changes were concentrated within prefrontal modules. We conclude that human adolescence is associated with biologically plausible changes in structural imaging markers of brain network organization, consistent with the concept of tuning or consolidating anatomical connectivity between frontal cortex and the rest of the connectome.This work was supported by the Neuroscience in Psychiatry Network, a strategic award by the Wellcome Trust to the University of Cambridge and University College London (Grant no. 095844/Z/11/Z to E.T.B., I.M.G., P.B.J., P.F., and R.J.D.). Additional support was provided by the National Institute for Health Research Cambridge Biomedical Research Centre and the Medical Research Council (MRC)/Wellcome Trust Behavioural and Clinical Neuroscience Institute. F.V. was supported by the Gates Cambridge Trust. J.S. was supported by the National Institutes of Health (NIH)-Oxford/Cambridge Scholars Program. K.J.W. was supported by a Mozilla Science Lab Fellowship and the Alan Turing Institute under an Engineering and Physical Research Council (EPSRC) grant (EP/N510129/1). P.E.V. was supported by a Medical Research Council (MRC) Bioinformatics Research Fellowship (MR/K020706/1). M.S. was supported by the Winston Churchill Foundation of the United States. A.A.B. was supported by National Institutes of Mental Health (NIMH) Integrated Mentored Patient-Oriented Research Training (IMPORT) in Psychiatry (R25 MH071584)

Banking of Surplus Emissions Allowances: Does the Volume Matter?

In the European Emission Trading scheme the supply of allowances exceeds emissions - cumulating, according to our estimates, in a surplus of 2.7 billion tonnes by 2013/2014. We find that initially the surplus was acquired by power companies so as to hedge future carbon costs. As the surplus exceeds this hedging demand, additional allowances need to be acquired as speculative investment. This requires higher rates of return and implies that expected future carbon prices are highly discounted. This could explain the recent drop in carbon prices. The analysis shows that the volume of unused allowances matters for the discount applied to future carbon prices. We use our supply-demand framework to assess currently discussed policy options set-aside, reserve price for auctions and adjustments of emission targets

The Effectiveness of the Clean Development Mechanism – A law and economics analysis

Climate change has been acknowledged as a threat to humanity. Most scholars agree that to avert dangerous climate change and to transform economies into low-carbon societies, deep global emission reductions are required by the year 2050. Under the framework of the Kyoto Protocol, the Clean Development Mechanism (CDM) is the only market-based instrument that encourages industrialised countries to pursue emission reductions in developing countries. The CDM aims to pay the incremental finance necessary to operationalize emission reduction projects which are otherwise not financially viable. According to the objectives of the Kyoto Protocol, the CDM should finance projects that are additional to those which would have happened anyway, contribute to sustainable development in the countries hosting the projects, and be cost-effective. To enable the identification of such projects, an institutional framework has been established by the Kyoto Protocol which lays out responsibilities for public and private actors. This thesis examines whether the CDM has achieved these objectives in practice and can thus be considered an effective tool to reduce emissions. To complete this investigation, the book applies economic theory and analyses the CDM from two perspectives. The first perspective is the supply-dimension which answers the question of how, in practice, the CDM system identified additional, cost-effective, sustainable projects and, generated emission reductions. The main contribution of this book is the second perspective, the compliance-dimension, which answers the question of whether industrialised countries effectively used the CDM for compliance with their Kyoto targets. The application of the CDM in the European Union Emissions Trading Scheme (EU ETS) is used as a case-study. Where the analysis identifies inefficiencies within the supply or the compliance dimension, potential improvements of the legal framework are proposed and discussed