With the recently adopted Paris Agreement, the international community has committed to an ambitious pathway towards decarbonization of the global economy. Cost-effective policy approaches will be critical to minimize the welfare impacts of climate change mitigation, and emissions trading is favored in economic theory because it offers compliance flexibility to participating entities. In practice, however, the implementation of this policy instrument is complex and raises important questions.
Against the backdrop of a recent U.S.-Canada Joint Statement on Climate, Energy, and Arctic Leadership that emphasized the role of carbon trading in North American climate cooperation, the MIT Center for Energy and Environmental Policy Research (MIT CEEPR) convened a timely high-level event on the prospects for emissions trading and carbon market linkage in Canada and the United States. In partnership with the Government of Québec and the Consulate General of the Federal Republic of Germany, this event brought together over 80 invited participants on the MIT Campus on April 11, including state legislators and cabinet members, senior public officials, and representatives from industry, civil society and academia.
Christopher R. Knittel, William Barton Rogers Professor of Energy Economics in the MIT Sloan School of Management and Director of MIT CEEPR, opened the event by recalling CEEPR’s strong legacy in the economic analysis and intellectual foundation of emissions trading as a policy instrument. Helmut Landes, Germany’s Deputy Consul General in Boston, provided welcoming remarks on behalf of his country and highlighted the importance of robust knowledge-based engagement in international relations, as evidenced by the success of the recent Iran nuclear negotiations brokered by MIT’s Ernest Moniz.
The morning sessions consisted of academic presentations by researchers and policy experts, whereas the afternoon sessions featured roundtable discussions with experienced leaders from public policy and the private sector. A retrospective of emissions trading around the world began the day, with Clayton Munnings of Resources for the Future (RFF) presenting his analysis of experiences with different approaches to carbon pricing. While the past two years have seen a surge in carbon pricing initiatives, the global dynamic still is concentrated around a small group of leaders. Above all, he argued, carbon pricing has yet to evolve from an insurance policy for regulators to the workhorse for abating carbon emissions before it can leverage its cost-reducing potential.
Michael Pollitt, a Professor of Business Economics at the University of Cambridge, continued with a presentation on the economic merits and feasibility of a global carbon market compared to alternative policy options. Considering the necessary alignment of governments to introduce a global carbon market, it may face political challenges; however, even incomplete linking of national and subnational carbon markets can result in sufficient arbitrage effects to achieve the desired economic benefits. Brian Murray, Director of the Energy Initiative at Duke University, and Michael Mehling, Executive Director of MIT CEEPR, offered comments on both presentations, drawing on recent experience with subnational emissions trading systems in North America, prospects for trading under the U.S. Environmental Protection Agency’s Clean Power Plan, and observations of the political economy of carbon markets.
The second session addressed opportunities for carbon market linkage following of the 21st Session of the Conference of the Parties to the United Nations Framework Convention on Climate Change (UNFCCC) in Paris in late 2015. Benjamin Görlach, Senior Fellow and Head of Economics and Policy Assessment at the Ecologic Institute in Berlin, Germany, introduced the concept of linking carbon markets, defining it as acceptance of a carbon unit issued under one scheme for compliance purposes under another. With his presentation, he highlighted that linking quickly becomes very complex as each additional linked system will impact supply and demand dynamics, and potentially market integrity, in all other linked systems, requiring joint governance structures to sustain compatibility over time.
Stefan Weishaar, Professor of Law and Economics at the University of Groningen, the Netherlands, and a Visiting Scholar at MIT CEEPR, expanded on the challenges of carbon market integration by highlighting the risks of electricity leakage. In certain linking scenarios, for instance in China, electricity generated within one jurisdiction might fall under carbon pricing, whereas electricity imported from outside the jurisdiction might not and would therefore, all things being equal, be produced and sold at lower cost.
Serving as discussant in the foregoing session, Jackson Ewing, Director of Asian Sustainability at the Asia Society Policy Institute in New York, however, highlighted that cooperation on carbon trading – especially among countries facing diplomatic stalemate on other issues – might be an area of shared interest and opportunity to foster mutual trust. Ruben Lubowski, Chief Natural Resource Economist at the Environmental Defense Fund, reminded the speakers that reducing leakage risks is one of many arguments favoring coordinated linking, but he also addressed some risks posed by recent proposals to develop a network of carbon markets with exchange rates between carbon asset categories.
At lunchtime, Marie-Claude Francoeur, Québec’s Delegate to New England, recalled her role in the elaboration and adoption of carbon pricing in Québec and how the government of Québec moved to an economy-wide carbon trading scheme to remind the audience that political challenges can be overcome, concluding with optimism about future climate cooperation across North America. The first roundtable after lunch then offered varied perspectives from leading policy makers and experts, including Jean-Yves Benoît, Director of Carbon Markets at the Québec Ministry of Sustainable Development, the Environment, and the Fight Against Climate Change, and Co-Chair of the International Carbon Action Partnership; Christopher Knittel, Director of MIT CEEPR; Deborah Markowitz, Secretary, Agency of Natural Resources, State of Vermont, and Member of the Board of the Regional Greenhouse Gas Initiative; and Alex Wood, Executive Director of the Ontario Climate Change Directorate; with David Cash, Dean of the McCormack Graduate School of Policy and Global Studies at the University of Massachusetts Boston and former Commissioner of the Department of Environmental Protection, Commonwealth of Massachusetts, moderating. A lively exchange of views and discussion with the audience ensued.
In the second and final roundtable, the focus shifted to the perspective of those stakeholders principally affected by emissions trading, compliance entities and market facilitators in the private sector. This session featured Adam Auer, Director of Sustainability at the Cement Association of Canada; Brad Neff, Principal at the Pacific Gas & Electric Company (PG&E); Jean Nolet, President and CEO of Coop Carbone; Janet Peace, Senior Vice President for Policy and Business Strategy at the Center for Climate and Energy Solutions (C2ES); and Sandy Taft, Director of Environmental and Sustainability Policy at National Grid; with Katie Sullivan, Director for the Americas and Climate Finance at the International Emissions Trading Association (IETA), moderating. In the discussion, the group agreed on three priorities for future policy development: fostering confidence, providing certainty, and safeguarding competitiveness.
Overall, these three issues proved to be recurring themes throughout the day. Lack of trust in market integrity and policy stability was repeatedly identified as a key challenge for emissions trading going forward. Both industry representatives and public policy makers acknowledged the importance of political certainty for short-, medium- and long-term investments. And finally, with only 12% of global GHG emissions covered by a carbon price, the threat of leakage remains very real as companies in some jurisdictions face higher costs than those operating in others, distorting competition and preventing a level playing field. Overall, the discussions throughout the day reflected a clear sense of momentum for emissions trading in North America and beyond, yet also underscored the need for further research and critical debate.