Supporting carbon pricing policies through crediting and RBCF

Frédéric Gagnon-Lebrun May 2016

Supporting carbon pricing policies through crediting and RBCF May 2016

World Bank supported

Huge amount of detail, analysis,

(ongoing) thinking

Starting point •  Policy-based crediting and Sectoral Approaches have long been

identified as promising options for GHG mitigation … •  … but not yet implemented •  Experience from CDM instructive, especially re: MRV •  Some useful experience of RBF

•  Paris Agreement has given structure, more certainty: •  International climate policy architecture, with NDCs •  Provisions for international transfers of “mitigation outcomes” •  A new, UNFCCC-governed baseline-and-crediting mechanism

(for all countries) •  Encourages RBF for REDD+

•  Crediting of carbon pricing policies – implicit or explicit – is innovative and may help increase mitigation impact

Supporting carbon pricing policies through crediting and RBCF May 2016

DOMESTICECONOMY

Government

*Somerevenuerecyclingcandirectlyimpacttheopera6onofthepolicyinques6on,e.g.ifgovernmentprovidesextrafreeallowancesinanETS.**Verylikelytobeforeign,butcouldbeadomes6ccharityorafounda6on,etc.

External**CreditPurchaser

Withincreasedmi6ga6onimpact

CouldCredi6ngPricingPolicyincreasemi6ga6onimpactfromnew/exis6ng

policies?

DOMESTICECONOMY

GovernmentSurplus,i.e.extrarevenue

Costofpolicydesignandopera@on

*Somerevenuerecyclingcandirectlyimpacttheopera6onofthepolicyinques6on,e.g.ifgovernmentprovidesextrafreeallowancesinanETS.**Verylikelytobeforeign,butcouldbeadomes6ccharityorafounda6on,etc.

External**CreditPurchaser

Withincreasedmi6ga6onimpact

CouldCredi6ngPricingPolicyincreasemi6ga6onimpactfromnew/exis6ng

policies?

SectorsandStakeholders

Significantlyaffectedbythe

policy

Notaffectedbythepolicy

Somewhataffectedbythe

policy

DOMESTICECONOMY

GovernmentSurplus,i.e.extrarevenue

FlowtogovernmentbudgetFlowfromgovernmentbudget

*

Costofpolicydesignandopera@on

*Somerevenuerecyclingcandirectlyimpacttheopera6onofthepolicyinques6on,e.g.ifgovernmentprovidesextrafreeallowancesinanETS.**Verylikelytobeforeign,butcouldbeadomes6ccharityorafounda6on,etc.

External**CreditPurchaser

Withincreasedmi6ga6onimpact

CouldCredi6ngPricingPolicyincreasemi6ga6onimpactfromnew/exis6ng

policies?

4 Case Studies: no external crediting, but show how/why policies were implemented

Supporting carbon pricing policies through crediting and RBCF May 2016

MoroccoEnergySubsidy

Reform

IndonesiaEnergySubsidy

Reform

MexicoCarbonTax

Beijing(China)EmissionsTrading

System

Policy Ongoingreduc6onofsubsidies(fuelandelectricitygenera6on)

Ongoingreduc6onofsubsidies(fuelandelectricitygenera6on)

Carbontaxonfossilfuelsalesandimports.Norevenuerecycling.

OneofseveralpilotETS.Covers40%ofcity’sdirectandindirectemissions.

Drivers Publicfinances;stabilityofpublicpoweru6lity;increasingcompe66onamongpowerproducers

Publicfinancesandfiscaldeficit;electricitygenera6onexpansion;otherfundingpriori6es

Strengthenfinancialcapacity;supportInclusiveMexicoandaProsperousMexico;raiseawarenessaboutclimatechange

Increasedenergyefficiency;supportforeconomicdevelopmentgoals;tes6ngETS

Barriers Concernsaboutimpactsonpoorhouseholds;compe66venessconcernsamongindustry;mixedministerialposi6ons

Popula6onaccustomedtolowandstableenergyprices;weaktransportinfrastructure;minoritygovernmentandcomplexadministra6on

Long-standingcultureofsubsidizedfuelsandelectricity;Industryandcommerceagainstoriginalproposals

Strongopposi6onfromenterprisesfacingabatementscosts

“Carbon Economics”: (very) low value of credits as % of policy financial revenues/ savings

Supporting carbon pricing policies through crediting and RBCF May 2016

Critical Design/Implementation Issue #1: Political Economy •  Increasing recognition that overall economic benefits are not the only

consideration for assessing policy: •  Experience shows us that impacts on the poor and vulnerable are key – can/

should they be compensated? •  Also suggests perception of impacts is higher than what could be/is observed

in practice

•  “Carbon Economics” analysis: savings vs potential credit value •  Could crediting play a role for increased ambition?

•  Perhaps, particularly if there are highly symbolic groups to compensate

•  GHG impact depends on how revenues are reinvested •  “GSI-IF” shows double reductions if 30% revenue goes to

renewable energy/energy efficiency •  Can be very hard to hypothecate or “earmark” savings (e.g.

Indonesia)

Supporting carbon pricing policies through crediting and RBCF May 2016

Critical Design/Implementation Issue #2: MRV •  At present no agreed standards or international agreement which allow for

the estimation of GHG emission reductions from policy •  Not an issue for ETS

•  For fiscal policies, range of assumptions and challenges needed pre-implementation (modelling) or post (empirical analysis)

•  Setting a baseline; •  Attributing impact to the policy alone; •  Time lags for impact; •  Period over which credits should be generated, etc.

•  Any pricing policy always part of a wider context and interacts with other policies and goals (e.g. carbon tax and subsidies in Mexico)

•  Will always be uncertainty for fiscal policies •  For a bilateral trade, this is a choice for the buyer •  Great benefit from (simple) agreed methodologies

Supporting carbon pricing policies through crediting and RBCF May 2016

3 options to take forward

Supporting carbon pricing policies through crediting and RBCF May 2016

1.  Support emission reductions at the policy margin 1.  For ETS: could purchase allowances (creating scarcity) 2.  Performance benchmarks from which to award credits, under a

carbon tax regime 3.  Credit supporting policies (e.g. energy efficiency programmes) for

pricing policies

2.  Support emission reductions within the targeted sectors 1.  Politically symbolic; but large enough to drive change?

3.  Overcome barriers to effective policy implementation and operation

1.  Support MRV needs 2.  For ETS: increase market liquidity

In all cases, (traditional) technical assistance is useful.

Next steps & Recommendations •  In-depth feasibility and identification of suitable policy crediting

approaches is needed •  In specific contexts •  With engagement with interested countries (“sellers” and “buyers”) and

other relevant stakeholders

•  Useful to explore the architecture more generally •  Can we go beyond bilateral agreements between a buyer and seller

to fungible credits? •  Connect domestic policies through crediting as an alternative to

wider (more difficult) linking? •  Is there a role for “non-market approaches” under Paris Agreement

to support policy implementation?

•  Need for piloting and testing of the mechanisms

Supporting carbon pricing policies through crediting and RBCF May 2016

Frédéric Gagnon-Lebrun Head – Climate Change Mitigation International Institute for Sustainable Development fgagnon-lebrun@iisd.org

Supporting carbon pricing policies through crediting and RBCF May 2016