Last year in Paris, world leaders came together for the first time to commit to keeping global warming below 2°C. With the Paris Agreement in force and negotiators at COP22 in Marrakesh teasing out the details of implementing the Agreement, countries are developing their action plans (or Nationally Determined Contributions, NDCs) to reduce global greenhouse gas emissions. Part of this is looking at how carbon assets could be traded across borders.
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Over the past year, people living in Bucharest, the capital of Romania, are seeing more bike lanes and metro stations in their city than before.
There are now about 122 km of cycling paths and four metro lines with 45 stations. It is a welcome sight in a city that suffers from air pollution and where many people tend to use private vehicles. Using bikes and the metro is cleaning up the city and, for some, is a quicker way to get around. And, as its popularity increases, it will likely lead to lower greenhouse gas emissions. Financing for this new development comes in part from the sale of carbon credits to Romanian power companies by the government, a welcome revenue stream for a stretched city budget.
It's been two months now since the historic climate change conference, COP21, wrapped up in Paris, concluding with 195 countries pledging to take actions to keep global warming to under 2 degrees Celsius. This is an unprecedented achievement in the long history of international climate policy.
Compared to past negotiations, there was a different atmosphere in Paris. The negotiators were determined to find common ground rather than draw insurmountable lines in the sand. Investors lined up with billions of dollars in new financial commitments in addition to the suggested roadmap for developed nations to contribute to the needed $100 billion annually for mitigation and adaptation efforts.
And the private sector was more active and visible than ever before: CEOs from industries as far ranging as cement, transportation, energy, and consumer goods manufacturers announced their own climate commitments in Paris to decrease their carbon footprints, adopt renewable energy, and improve natural resource management.
This enthusiasm was especially apparent during the CEO panel that IFC, the organization I represent, convened during the Caring for Climate Business Forum by UN Global Compact. CEOs from client companies in India, Turkey, Thailand, and South Africa discussed their innovative climate change initiatives, investments, and technologies, and the challenges of scaling up their climate business.
Concentrated Solar Power is the greatest energy technology you have probably never heard of. While it may not be as widely known as other renewable energy sources, there’s no doubting its potential - the International Energy Agency estimates that up to 11 percent of the world’s electricity generation in 2050 could come from CSP.
And this week in Morocco, the King, His Majesty Mohammed VI, is officially opening the first phase of what will eventually be the largest CSP plant in the world – the same size as Morocco’s capital city Rabat. I congratulate Morocco for taking a leadership role that has placed it on the frontlines of a revolution that is bringing low-carbon development to emerging and developing economies worldwide.
In collaboration with the World Bank and the African Development Bank, the CIF has already provided US$435 million into this three-phase Noor CSP complex in Morocco.
During his visit to Washington last week, China’s President Xi Jinping confirmed that the world’s largest greenhouse gas emitter, which has pledged to reduce its carbon intensity and reach a peak of overall emissions by 2030, will use a cap-and-trade market approach to help realize this.
China already has 7 pilot markets in cities and provinces in place that cover 1 billion tons of greenhouse gas emissions annually. Under the national scheme, now to go live in 2017, this could increase to 4 billion tons according to Chinese researchers - making it the world’s largest national emissions trading system.
It’s an exciting step and demonstration of China’s commitment to achieve its low carbon goals.
China, the biggest source of CO2 emissions globally, accounts for more than 27 percent of the world's emissions. China is the first developing country to control CO2 emissions through a cap-and-trade system. Once a national carbon market is established, which could be as early as 2017, China will overtake the European Union (EU) to become the biggest carbon market in the world. The Chinese market will significantly alter the balance of power in global carbon markets in the mid-term. Significant challenges remain, and the IFC, a member of the World Bank Group, is helping China to overcome them with a project in Shenzhen that addresses key barriers to carbon trading.
Fundamentals of Emissions Markets
Once a liquid carbon market has been created, trading will mostly happen via forward and futures contracts. These instruments help companies to protect themselves against volatile prices and to hedge their carbon position. In the EU, exchange platforms emerged as one of the main mechanisms aimed at simplifying transactions, reducing risk and facilitating transparent pricing. As trading platforms, exchanges can facilitate price discovery and offer hedging products.
The financial sector and financial institutions (FI) play a fundamentally important role in an emissions trading system. It is to be expected that most companies in China will trade with the help of intermediaries; only large emitters will trade directly at an exchange. Thus, FIs will be in a position to offer trading-related services, as well as advisory products, to clients subject to mandatory CO2 regulation.
It is the development conundrum of our era. Extremely poor people cannot lift themselves out of poverty without access to reliable energy. More than a billion people live without power today, denying them opportunities as wide-ranging as running a business, providing light for their children to study, or even cooking meals with ease.
Ending poverty requires confronting climate change, which affects every nation and every person. The populations least able to adapt – those that are the most poor and vulnerable – will be hardest hit, rolling back decades of development work.
How do we achieve the dual goals of expanding energy production for those without power and drastically reducing emissions from sources such as coal that produce carbon dioxide, the primary contributor to climate change?
There is no single answer and we cannot ask poor communities to forego access to energy because the developed world has already put so much carbon pollution in the air.
An array of policies and programs backed with new technology and new thinking can — if combined with political will and financial support — help poor populations get the energy they need while accelerating a worldwide transition to zero net carbon emissions.
This weekend, the leaders of the G7 committed to a series of actions that mark their first serious recognition of the economic transformation that is ahead of us.
Collectively, they recognized the need to decarbonize the global economy, enshrining in economic cooperation what the scientists in the IPCC told us last year in their Fifth Assessment Report. They called for ambition at the Paris climate talks this year – not new, but they recognized that they, individually and collectively, need to be in the upper part of the ambition bracket and that that means at least a “transformation of the energy sector by 2050.”
They talked about the mobilization of capital for this transformation, as well as ending the increasingly profligate use of harmful fossil fuel subsidies. Recognizing the need for an orderly transition to low-carbon growth as quickly and as smoothly as possible, they took on some degree of leadership around the pledge to provide $100 billion in climate finance for developing countries from public and private sources before 2020. More on that in a moment.
Over the past two weeks, hundreds of global business and government leaders meeting in Paris and Barcelona demonstrated the growing support for ambitious climate policies.
At the Business & Climate Summit in Paris, François Hollande, the president of France, echoed a key message from the private sector in his keynote address, saying, “Carbon pricing is essential to move to a low-carbon economy.” Business leaders repeatedly asked governments to put a price on carbon to enable them to scale up investment in low-carbon solutions. Eldar Saetre, chief executive of Norway’s Statoil described a carbon price as “the single most efficient measure.”
The messages carried into Barcelona and Carbon Expo the following week, as market traders and officials from from multinational companies and governments discussed carbon pricing tools and options to finance a transition to sustainable economic growth. The Expo saw a 30 percent uptick in attendance this year, due in part to the growing interest in carbon pricing and the upcoming climate negotiations. The World Bank Group released its Carbon Pricing Watch, reporting that about 40 national and over 20 sub-national jurisdictions, representing almost a quarter of global greenhouse gas emissions, are now putting a price on carbon. Carbon pricing instruments have increased their coverage threefold in the past decade and now represent 7 gigatons of CO2.
A learning journey
With the growth of carbon pricing instruments and rising interest from the private sector, governments are increasingly learning from one another and experimenting with different carbon pricing solutions. Whether they use taxes or emissions trading systems, there is now an emerging evidence base of how to successfully price carbon. Three jurisdictions are leading the way: the European Union, California and China.
In the village of Aharkandhi in northeastern Bangladesh, life has changed since homeowners began installing solar panels on their roofs. At night, families gather at the local grocery store to watch TV, which boosts business. Children study longer than before.
This is due in part to a World Bank-financed electrification project to promote off-grid electricity in rural communities. This year, the project became the first renewable energy program in Bangladesh to be issued carbon credits for lowering greenhouse gas emissions and the world's first Programme of Activities for solar home systems under the UNFCCC’s Clean Development Mechanism (CDM) to generate carbon credits.
With access to electricity, people are finding new ways to increase their income, and the word is spreading quickly across villages.