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.
By providing a floor price for captured methane, the PAF offers private investors a financial incentive to fund carbon capture. Using an auction maximizes the impact of public funds dedicated to slowing climate change.
Here’s my journal entry from the day – July 15 – auction day (at last!)
At the Aspen Ideas Festival, World Bank Vice President and Special Envoy for Climate Change Rachel Kyte talks about climate resilience and how it can create opportunities for all people while protecting all people. Women and children make up a large number of the extreme poor, who are among those most at risk from the impacts of climate change.
At the UN Climate Summit in September 2014, Secretary-General Ban Ki-moon called for the private sector to drive more action and mobilize political will for a meaningful agreement in 2015. Last month, business and government leaders from all around the world came together in Paris at the Business & Climate Summit and at Carbon Expo in Barcelona to make a united call for ambitious actions that will allow the scaling up of workable solutions to climate change. Given the pressing challenge, the private sector is grappling with the reality that sustainable business means de-coupling economic growth from rising carbon emissions.
The headline coming out of the Summit was the steady call from the business community for a price on carbon. CEO after CEO from a diverse range of companies came on stage to tell governments that the only way for a smooth transition to a low-carbon economy is through clear, predictable price signals that will allow them to invest in an efficient and sustainable manner. A week later, six European oil and gas companies made news by calling for a globally coordinated price on carbon emissions. This represents a major change in mindset from the business community. Just a few years ago, no one would have expected calls for a carbon price from the private sector, especially not from the oil and gas sector.
So, why are some of the leading private sector companies calling for action on climate change?
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.
Peter Damgaard Jensen is the CEO of Pensionskassernes Administration A/S, a Danish investment manager with a portfolio that includes pension funds. He spoke at the World Bank Group about carbon pricing and engaging with fossil fuel companies to reduce climate risks.
"We are supporting the price on carbon because we think it is the most cost effective way of having influence on the way companies use carbon and have carbon emissions.
In PK (Pensionskassernes Administration A/S), we have just started a policy especially targeting companies that are very dependent on coal. We do that because we think coal is the first fossil, not fuel, but fossil product that will get out of the market because it is the product with the highest CO2 emissions.
In preparing for a climate agreement in Paris, countries all over the world are planning their domestic strategies for cutting emissions. This often requires new policies to create incentives for low-carbon development, and for that, governments need accurate and comprehensive emissions data.
One important building block is a greenhouse gas reporting program, which a growing number of countries are working on. Mexico, for example, is gathering information from its newly established emissions reporting program to support its mitigation policies. The European Union’s and California’s reporting programs are essential to their emissions trading systems, and China’s reporting program will underpin its national trading system, planned for launch in late 2016.