Universidad Carlos III

Economic Department

Energy Economic Issues

Theme 5. Climate Change and Energy

Course 2016-2017
 Content
1. Overview
2. The Rate of Discount: a Relevant Issue?
3. UNFCCC
4. European Carbon Market, EU ETS
5. Options for Controlling CO2 Emissions
6. References
1. Overview
 GHG are gases that trap heat in the
atmosphere
Carbon dioxide (CO2)
Carbon dioxide enters the atmosphere through burning
fossil fuels (coal, natural gas and oil), solid waste,
trees and wood products, and also as a result of
certain chemical reactions
Carbon dioxide is removed from the atmosphere (or
"sequestered") when it is absorbed by plants

Methane (CH4)
Methane is emitted during the production and transport
of coal, natural gas, and oil.
Methane emissions also result from livestock and other
agricultural practices and by the decay of organic
waste in municipal solid waste landfills.
 Others GHG
Nitrous oxide (N2O)
Nitrous oxide is emitted during agricultural and
industrial activities, as well as during combustion of
fossil fuels and solid waste.
Fluorinated gases
Hydrofluorocarbons, perfluorocarbons, and sulfur
hexafluoride are synthetic, powerful greenhouse
gases that are emitted from a variety of industrial
processes.
CO2
2014
399ppm

Stock GHG
larger than
450-500 ppm
 Stock GHG
Smaller than
450-500 ppm
 Key Messages
The global average concentrations of
greenhouse gasses continue increasing.
The combustion of fossil fuels from human activities
and land-use changes are largely responsible
The concentration in 2014 of the six
greenhouse gases (GHG) reached 438 ppm
The concentration of CO2 has reached in 2014 a
level of 399ppm and increase 2ppm per year
Without climate policy, the overall
concentration is projected to increase up to
638-1360 ppm CO2 by 2100
 Definition Of Public Good
From theme 4
A public good is commodity for which the
use of a unit of the good by one agent
does not preclude its use by other agents
Public goods can be
Exclusion is possible: the use of a highway
Exclusion is not possible: public lights, Country
Defense
Is climate a Public Good ?
 Climate is a Global Public Good
Climate is global public good
All persons living in the future will benefit of climate
stabilization independently of each person contribution to
avoid increasing temperatures
Persons making efforts now will not see the benefits, because the
bad climate will come later
We are not sure which generation will benefit because we do not
know when benefits or costs will occur
Individual efforts are useless because no profits will arise without
the efforts of many people
Market fails to achieve a reduction of emissions
As it fails for the productions of other public good as defense o
Public Light
The reason is that there is no possibility to exclude from their use to
those that do not pay for it
Other mechanisms of resources allocation are needed
 Climate as Global Public Good
Designing and implementing a mechanism that
efficiently limit the emissions and distribute the
costs among actors is a difficult job
Much difficult than implementing a mechanism to provide
defense or Public Lights
A mechanism to reduce emissions has the
same problems of mechanisms to produce
public goods and three additional ones
A world global agreement is needed in a world without a
Global Government but with National Governments
Different perception of equity issues due to past damages
Intergeneration equity issues appear due to the asymmetry
between benefits and costs across different generations
 Enforcement
- Past emissions
- Level of development
- Intergenerational Efforts

- Cost Minimization
- Technological Change Flexibility Sovereign issues
-Comparative advantages Who manages the
Supervisory System?
Equity

Growth structure
Technology Path
Efficiency Temperature evolution

TRADE DISTORTIONS
 Energy emissions are huge
Energy policies are constraint by global climate
change agreements

World energy related emissions represent 65% of

world total emissions
Therefore, efforts for limiting world emissions mean dealing with
energy
The participation of energy related emission in
industrialized countries is even larger
88% in USA and 82,3 % in EU (27)
Moreover, from 2000 to 2009 the participation of
energy related emission increased
from 64.5% to 65.8%
However, other emissions as change of land use and
forestry are important and must be taken into account
for success on reducing world emissions
As recognized by 2009 Copenhagen Accord
 Energy versus non energy related
GHG Emissions 2005
World USA
12.4
65.8
South America 88.8

20.6

53.0
Asia EU (27)

11.7
64.7 82.3

World Resources Institute, http://cait.wri.org

USA: Changes in energy related
emissions
 A Selection of Topics
Many topics around the climate change theme
Any selection is to some extend arbitrary
Why the four topics were selected?
Large debates among economists over the appropriate rate
of social discount
The UNFCCC is the global governance structure to deal with
climate change
EUETS was the first market stablished to implement Kyoto
protocol agreements
Comparing options to control emissions allows to apply
economic basic concepts
2. The Rate of Discount: a Relevant
Issue?
 Background
The British government in November 2006
presented the Stern Review on the Economics
of Climate Change, (Blair 2006).
Without radical international measures to
reduce carbon emissions within the next 10 to
15 years, there is compelling evidence to
suggest we might lose the chance to control
temperature rises
 Background
The summary in the Stern Review was equally
stark:
if we dont act, the overall costs and risks of
climate change will be equivalent to losing at least
5% of global GDP each year, now and forever
If a wider range of risks and impacts is taken into
account, the estimates of damage could rise to
20% of GDP or more....
Our actions now and over the coming decades
could create risks . . . on a scale similar to those
associated with the great wars and the economic
depression of the first half of the 20th century (p.
xv).
 The issue
These results are dramatically different from earlier economic
models that use the same basic data and analytical structure.
Previous models found that the optimal economic policies to
slow climate change involve modest rates of emissions
reductions in the near term, followed by sharp reductions in
the medium and long term that is the so called climate-
policy ramp
The climate-policy ramp have survived the tests of multiple
alternative modelling strategies, different climate goals,
alternative specifications of the scientific modules
How to explain such difference? The rate of discount is
central for it
 The Stern Setting (I)
Stern results relay on choosing a reducing
climate change impact investment path
that maximize Social Welfare
Social Welfare is the summation over time
of the utility of each generation discounted
by a given social rate of discount
W = U[c(t)]ert dt. 0
Utility function of each generation is a
simple function of consumption
u[c(t)] = c(t)1 a/ (1 a)
 The Stern Setting (II)
In this setting is easy see the relevance of
social rate of return for policy
If r=0 or near zero, policy recommendations would
be biased toward more investment now, meaning
less consumption now
If r is large, policy recommendations would be
biased toward more investment in the future, more
consumption now
The Stern Review uses a social rate of
discount near to zero
Is that reasonable?
 Discounting involves two related
and often confused concepts
One concept is a discount rate on goods
It measures the relative price of goods at different
points of time
It is also called the real return on capital, the real
interest rate, the opportunity cost of capital, and
the real return.
The real return measures the yield on investments
corrected by the change in the overall price level
This is observable in the market: rate of interest
This concept explains individualdecisions
 Discounting involves two related
and often confused concepts
The second concept involves the relative
weight of the economic welfare of different
generations
This is called the rate of social time preference, or
the social discount rate for brevity
A zero time discount rate means that future
generations are treated symmetrically with present
generations
A positive time discount rate means that the
welfare of future generations is reduced or
discounted compared to nearer generations
 Which is the appropriate value
for social discount rate?
Philosophers and economists debated
about how to apply social discount rates
in diverse areas
The Review argues that fundamental
ethics require intergenerational neutrality
as represented by a near-zero time discount
rate.
The logic behind the Reviews social welfare
function is not so universal
 Other Views
Each generation should leave at least as
much total societal capital as it inherited.
This would admit a wide array of social discount
rates.
Societies should maximize the economic
well-being of the poorest generation
The implication would be that current consumption
should increase sharply to reflect the projected
future improvements in productivity
That view implies large social discount rates
 Other views
Koopmans (1965) The problem of optimal
growth is too complicated, or at least too
unfamiliar, for one to feel comfortable in making
an entirely a priori choice of a time discount rate
before one knows the implications of alternative
choices
Following Koopmans approach, let see results
under different social rates of discount
 Analyzing Stern Results
For example in the high-climate scenario with
catastrophic impacts the mean losses are the following
0.4 percent of world output from 2006-2060
2.9 percent in 2060-2100
and 13.8 percent after 2200
These data results in Stern review in an average loss in per
capita consumption of 14.4 percent in all generations
Remarks
The estimate of the output loss now, as in today, is essentially
zero
The projected negative impacts from climate change are far into
the future
 Analyzing Stern Results
How do damages, which average around 1 per cent of
output over the next century, become a 14.4 per cent
reduction in consumption now and forever?
The answer is that, with near-zero discounting, the low
damages in the next two centuries get overwhelmed by
the long-term average over the many centuries that
follow
More than half of the estimated damages now and
forever occur after the year 2800
The large damages from global warming reflect large
damages in the far-distant future magnified into a large
current value by a near-zero time discount rate
 Some lessons
Estimation of social benefits and costs from
climate change investments are very sensible to
social rate of discount
Some defend that using of social rate of discount
equal to Zero or near zero means a fair treatment
for different generations
Others defend that using Zero or near zero means
unfair treatment for present generation because
Zero o near zero do not take into account the
technological and productivity advances
 Some Thoughts on the Debate
Relevance
The issue is no only present generation
versus future generations
The most relevant issue is distributing the
efforts of each generation
Among different countries
And among different actors within each country
This issue is not only an economic
problem, but also a political one
that need to be solved by consensus
Without a global Authority
 3. UNFCCC
The United Nation Framework Convention For
Climate Change
United Nations Framework Convention on Climate
Change (UNFCCC)

The UNFCCC (United Nations Framework Convention

on Climate Change )is an international environmental
treaty negotiated at the United Nations Conference on
Environment and Development (UNCED), informally
known as the Earth Summit, held in Rio de Janeiro from
3 to 14 June 1992.
The UNFCCC is also the name of the UN Secretariat
charged with supporting the operation of the Convention.
The objective of the treaty is to "stabilize greenhouse
gas concentrations in the atmosphere at a level that
would prevent dangerous anthropogenic interference
with the climate system".
 Background
1992. The Earth Summit in Rio took place
and the UNFCCC was opened for
signature
1994.UNFCCC enters into force
1995.Countries realized that emission
reductions in the Convention were
inadequate and strengthen the response to
climate change.
1997. Kyoto Protocol formally was adopted
in December
 Background
There are 195 Parties to the Convention
A secretariat supports all institutions involved
negotiations
Conference of the Parties (COP) is the
supreme decision-making body
COP Bureau deals mainly with procedural and
organizational issues arising from the COP
All States that are Parties to the Convention are
represented at the COP
they review the implementation of the Convention
and any other legal instruments.
20 COP celebrated since 1994
 Some COP
1997, COP3 : Kyoto Protocol formally adopted
2005,COP 11: Kyoto protocol in force
2007,COP13 Bali Road map
2009, COP 15, Copenhagen Accord was drafted, but not signed
2010, COP16, Cancun, Accord to reform CDM
2011, COP17 Durban, Commitment for the second period on Kyoto
2012,COP 18 in Doha from November 26 to December 6
2013, COP 19 in Warsaw, 11-22 November
2014, COP 20 in Peru, 1-12 December
2015, COP 21, in Paris, November 30-December 11

See more on http://unfccc.int/2860.php

 The two most relevant
Kyoto Protocol was adopted at COP3 in
year 1997
Paris Protocol was adopted at COP 21 in
year 2015
 Kyoto Protocol
International agreement linked to
UNFCCC, which commits its Parties by
setting internationally binding emission
reduction targets
The Protocol places a heavier burden on
developed nations under the principle of
"common but differentiated responsibilities."
Recognizing that developed countries are principally
responsible for the current stock of emissions
 Kyoto Protocol
The Protocols first commitment period started in
2008 and ended in 2012.
At COP17 in Durban, governments decided a second
commitment period, from 2013 -2020
The parties of UNFCCC are 195 plus the EU
By September 2015 the Protocol had received 84 signatures.
USA signed it, but no ratified it, meaning the signature does
not establish the consent to be bound.
However, it is a means of authentication and expresses the
willingness of the signatory state to continue the treaty-making
process.
To see state signatures
http://unfccc.int/kyoto_protocol/status_of_ratification/items/2613
.php
 Kyoto Protocol
Why did the United States did not ratify the Kyoto
Protocol
In July 1997, five months before the Kyoto meeting, the Senate passed
the ByrdHagel resolution stating that:
the United States should not be a signatory to any protocol which would mandate new
commitments to limit or reduce greenhouse gas emissions for the Annex I Parties,
unless the protocol also mandates new specific scheduled commitments for
Developing Country Parties within the same compliance period,
Such a protocol would result in serious harm to the economy of the United States

Which are the reasons behind USA position?

If China and other developing countries do not accept reduction
commitments, the efforts of developing countries may became
useless
 Kyoto Protocol
The basic architecture
I. Reducing emission in developed countries and
effort in others
II. Flexible market mechanisms
III. Reporting a verification procedures
IV. Compliance system
 Kyoto Protocol
I. Reduction Emissions
The total emission reduction of the
developed countries
5 % with respect 1990 over 2008-2012 (Annex I)
The EU members must reduce emissions
by 8 % between 2008 -2012
Three paths to meet targets
Place restrictions on biggest polluters
Manage transportation to reduce emissions
Make better use of renewable energy sources
 Kyoto Protocol
I. Reduction Emissions
Classifications for commitment
Annex I
Industrialized countries
Non-Annex I
mostly developing countries
 Kyoto Protocol
II. Flexible Market Mechanisms
Emission Trading
Allows countries that have emission units (AAU) to spare
that is emissions permitted them but not "used,to sell this
excess capacity to countries that are over their targets
A new commodity was created carbon
The Clean Development Mechanism ( CDM)
Allows a country with an emission-reduction or limitation
commitment to implement an emission-reduction project in
developing countries
Such projects can earn saleable certified emission
reduction (CER) credits, which counted towards meeting
Kyoto targets
 Kyoto Protocol
II. Flexible Market Mechanisms
Joint Implementation (JI)
Allows a country with an emission reduction
commitment to earn emission reduction units
(ERUs) from an emission-reduction or
emission removal project in another Party,
Offers Parties a flexible and cost-efficient
means of fulfilling a part of their Kyoto
commitments, while the host Party benefits
from foreign investment and technology
transfer.
 Kyoto Protocol
II. Flexible Market Mechanisms
Notice that countries can trade 3 different carbon
emission permits
Country targets are expressed as levels of
allowed emissions, or assigned amounts,
allowed emissions are divided into assigned amount units (AAUs)
Excess of (AAUs) over country emissions can be sold

A new commodity was created in the form of

emission permits
Since carbon dioxide is the principal greenhouse gas, people speak
simply of trading in carbon
Carbon is traded like any other commodity. This is known as the
"carbon market."
 Kyoto Protocol
II. Flexible Market Mechanisms
Other units which may be transferred
under the scheme, each equal to one ton
of CO2:
An emission reduction unit (ERU) generated by a
Joint Implementation projects
A certified emission reduction (CER) generated
from a Clean Development Mechanism
 Emission Trading
Country A Country B

AAU
Effective Effective
Goal AAU Goal
reduction reduction
100 Ton 10 160 Ton
110 150
Cash

Clean Development Mechanism

Country X Country Y
Project investment
Effective Effective
Goal CER Goal
reduction reduction
100 Ton 70 0 Ton
80 70
CER

Joint Implementation
Country M Country N
Project investment
Effective Reduction
Goal ERU Goal
reduction own efforts
100 Ton 70 100 Ton Project
80 100 Ton 70 Ton
ERU
 Kyoto Protocol
II. Flexible Market Mechanisms
Transfers and acquisitions of these units are tracked and recorded
through the registry system
An international transaction log ensure secure transfer emission reduction units
between countries
Each Party is required to maintain a reserve of ERUs, CERs, AAUs
in its national registry.
This reserve, known as the "commitment period reserve", should not drop below
90 per cent of the Party's assigned amount or 100 per cent of five times its most
recently reviewed inventory, whichever is lowest
Emissions trading schemes may be established as climate policy
instruments at the national level and the regional level
Under such schemes, governments set emissions obligations to be reached by
the participating entities
The EU emission trading was the first stablished and is the largest
 Kyoto Protocol
III. Reporting a verification procedures
Countries emissions have to be monitored and precise
records have to be kept of the trades
Registry systems track and record transactions by
Parties under the mechanisms.
UNCC Secretariat keep an international transaction log
To verify that transactions are consistent with the rules of the
Protocol.
Reporting is done by Parties by submitting annual
emission inventories and national reports at regular
intervals
 Kyoto Protocol
IV. Compliance system
The Compliance Committee
A facilitative branch that provide advice and assistance to
Parties in order to promote compliance,
The enforcement branch has the responsibility to determine
consequences for Parties not meeting their commitments.
Both are composed of 10 members,
one representative from each of the five official UN regions
Two each from Annex I and non-Annex I Parties

Decisions
The decisions of the plenary and the facilitative branch may
be taken by a three-quarters majority
decisions of the enforcement branch require, in addition, a
double majority of both Annex I and non-Annex I Parties
 Two group of Enforcement
countries:
Annex I
Non-Annex
Market One
mechanism Flexibility Reporting a
verification and
compliance
procedures
Equity
Efficiency Lack of
Flexibility
???

TRADE DISTORTIONS
 Paris Agreement
Climate talks that concluded on COP 21 on December 2015
were a great success, but it will be decades before we can
judge whether the Paris
The accord provides a good foundation for meaningful
progress on climate change, and represents a dramatic
departure from the past 20 years of cli mate negotiations.
The dichotomous distinction between Annex I and non-Annex
I countries in the Kyoto Protocol as the major stumbling block
to progress
The protocol included mandatory emissions-reduction
obligations for developed countries, but none for developing
countries.
That made progress impossible, because significant growth in
emissions has been entirely in the large developing countries ,
China, India, Brasil and Russian
When the change took place?
The big break came at COP in Durban, South Africa,
in 2011, where a decision was adopted by member
countries
To develop by December 2015, in Paris a protocol,
another legal instrument or an agreed outcome with
legal force under the convention applicable to all
parties.
The climate conferences in Warsaw (2013)
and Lima (2014) agreed that all countries should put
forward their emission reduction targets for the 2015
year agreement
This is the so called INDCs "intended nationally
determined contributions"
 The Paris Agreement (2015)

All signatory countries (195) are involved

in emission reductions

Hybrid approach

Bottom-up:Intended Nationally Determined Contributions

(INDCs), which are national targets and actions that arise
from national policies
Top-down: Oversight, guidance, and coordination

Global Economics Group 56

 Paris Accord
Basic Architecture
Bottom up elements: all Parties to put
forward their best efforts through nationally
determined contributions (INDCs) and to
strengthen these efforts in the years ahead
and all Parties report regularly on their
emissions and on their implementation effort
Top-Down elements: elements for oversight,
guidance, and coordination
 The large emitters (2011)
Industrial MTCO2 Ton Per capita
USA 5490 17,63
Germany 748 9,42
France 374 5,73
Spain 318 6,82
Japan 1180 9,26
Canad 552 14,24
Emerging
China 8715 6,52
India 2407 1,45
Russia 1788 12,55
Indonesia 426 1,73
Brazil 475 2,41
Mxico 462 4,07
South Africa 461 9,42
 What is the country with the
largest emission per capita?
Arabia Saudi
513 Million of metric Tons and 19,65 metric tons per
capita
More that USA and Canada
 USA Commitment
The United States intends to achieve a target of reducing its
greenhouse gas emissions by 26-28 per cent below its 2005 level in
2025
and to make best efforts to reduce its emissions by 28%
The United States has already undertaken substantial policy action
to reduce its emissions
to achieve the 2020 target of reducing emissions in the range of 17 percent
below the 2005 level in 2020
Additional action to achieve the 2025 target represents a
substantial acceleration of the current pace
 Canada Commitment
Canada intends to achieve a target to
reduce its greenhouse gas emissions by
30% below 2005 levels by 2030
Australia will implement a target to reduce
greenhouse gas emissions by 26 %to 28
% below 2005 levels by 2030.
 Summary of targets on large
industrialized emitters
Over 2005 level

EU 40% on 2030
USA 26%-28% on 2025
Canada 30% on 2025
Australia 26%-28% on 2025
 China Non-reduction
Commitments
China will increase emissions up to 2030, but intends
other commitments
To achieve the peaking of carbon dioxide emissions
around 2030 and making best efforts to peak early
To lower carbon dioxide emissions per unit of GDP by
60% to 65% from the 2005 level
To increase the share of non-fossil fuels in primary
energy consumption to around 20% with respect 2005
To increase the forest stock volume by around 4.5 billion
cubic meters on the 2005 level.
 Russian Pre- Commitment
Reducing emissions of greenhouse gases in Russia by 25-30 % of
1990 levels by the year 2030
subject to the maximum possible account of absorbing capacity
of forests
Relevant Statements
If contribution of the Russian forests is fully taken into account, limiting
GHG emissions to 70-75% of 1990 levels by the year 2030 does not
create any obstacles for social and economic development
Taking into account forest absorption corresponds to general objectives
of the land-use and sustainable forest management
the final decision of the Russian Federation will be taken in the
negotiating process and the commitment announced by major emitters
 Mexico Commitment refers to BAU not to
the emissions of a given past year
Mexico is committed to reduce 25% of its Greenhouse
Gases emissions (below BAU) for the year 2030
This commitment implies an emission peak on 2026
Emissions intensity per unit of GDP will reduce by around 40%
from 2013 to 2030
The commitment could increase up to a 40% subject to a
global agreement addressing important topics
international carbon price, carbon border adjustments, technical
cooperation, access to low cost financial resources and
technology transfer
 The problem
The initial set of contributions could cut
anticipated temperature increases this century
to about 3.5 degree Celsius
more than the frequently discussed goal of limiting
temperature increases to 2or the aspirational target from
Paris of 1.5
but much less than the 5-6 C increase that is expected on a
business as usual scenery
Some analysts see COP 21 as a failure because
did no limit temperature increase below 2
degree
 But , it could be good
First universal climate agreement with the
following potential commitments
Limiting temperature rise 'well below' 2 C
Helping poorer nations
Publishing greenhouse gas reduction
targets
Achieving a Carbon neutral world by 2050
 First universal climate
agreement
It's the world's first comprehensive
climate agreement, with all countries
expected to pitch in.
Under the previous emissions treaty, the
1997 Kyoto Protocol
developing countries were not mandated to
reduce their emissions
 Limit temperature rise 'well below' 2 C

The agreement includes a commitment to keep the rise

in global temperatures "well below" 2 C compared to pre-
industrial times, while striving to limit them even more, to
1.5 degrees.
Scientists consider 2 degree Celsius as the threshold
to limit potentially catastrophic climate change
Remember that the INDCs do not reach the goal
 Helping poorer nations

The deal also calls on developed nations to

give $100 billion annually to developing
countries by 2020
This would help these poorer countries combat climate
change and foster greener economies.
The agreement promotes universal access to
sustainable energy in developing countries,
particularly in Africa
It says this can be accomplished through greater use
of renewable energy.
Publishing greenhouse gas reduction
targets
Countries will be tasked with preparing, maintaining and
publishing their own greenhouse gas reduction targets.
The agreement says these targets should be
greater than the current ones and "reflect the highest
possible ambition."
These targets will be reviewed and revised every five
years starting in 2023.
The agreement also says that each country
should strive to drive down their carbon output "as soon
as possible."
 Carbon neutral
2050-2100
The deal sets the goal of a carbon-neutral world
sometime after 2050 but before 2100.
This means a commitment to limiting the
amount of greenhouse gases emitted by human
activity to the levels that trees, soil and oceans
can absorb naturally.
Scientists believe the world will have to stop
emitting greenhouse gases altogether in the
next half-century in order to achieve this goal.
 At COP21, countries agreed to the Paris Agreement.
Does that mean the Agreement is now in effect? NO

Countries still need to take steps so that it takes effect. What

occurred on December 12 at COP21 was the adoption of the
Paris Agreement by the Conference of the Parties (COP)
Adoption is the formal act that establishes the form and
content of an agreement.
the Parties made a number of key decisions about whats
necessary for the Agreement to enter into force.
They also agreed on a process for how countries will finalize
their current national climate plans and shift them from
being Intended Nationally Determined
Contributions (INDCs) into Nationally Determined
Contributions (NDCs).
 What needs to happen now?

Countries must now actually join the Paris

Agreement and become Parties to it.
To do this, each country must now sign and indicate their
consent to be bound by the Agreement.
Only after at least 55 Parties to
the UNFCCC representing at least 55 percent
of total global greenhouse gases sign on, the
Agreement enter into force, meaning it will
become legally binding
Whats the timeline for countries
to ratify the Agreement?
On April 22, 2016, 174 Heads of State plus the EU
signed the Agreement at a high-level signing
ceremony at the United Nations in New York.
While signing indicates a commitment , it does not mean that a
country becomes a Party to the Paris Agreement.
Joining the Paris Agreement follows a two-step
process: countries must sign the Agreement, and
also indicate their consent to join as Parties
The Agreement was open for signature on April 22, 2016 for one
year ( until April 21, 2017)
On August 2016, 22 parties ratify the Paris Agreement
China and USA announced their intention to ratify the Paris
Agreement
 Will the Paris Agreement became
legally binding on April 21, 2017?
The Paris agreement will became legally
binding
XXXXX

The Paris Agreement will not became

legally binding
XXXXX

Sent justified bets:

pbeatoblanco@Outlook.com; before October 27,
The losers will invite the winners
Can Parties still join the Paris Agreement
after April 22, 2017 ? YES
After April 22, the Agreement will be open
for what is called accession.
Accession is the term for when a country
becomes a Party to an international agreement
that other countries have already signed.
Depositing an instrument of accession after
April 22, 2017 will have the same legal effect
as if that country had signed an instrument of
ratification
4. European Union Emission Trading
System, EU ETS
 Basic I
The EU ETS is the EU cornerstone to
reduce GHG emissions
The system put a limit on overall emissions
from high-emitting industry sectors which
is reduced each year
Within this limit, companies can buy and
sell emission allowances as needed
Cap-and-trade approach gives flexibility
to cut emissions in a cost-effective way
 Basic II
The EU ETS covers more than 11,000
power stations and manufacturing plants
in the 28 EU and Iceland, Liechtenstein
and Norway
Aviation operators flying within and
between most of these countries will be
also covered
Around 45% of total EU emissions are
limited by the EU ETS.
 Basic III
The system is the worlds biggest emissions
trading market, accounting for over 75% of
world carbon trading
The EU ETS is inspiring the development of
national or regional emissions trading
systems in the world
Europe is looking to link the EU ETS with
schemes in other countries
and a pathway for linking with Australias has been
agreed in principle
 Basic IV
European Union (EU) established the first
cap-and-trade system for carbon dioxide
emissions in the world starting in 2005.
Proposed in October 2001, the EUs Emissions
Trading System (EU ETS) was up and running just
over three years later
The system vision
businesses began incorporating this price into their
decision-making
the market infrastructure for a multi-national trading
program be in place
 Three Trading Periods
2005-2007: First period: Learning by
doing
EU ETS successfully established as the worlds
biggest carbon market.
Allowances, based on estimated needs, turns out
to be excessive
The price of first-period allowances falls to zero in
2007.
 Three Periods
2008-2012: 2nd trading period
Iceland, Norway and Liechtenstein join (1.1.2008)
The number of allowances was reduced by 6.5%
for the period
but the economic downturn cuts emissions, and
thus demand, by even more.
This leads to a surplus of unused allowances and
credits which bring carbon price dawn
Aviation brought into the system (1.1.2012).
 Three Periods
2013-2020: 3rd trading period.
Introduction of an EU-wide cap on emissions
(reduced by 1.74% each year)
Progressive shift towards auctioning of allowances
in place of cost-free allocation
Croatia joins the ETS (1.1.2013).
2021-2028: 4th trading period.
 GHG Included
Carbon dioxide (CO2) from
Power and heat generation
Energy-intensive industry sectors including oil refineries,
steel works and production of iron, aluminium, metals,
cement, lime, glass, ceramics, pulp, paper, cardboard, acids
and bulk organic chemicals
Commercial aviation
Nitrous oxide (N2O) from production of nitric,
adipic, glyoxal and glyoxlic acids
Perfluorocarbons (PFCs) from aluminium
production
 Countries and Sectors
The ETS operates in 31 countries:
the 28 EU Member States plus Iceland, Liechtenstein and Norway.

It covers CO2 emissions from

installations such as power stations, combustion plants, oil
refineries and iron and steel works
factories making cement, glass, lime, bricks, ceramics, pulp, paper
and board.
The aviation sector was brought into the system at the start of 2012;
however, in November 2012 the EC made a proposal to defer
application to flights operated to and from countries outside the EU.
It will start later
Petrochemicals, ammonia and aluminium industries started in 2013,
 Monitoring and Compliance
Industrial installations are required to monitor and
report their annual emissions
Binding guidelines adopted by the European
Commission in 2007
The data in the annual emissions report must be
verified before 31 March by an accredited verifier
operators must surrender the equivalent number of
allowances by 30 April of the same year
 Allocation
The National Allocation Plans (NAPs) set out the total
quantity of greenhouse gas emission allowances that
Member States grant to their companies
in the first (2005-2007) and the second (2008-2012) trading
periods
For the third trading period, which started in 2013, the
allocation is determined directly at EU level
 Allocations: Free or Auctions?
During the first trading period (2005 to 2007) and also
during the second trading period (2008 to 2012)
Member States have auctioned only very limited quantities of
carbon allowances
Lion's share of carbon allowances is still allocated for free
From the start of the third trading period in 2013 about half
of the allowances were expected to be auctioned
A common platform to auction emission allowances procured
by Commission and Member States
It has been delayed to 2019 due to crisis
Nevertheless has been distributed by EC
 A problem: Allowances Surplus
EU allocated permits amounted 16 billion tons for the
2013-20 period
Approximately, half the European Unions total carbon emissions
Recession has reduced industrial demand for the
permits
there is massive overcapacity in the carbon market
The surplus is 1.5 billion-2 billion tons, or about a years
emissions.
Prices had already fallen from 20 ($30) a tons in 2011
to 5 a ton in early 2013 to 7 a tons in February 2015
On October 23, 2015, the price was 8,60
 The problem is not new

The cap on emissions in (2008-2012)

was 6.5% lower than in (2005-2007)
It was considered ambitious when it was set.
However the economic crisis radically altered the picture
2009 the EU ETS has experienced a growing surplus of
allowances which has significantly weakened the price
signal.
By early 2012 the allowance surplus had reached 955 million
 A rejected proposal
European Commission proposed a plan to
take 900m tons of carbon allowances off
the market now and reintroduce them later
The European Parliament rejected the
plan by 334 votes to 315, sending the
price lower still. On April 17th it stood at
just 2.75 (see chart below).
The EU is working in a new proposal
Starting 2020
 Linking cap-and-trade systems
Linking the EU ETS with other cap-and-trade systems offers several
potential benefits
reducing the cost of cutting emissions, increasing market liquidity, making the
carbon price more stable, leveling the international playing field and
supporting global cooperation on climate change.
The number of emissions trading systems around the world is
increasing.
Australia, Japan, New Zealand and the United States, and are planned in
Canada, China, South Korea and Switzerland.
The Commission is a founding member of the International Carbon
Action Partnership (ICAP),
which brings together countries and regions that are actively pursuing the
development of carbon markets.
 Linking with other markets
The Commission and Australia announced
agreement in August 2012 on a pathway for
linking their carbon markets
A full two-way link between the two cap-and-trade systems will start no later
than 1 July 2018.
Under this arrangement, businesses will be able to use carbon units from the
Australian emissions trading scheme or the EU ETS for compliance under
either system.

Based on a mandate from the Council, the

Commission is also negotiating with Switzerland
on linking the EU ETS with the Swiss ETS.
5. Options for Controlling CO2
Emissions
 The Issue and the Options
All aspects of economic activity affect
greenhouse gas emissions and, hence,
the global climate
An effective climate change policy must
change the decision calculus for these
activities to promote
more efficient generation and use of energy
lower carbon-intensity of energy
a more carbon-lean economy.
 The issue and the options
There are several ways to accomplish this
goal
(Remember Them 4 on Externalities)
Mandate that businesses and individuals change
their technology and emissions performance
Subsidize business and individual investment in
and use of lower-emitting goods and services
Price the greenhouse gas externality according to
the harm that such emissions impose on society
Imposing taxes
Creating a new market
 The question for economists is
Why the UNFCCC mainly agreed on
markets mechanisms for dealing with
climate change?
The answer may be
Market mechanisms are superior from the
efficiency point of view than mandatory
technologies
Carbon markets are not superior to carbon taxes
Carbon markets are more palatable for the
incumbent industries
 The Mandatory Approach
Mandatory technology and performance
standards may have been effective in
achieving goals
Tend to lead to non-cost-effective outcomes
Do not provide dynamic incentives
Once a performance standard is reach , it has little
incentive to develop or adopt cleaner technology
Indeed, regulated firms may fear that if they adopt
a superior technology, the government may tighten
the standard
 The Mandatory Approach
It is difficult that a standards based
approach be the core of climate change
policies
Hard regulation will be needed across the economy
Given the ubiquitous nature of green- house gas
emissions from diverse sources
The higher cost of a standards-based
policy may undermine political support
Securing political support may require weakening
standards and lowering environmental benefits
 Subsidies approach
Providing subsidies for targeting green
technologies entails revenues
Raised by taxing other economic activities or
reducing spending
On present or in future generations
Given the tight fiscal environment
throughout the developed world
It is difficult to justify increasing (or even continuing)
the subsidies necessary to change significantly the
emissions intensity of economic activity
 Market approach
Experience shows the power of prices to
drive changes in the investment and use of
emission-intensive technologies
The run- up in gasoline prices in 2008 increased
consumer demand for more fuel-efficient new cars
and trucks, while also reducing vehicle miles
travelled by the existing fleet
Utilities answer to the decline in gas prices (decline
in relative gas-coal price) in 2009 and 2010 by
dispatching more electricity from gas plants
Resulting in lower CO2 emissions and the lowest
share of U.S power generation by coal in the last
four decades
 Market approach
Market-based policies can support cost-
effective attainment of policy goals
A carbon tax and cap and trade system establish a common
price for emitting a ton of CO2
The private sector has the flexibility to identify and exploit the
least costly ways of reducing emissions

This approach is superior to command-

and-control regulatory mandates
It result in lower costs per ton of CO2 abated than a clean energy
standard
it does not provide a comparable incentive for efficiency and
conservation.
 Cap and trade versus taxes
In a world without uncertainty, a carbon tax
and a cap-and-trade program could be
designed to yield an identical costs and
emission reductions (remember theme 4)
But the choice of policy instrument can
affect the net social benefits, given the real-
world uncertainty
Carbon trade ensure the emissions, but not
the cost while a tax ensure cost but not the
emissions
Comparison
Consumer surplus = ABP*.

Producer surplus
Taxes: OFPP
Subsidies: OFBP* + BGHF
Quotas: OFBP*,
New Markets : OFPP

Government expenditure
Taxes: = P*BFPP
Subsides: BGHF
Quotas =0
New Market: P*BFPP
(If government sell the rights)
 Cap and Trade versus taxes
The government must implement a climate policy with uncertainty
about the cost of emission mitigation
If mitigation costs are higher than the government expected, then
fewer emission reductions than expected when implementing
a carbon tax
Firms incur in higher costs than expected when the
government implemented cap and trade.
A tax would be the preferred policy instrument under uncertainty
If the foregone economic benefits from fewer emission
reductions are huge
Otherwise, cap and trade would likely maximize net social benefits
relative to a carbon tax
 Cap and Trade versus taxes
Uncertainty about the price of carbon inhibits private-sector investment
In recent years, uncertainty about the type, design, and stringency of climate policy has
adversely affected new energy and climate related technology investment.
Uncertainty about future modifications to a climate policy may also
deter investment,
For example, a future government could relax policy stringency with a lower carbon tax or
higher emission cap
Under a cap-and trade regime, a future government could wipe out the
value of an emission allowance bank (the allowances set aside and
banked for future use), increasing the stringency of the cap-and-trade
program,
While the business community would prefer cost certainty, the
environmental community favors certainty over greenhouse gas
emission levels.
6. References
 References
Aldy J and R.Stavins (2012), Using the Market to Address Climate Change:
Insights from Theory & Experience American Academy of Arts &Sciences
Andrei Marcu ( 2012) Expanding Carbon Markets through New Market-
based Mechanisms. A synthesis of discussions and submissions to the
UNFCCC Centre for European Policy Studies ( CEPS), Brussels
David G. Victor. (2006), Toward Effective International Cooperation on
Climate Change: Numbers, Interests and Institutions, Global Environmental
Politics, Vol. 6, No. 3, pp. 90-103.
David Victor and Danny Cullenward. (2007). Making Carbon Markets
Work. Scientific American. September. (extended version) Pew Center for
Global Climate Change. The European Union Emissions Trading Scheme:
Insights and Opportunities.
Nordhaus, W.D. (2007). A Review of the Stern Review on the Economics
of Climate Change Journal of Economic Literature Vol. XLV , pp. 686702
 References
Stavins R. and S. Barrett. (2002). Increasing
Participation and Compliance in International Climate
Change Agreements. International Environmental
Agreements: Politics, Law, and Economics.
Stern, Nicholas (2007). The Economics of Climate
Change: The Stern Review. Cambridge and New York:
Cambridge University Press.
Stern Review Web Page ( 2007) Background to Stern
Review on the Economics of Climate Change.
http://www.hmtreasury.gov.uk/independent_reviews/
stern_review_economics_climate_change/sternreview
_backgroundtoreview.cfm
 Web Pages
http://cait.wri.org/
http://www3.epa.gov/climatechange/ghge
missions/
http://unfccc.int/2860.php
http://www.rff.org/research/topics#Climate
%20Change