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Climate Change

Has Paris deal injected life into carbon market?

Stig Schjølset

10 Jun 2016

Photographer: Gonzalo Fuentes

The Paris agreement on climate change was hailed as a triumph by world leaders, but how do those in the carbon market view the accord and its impact on emissions trading?

A mood of optimism appears to have been injected into the carbon market after December’s historic Paris agreement saw 195 nations pledge to cut greenhouse gas emissions to a level that will limit the rise in global temperatures.

Download the Carbon Market Survey

Nearly half of respondents (48%) to a global survey of 908 stakeholders and opinion-formers conducted by Thomson Reuters expect that international emissions trading will expand as a result of the pact.

This figure rises to almost 70% amongst government and international organization respondents.

Paris satisfaction. Selected roles

The Carbon Market Survey, which took place in February and March 2016, backs the cap-and-trade system as the most cost-effective means of reducing emissions, with most respondents expecting it to continue as Europe’s chief climate policy instrument.

Interestingly, this optimistic appraisal of the Paris accord contrasts with actual developments following the climate summit, as prices have been falling in all major emission markets this year.

"Overall the feeling was that the Paris agreement injected new optimism into the carbon market.” Stig Schjølset, Head of Carbon Analysis at Thomson Reuters Point Carbon

Cap-and-trade

The biggest example of cap-and-trade is still the EU Emissions Trading Scheme (EU ETS). It has been in existence for more than 10 years and covers 4,000 operators of fossil power generation and heavy industry representing around 50% of Europe’s total output of CO2.

Every year compliant companies report how many tonnes of CO2 equivalents they emit and surrender a corresponding number of emission permits. They basically have two options:

  1. They can surrender a permit to cover their pollution
  2. Or become more efficient and reduce emissions organically

The overall cap — the maximum allowed level of pollution — is reduced gradually, so that the annual number of permits shrinks steadily.

Perceptions of cap-and-trade. Year-on-year.

Cost-effective choice

When asked which climate instruments they believed would be in place in their jurisdictions in 2020, 71% of respondents chose cap-and-trade, just behind green subsidies (73%) and ahead of taxes at 54% and regulations at 27%.

It would appear that cap-and-trade is still the most cost-effective way of reducing emissions, with 51% of European respondents supporting EU ETS and two-thirds expecting it to continue as Europe’s main tool in addressing climate change.

Moreover, the survey revealed continued support for emission trading as a climate policy instrument, with 69% agreeing with the statement that “cap-and-trade is the best we can agree on nationally and internationally” and a further 23% saying that it is “the best way in theory and in practice”.

In 2015, these shares were 71% and 21% respectively.

The survey further revealed that U.S. and Chinese respondents are relatively strong supporters of cap-and-trade, with nearly 40% believing that it is the best way forward. In the United Kingdom, attitudes are slightly more negative, with 16% viewing cap-and-trade as “harmful”.

"It would appear that cap-and-trade is still seen as the most cost-effective way of reducing emissions." Stig Schjølset, Head of Carbon Analysis at Thomson Reuters Point Carbon

Impact of capping

One of the main objectives of the survey was to find out whether those whose emissions are capped actually reduce their emissions and whether their competitiveness or investment decisions are affected.

Of the European compliance respondents polled, 26% reported that the EU ETS “caused reductions in the early years, but has little impact today” — up from 19% in 2015.

A further 35% reported that it “has caused and continues to cause reductions” (up from 32% last year) and 23% were of the opinion that it is “not likely to cause any reductions by 2030” (down from 29%).

Two-thirds say that carbon cost is “somewhat important” for their competitiveness. Only 16% see it as “detrimental”, a significant drop from 27% the previous year. Those reporting “little or no effect” fell from 21% to 14%.

January 2016 price drop

The survey also made it clear that carbon pricing is an important consideration when making investment decisions. One third of European compliance entities see the cost of carbon as a “decisive factor” in their investment decisions, with a further 55% reporting that it forms “part of the calculations”.

China scheme

Just under a third (31%) of emerging market respondents expect China’s Emissions Trading Scheme (ETS) to become operational as scheduled in 2017, but slightly more (33%) believe it will only actually start in 2019 or 2020.

Almost half of the China section respondents believe that some of the current pilot schemes will continue to exist in parallel with the national system, but the majority think that pilot emission allowances will be converted into new national allowance units.

South Korea respondents were cautious about the prospects for the Korean ETS after a first year of very feeble trading and concerns about insufficient allocation.

Optimistic tone

Overall, respondents seem to be relatively pleased with the Paris agreement of last December and are optimistic that international emission trading will grow as a result.

Cap-and-trade is still seen as the most cost-effective means of reducing emissions and has implications for both competitiveness and investment decision making.

Download the full survey for in-depth information and more detailed analysis.

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