In this week’s episode, host Daniel Raimi talks with Stefano De Clara, head of secretariat at the International Carbon Action Partnership (ICAP), an international forum for governments and public authorities that have implemented (or are planning to implement) emissions trading systems (ETSs). De Clara discusses this year’s status report from ICAP, which provides the latest updates on global ETSs; the role of ETSs in the carbon market; how ETSs are being implemented with increasingly ambitious emissions reduction policies; specific ETSs in China, the European Union, and California; the potential for integrating negative emissions (carbon removal) into ETSs; and more.
Listen to the Podcast
- Status Report on Emissions Trading Systems: “2021 was a very important year for emissions trading systems (ETSs) … Just to give you a quick overview of the numbers that come out of this year’s report: As of today, we have 25 systems in operation globally at all levels of government, and 22 more systems are either under development or under consideration. The 25 systems in operation cover one-third of the global population and 70 percent of global greenhouse gas emissions. The jurisdictions that operate ETSs today account for 55 percent of the global GDP.” (5:27)
- Role of Emissions Trading Systems in Net-Zero Commitments: “ETSs are increasingly becoming a key tool to reach net-zero commitments and long-term commitments that governments have formalized at COP26. Over one-third of the emissions captured by net-zero commitments globally are covered by an ETS, which really tells you that these policy tools are positioning to become a key contributor to the net-zero challenge.” (7:25)
- Emissions Trading Systems as Signal for Investors: “Halfway through last year, in July 2021, the European Union released the biggest reform package for climate policy in its history that comprises a lot of different elements, including a strengthened European Union ETS. That really gave a signal to regulative entities and to investors in the system about the seriousness that the European Union has in raising the ambition of its ETS. That is the sort of signal that then determines an increase in price, because people know that the system will only become more and more stringent and ambitious over time, delivering increased abatement over time.” (16:28)
The Full Transcript
Daniel Raimi: Hello, and welcome to Resources Radio, a weekly podcast from Resources for the Future. I'm your host, Daniel Raimi. Today, we talk with Stefano De Clara, head of secretariat at the International Carbon Action Partnership, or ICAP. ICAP is an international forum for governments and public authorities that have implemented, or are planning to implement emissions trading systems, or ETSs. This is the third year in a row that we are featuring their annual status report on carbon markets around the world.
As Stefano will tell us, it's been a bullish year for carbon markets in China, Europe, California, and elsewhere. The combination of economic recovery after COVID and increasing ambition of policymakers has led to a considerable increase in market prices. We'll talk about those developments and more in today's episode. Stay with us.
All right, Stefano De Clara from the International Carbon Action Partnership, welcome to Resources Radio.
Stefano De Clara: Hi, and thank you for having me here. It's a pleasure.
Daniel Raimi: It's our pleasure. It's our third year in a row where we are featuring your organization's annual Emissions Trading Worldwide Status Report, we're going to talk about what's been happening in carbon markets around the world.
But first, we all always ask our guests how they got interested in working on environmental issues, either at a young age or later in life. So, what drew you into this career?
Stefano De Clara: Well, I think it's fair to say that we are unfortunately living at a time when climate change is one of the most difficult challenges facing mankind right now. But at the same time, we are luckily living at a time when there is widespread consciousness about the issue. I personally was lucky enough to grow up in a generation where the consciousness and the perception about this problem has always—at least for the vast majority of the people living in my generation—been taken for granted from the outset. I was born in the late '80s, and I think it's fair to say that my generation was the first one that grew up with a full consciousness of the climate change issue and of the challenge facing humanity arising from this issue.
Just to give you a quick anecdote, one of the first memories that I have from primary school (I think I was seven or eight, probably six or seven years old then) was taking part in a contest to design some sort of painting that would go on a trash can for recycling. As silly as that seems, it makes you realize that we are, or I belong to a generation that grew up with a good degree of environmental and climate consciousness. That was also reflected in the opportunities that we had around us. For example, I did undergrad in environmental science and a master’s in sustainable development with a focus on the energy and resources systems. Those are two programs that likely did not exist until a few years earlier and that now are standard in most universities. So, I was lucky enough to grow up in a context that gave me the opportunity to get into environmental issues from the get-go.
Daniel Raimi: Yeah, that's really interesting. And where did you grow up?
Stefano De Clara: I grew up in northeastern Italy, so a pretty rural area, far from the usual touristic circles, but again, a really nice region to grow up in.
Daniel Raimi: Yeah. Oh, that's lovely. I would love to visit there sometime. I've actually never been to Italy, so that's got to be part of my agenda in the future, I hope.
But let's talk now about the status report itself. We're going to focus our conversation on China and Europe today, but I'm hoping you can start us off by just giving us some high-level data points about how widespread emissions trading is currently around the world and whether these programs are generally expanding or contracting.
Stefano De Clara: Yeah. Happy to do that. It's always fascinating to look at what comes out from the status report that we release every year. Just for context, that is a report that we release every year around this time, so around late March, early April, that looks at the state of play for emissions trading systems worldwide. Often, as we start to work on the report, we can anticipate what the key trends will be in a particular year, or what we learn as part of that process. But we never know what the full picture will look like until we get to the end of the process.
As you might imagine, 2021 was a very important year for emissions trading systems. It was, overall, clearly a year of consolidation for existing systems as they emerged from the COVID pandemic and from the COVID-induced shocks, and as more and more countries consolidated those systems as a way to align them with their long-term commitments.
Just to give you a quick overview of the numbers that come out from this year's report, we do have now, as of today, 25 systems in operation globally at all levels of government, and 22 more systems are either under development or under consideration. The 25 systems in operation cover one-third of the global population and 70 percent of the global greenhouse gas emissions. The jurisdictions that operate emissions trading systems today account for 55 percent of the global GDP.
Again, coming out from the COVID pandemic, and as part of the alignment process with the long-term targets, prices have been increasing in all systems over the course of 2021. As a consequence, the revenues that the system generated have also increased significantly, bringing the cumulative total of auctioning revenues to more than 160 billion US dollars globally, which is more than a 50 percent increase compared to last year.
As a last consideration: ETSs are increasingly becoming a key tool to reach net zero commitments and long-term commitments that governments have formalized at COP26. Over one third of the emissions captured by net zero commitments globally are covered by an emissions trading system. So that really tells you that these policy tools are positioning to become a key contributor to the net zero challenge.
Daniel Raimi: Yeah, absolutely. I would just point listeners to the report itself. There's a wonderful series of infographics starting on page 32 in the report, which of course we'll have a link to in the show notes, and you can get some of those stats, like 17 percent of global greenhouse gas emissions covered and trends over time and prices and geographies; it's really, really nicely done.
But let's talk now about China, which is now the home of the world's largest emissions trading program. Can you give us a quick overview of the program? And, as you mentioned, how it fits into China's larger goal—its nationally determined contribution of aiming for net-zero emissions by 2060?
Stefano De Clara: Yeah. China is a fascinating example to look at. First of all, the Chinese national ETS started to have trading in the system in 2021, and that was a major development for the year. That is really the completion of an almost 10-year journey that started all the way in 2013 when China launched regional pilot systems that were aimed at understanding how emissions trading systems could work in different contexts and in different provinces in China.
Based on that experience, all the way back in 2017, China started the journey to design, develop, and launch a system that would operate at the national level. This is really what came to fruition in 2021, when the national ETS was first launched, and then it started to operate. As you might imagine, just the sheer size of the Chinese economy will clearly indicate the relevance of that system.
China has a target to peak emissions by 2030 and to achieve carbon neutrality by 2060, and the ETS will be a key component to achieve that target. So far, it only covers the power sector, and additional sectors will be phased in over time. But just by covering the power sector in China, it is the largest emissions trading system in the world. It covers more than 2,000 power companies across all of China, for a total coverage of 4.5 billion tons. To give you perspective, that is more than twice as much as the EU ETS, which is the second-largest system and was, for a long time, the largest system in operation. As I said, more sectors are expected to be phased in over time, and already in the near future, this sector will likely be aluminum, cement, steel—and other sectors, such as petrochemical or paper will also be phased in over time.
Now that the system is up and running, China will start to consider the long-term emissions trajectory all the way to 2060 and to understand how the system will fit into this trajectory. Up until now, the Chinese ETS has been an intensity-based system, so it doesn't work on the basis of an absolute cap such as the European Union or the California one. So, as part of the alignment process with the long-term target, it might also move to adopting an absolute cap over time.
Daniel Raimi: That's really interesting. Just one other data point to help listeners get a sense of the scale of this market, you mentioned that it was on the order of 4.5 gigatons of CO2 per year. Total emissions across the entire economy in the United States are on the order of 5 gigatons of CO2 per year. So, almost as large as all of the emissions from the United States, from carbon dioxide.
That's a great overview of China's program. Can you talk a little bit about prices that we've been seeing recently in the Chinese market and whether you have any expectations about future prices—whether they are likely to rise or stay consistent? What do you think about that?
Stefano De Clara: Yeah, and that's always an interesting dimension to look at, because eventually, emissions trading systems are meant to generate a price on CO2. So far, and for the few months in which we had trading in the Chinese ETS, prices were in line with the prices observed in the different pilot systems at the regional level in China. That is just below 10 US dollars a ton, I think. They're fluctuating between six and eight US dollars over the last few months, which is more or less roughly the level at which pilot systems in China trade.
That is obviously not surprising—all systems tend to start from relatively low carbon prices as they get up and running and as they get the other system in order. Then prices tend to rise over time as the other system is also tightened over time. Looking at future price evolution, a lot will depend on what the future design choices for the Chinese market will be; namely, how the cap setting will work in the future, how stringent allocation will be, and obviously how and when it'll be expanded to new sectors over time.
Daniel Raimi: That'll be really interesting to watch. We could talk about the Chinese market for a long time, but we're going to switch geographies now and move over to Europe, where emissions trading has been going on for more than 15 years in the EU Emissions Trading System, or ETS. Carbon prices in Europe in the last year have really increased dramatically. They've reached all time highs, both for the European Union and in the United Kingdom's now separate but related carbon market. Can you help us understand some of the dynamics behind those price increases and what it might tell us about the future of those trading systems?
Stefano De Clara: Yeah, and that is one of the most interesting developments that we saw over the course of last year. We did reach all-time highs in the past few months in the EU ETS, but that is a journey that started a few years back. If you look at price evolution in the EU ETS, prices have started to steadily rise all the way back around mid-2018. I think the reason for that is quite simple: prices rose steadily over time, up until the recent all-time highs on the back of expectations of more stringency and more ambition in the system.
Back in mid-2018, in Europe, everyone expected the market stability reserve to start operating, which was a mechanism that was meant to tighten the supply level in the system. After that, prices continued to rise as the discussion on the long-term target for Europe (the 2050 goal, and on increasing the 2030 target) started to take place.
Halfway through last year, in July 2021, the European Union released the biggest reform package for climate policy in its history that comprises a lot of different elements, including a strengthened EU ETS. That really gave a signal to regulative entities and to investors in the system about the seriousness that the European Union has in raising the ambition of its ETS. That is the sort of signal that then determines an increase in price, because people know that the system will only become more and more stringent over time and more and more ambitious over time, delivering increased abatement over time. Prices are expected to increase in the future, and that is the trend that we've been observing.
Daniel Raimi: That's really interesting. Just to give people another couple of data points here, most of the 2010s prices in the EU ETS were on the order of $10 per ton, or lower in some years. But in 2018, as you mentioned, we saw an increase up to maybe $25 or $30 a ton. By 2020, we were above $30 a ton. And by the end of 2021, we were up to $90 per ton. So, really rapid growth in those prices, which of course signals something good—which is increased ambition.
One of the really interesting parts of the report for me was the discussion of the expansion of the EU program into maritime transport, or ocean-based transport, primarily. Can you tell us why that's a significant development for Europe, and how it might inform other countries as they look to cover emissions from the transportation sector more comprehensively—not just for cars and trucks and on-road vehicles, but increasingly for international and seaborne transport?
Stefano De Clara: Yeah. As you point out, ETS expansion to cover new sectors is a key trend that we are observing right now. That means moving away from the traditional sectors that are usually covered by an ETS (power and industry) into covering an additional set of sectors. There's a need for that, because as climate commitments become more ambitious and more stringent, all sectors willing to contribute to the decarbonization challenge—and doing so through the extension of an ETS price signal—has obvious benefits in exposing more and more parts of your economy to the same price signal that can drive decarbonization.
The European Union, as part of the July 2021 package that I referred to earlier, actually has two different proposals to expand the reach of the ETS to new sectors. You have the maritime transport sector proposal that you mentioned, that is aimed at bringing the maritime transport sector into the existing EU ETS. And then there's a different proposal that aims at setting up a separate, new ETS for fuels used in transport and buildings. Those are two different approaches to bring more sectors and additional sectors into the carbon pricing coverage and the carbon price generated by an emissions trading system.
In both examples, there are a lot of learnings that can be made as more and more jurisdictions are also looking at expanding their ETS. That is important, because as we move down the decarbonization curve, and as we take on more ambitious commitments, it's important to find the ways and cost-efficient ways to decarbonize different sectors across the board.
Daniel Raimi: One of the key components in most of the energy system models that we see out there, whether it's from IPCC or other organizations and other modeling teams, is the inclusion of carbon dioxide removal. Along with reducing emissions, we're increasingly seeing the need to have negative emissions in the system, whether that's nature-based technology such as forestry, or technology based, like direct air capture or biomass energy with carbon capture and sequestration. It seems like those are going to play a very important role in achieving a lot of these net-zero emissions targets.
Setting aside the question of whether or not that's good or bad (it's controversial in some sectors)—but setting aside that question, can you help us understand how carbon markets are looking to incorporate negative emissions into their systems, and how mechanically they're being audited and accounted for to make sure that they are real negative emissions and not what sometimes people call “hot air”?
Stefano De Clara: Integrating removals into an emissions trading system will be the challenge of tomorrow, so to speak, for emissions trading systems. So far, emissions trading systems have been designed as tools to reduce emissions, and they've been doing that quite effectively and efficiently. But understanding how a system to reduce emissions can interact with the technologies and methods to remove emissions is a different question altogether.
We do have a few examples out there of systems that already do that in terms of systems that either include forestry in the system coverage, such as the New Zealand ETS—or allow offset methodologies that have removal methods included in the project types, such as the California ETS—but doing that at a large scale is a different question.
There will be challenges related to, as you pointed out, the accounting for it and the integrity of the removal units. There will be challenges related to the economics of how this can actually work, for how high the prices that we observed in some systems lately can be. There is still a big differential between the allowance price in the systems today and the price needed to make at least technology removal profitable. So, there will be questions on how you actually bridge that price differential in the short term.
And then there's a more fundamental question that will need to be addressed over time related to the extent to which you want to achieve a balance between reductions in the system and removals that might come in the system. That has to do with how net-zero targets are formulated. It is related to the extent to which you want to reduce emissions to a certain level before you balance them with removals and how that balance might also evolve over time.
It is a fascinating topic. There are a lot of questions that have to be resolved, both from a technical point of view and from a more theoretical and philosophical point of view. I would expect this kind of discussion to become more and more predominant and take the center stage in more and more jurisdictions in the coming years.
Daniel Raimi: That's so interesting. I totally agree with you: It's just a fascinating set of questions, and the technical and moral issues around them are deep and complex. It's going to be a really interesting issue to watch over the years.
You mentioned California just a minute ago. We only have a couple minutes left, but I'd love to ask you to give us a quick summary of what's been happening in California this year—whether it has to do with prices or market development or changes in rules or procedures. Can you give us a quick update on California?
Stefano De Clara: Yeah, more than happy to. Again, California is one of those jurisdictions where we got really interesting stories in the last few months. California is a fascinating example of how a system—an emissions trading system—can operate at the subnational level and how it can actually drive decarbonization at the subnational level. It does offer interesting insights from that point of view, even more so as it is a subnational system that is linked internationally to another subnational system in Canada (the Quebec ETS).
In terms of what we've been observing over the last few months, California (in line with almost all other systems around the world) has seen an increase in the allowance price, again, on the back of the post-COVID recovery and on the back of ambitious, long-, and medium-term targets that have been adopted over time.
A really interesting story and lessons learned and case study that California offers is related to the way in which auctioning revenues are actually reinvested in the system. This is really, really important right now at a time of high energy prices that might impose an extra burden on the most vulnerable parts of the population. California has a really interesting system to reinvest and redirect the auctionary revenues to support disadvantaged communities. It has been doing that really effectively over the last few years, and especially over the course of the last 12 months. It is an interesting model to look at for almost all systems, as almost all jurisdictions are grappling right now with high energy prices that might impact consumers as well as the other businesses covered by the system.
Daniel Raimi: The use of these revenues is such an important element of program design, and it's really interesting to see how different jurisdictions are approaching it in different ways.
Well, Stefano De Clara, this has been so fascinating. I know we could talk about this stuff for hours, but we really appreciate you coming on and summarizing some of the key findings from this year's status report. It's been a fascinating conversation.
We'd love to close it out now with the same question that we ask all of our guests, which is to recommend something that you've read or watched or heard that you think is really interesting and that you'd recommend to our listeners. So, what's at the top of your literal or metaphorical reading stack?
Stefano De Clara: It is quite literal. It's a consistent stack that never gets slimmer over time, unfortunately. But this is actually a book that came back to the stack, because I read it, I think, back in high school or during university. And it's not necessarily a happy read. It's a book called Collapse by Jared Diamond. It's a book that looks at how different civilizations in the past went from a phase of prosperity to the collapse of the given civilization, and the book really analyzes the reasons why that happened.
It's fascinating—or, I mean, fascinating or worrying—to see to what extent those examples can relate to today's reality. Like, in a few examples, civilizations came to a collapse because they used the natural resources beyond what was sustainable. In other times, they came to a collapse as a result of local instances of climate change that caused threats that couldn't be overcome. It's always interesting to look at these examples and hopefully find a way to learn from what happened in the past.
Daniel Raimi: Absolutely. I haven't read that book in a long time, either, but I do remember some of its lessons and certainly worrying examples. But the work that you and your colleagues do at ICAP certainly gives us one of the tools that we need to reduce the risk of collapse in our society, which hopefully won't be coming anytime soon.
Well, one more time, Stefano De Clara from the International Climate Action Partnership, thank you so much for coming on Resources Radio today. We've really enjoyed the conversation.
Stefano De Clara: Yeah. Thank you for having me, and I look forward to the next time we'll talk.
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Resources Radio is a podcast from Resources for the Future (RFF). RFF is an independent, nonprofit research institution in Washington, DC. Our mission is to improve environmental, energy, and natural resource decisions through impartial economic research and policy engagement.
The views expressed on this podcast are solely those of the podcast guests and may differ from those of RFF experts, its officers, or its directors. RFF does not take positions on specific legislative proposals. Resources Radio is produced by Elizabeth Wason, with music by me, Daniel Raimi. Join us next week for another episode.