Carbon Market:

Policies, Opportunities & Challenges

Dr Dina Wahyuni, M.Bus.Acc, Ak.

Fakultas Ekonomi dan Bisnis, Universitas Jember
Swinburne Business School, Swinburne University of Technology

@carbonvestment

Institut Teknologi Sepuluh Nopember, Surabaya, 18 Nov 2016

CRICOS 00111D TOID 3059
 About me
• Dr Dina Wahyuni
– Sarjana (Akuntansi) from Universitas Jember
– Akuntan (Ak.) from Universitas Brawijaya, Malang
– Master of Business (Accounting) from Monash University,
Melbourne
– PhD from University of South Australia, Adelaide, Australia
– Twitter: @carbonvestment
– Email: dwahyuni@swin.edu.au
– Linkedin : https://au.linkedin.com/pub/dina-
wahyuni/28/764/3a9
– Now: Lecturer in Accounting, School of Business, Swinburne
University of Technology
 1.
Introduction: Carbon Budget

3
 Introduction

WRI.ORG
 The brutal arithmetic: World’s carbon budget to be
spent in three decades

Sources WRI
Top 10 Emitters
 Top Emitters

Cumulative emissions: the time period from 1850 to 2011,

during which data only on CO2 emissions are continuously
available.

The five major emitters—the United States, European

Union, China, Russian Federation, and Japan— together
contributed two-thirds of the world’s historic CO2 emissions
- using up around 37 percent of our global carbon budget.
 2.
Carbon Market:
Policies

8
 Global Climate Policies
Three most influential global policies:

1. The United Nations Framework Convention on Climate

Change UNFCCC (signed in 1992, came into effect in 1994)

2. The Kyoto Protocol (signed in 1997, came into effect in

2005)

3. Paris Agreement (signed in 2015, came into effect on 4 Nov

2016)
 Global Climate Policies

1. The United Nations Framework Convention on

Climate Change UNFCCC (signed in 1992, came into effect in
1994)
– Strategies to combat climate change:
• Adaptation: adjustments to take account of the impact of climate
change
• Mitigation: cutting the emissions level
– Annual meeting > Conference of the Parties (COP) since 1995
– COP 22: Marrakech, 7 – 18 Nov 2016, 196 countries, hundreds of
NGOs & 40,000 representatives of civil society
 Global Climate Policies
2. The Kyoto Protocol (signed in 1997, came into effect in 2005)
– Aim : to cut greenhouse gases (GHGs) emissions back to 1990
level
– The Principle of ‘common but differentiated responsibilities’
• different emission reduction targets for developed countries
• no emissions reduction target for developing countries
– No mandatory policy framework to be applied for reducing
emissions
• International (cross country) Market mechanisms
1. Joint Implementation
– Between developed countries
2. Clean Development Mechanism (CDM)
– Between developed and developing countries
3. Emissions Trading Scheme (ETS) aka. carbon trading
– To trade carbon permits
Joint Implementation: Article 6

ERUs

Annex I countries Annex I countries

Investment

ERUs removed from the Implement projects or carbon

national budget sequestration

Project based mechanism

Clean Development Mechanism: Article 12
CERs

Developing countries Developed countries

Resources
Low cost of emission High cost of domestic
reduction emission reduction
Guiding principles
Achieve SD, TT, Meet ER targets in a
Investment cost effective way

Project based mechanism

Emissions Trading: Article 17
Allowances

Annex I countries Annex I countries

Allowances
Allowances allocated
by Annex I Govts. to
Emission Intensive
Industries
Allowances allocated
by Annex I Govts. to
Emission Intensive
Industries

Within an Annex I country and between Annex I countries

Allowance based mechanism

 Carbon Credits
• Emissions trading (among Annex I countries)
– Assigned Amount Units (AAUs)

• Joint Implementation (between Annex I

countries)
– Emission Reduction Units (ERUs)

• Clean Development Mechanism – CDM

(between Annex 1 and non-Annex 1 countries)
– Certified Emission Reductions (CERs)
 Global Climate Policies
Three most influential global policies:
3. Paris Agreement (signed in 2015, came into effect on 4 Nov 2016)
– An international climate agreement under the UNFCCC adopted by 196
countries in 2015 during COP21 Paris.
– Long Term Goals:
• Limiting global temperature rise to well below 2 degrees C (3.6
degrees F),
• Pursuing efforts to limit it to 1.5 degrees C (2.7 degrees F)
above pre-industrial levels
• Achieving net-zero emissions (where GHGs emissions do not
exceed the world’s carbon sinks can absorbed) in the second
half of this century
– All Parties to the Paris Agreement have agreed to take actions in their own
countries to collectively achieve these long-term goals.
 The 2015 Paris Agreement

WRI.ORG
 The 2015 Paris Agreement

• Articles 6.2–6.3 of the Paris Agreement cover cooperative

approaches where Parties could opt to meet their Nationally
Determined Contributions (NDCs) by using internationally
transferred mitigation outcomes (ITMOs).
• ITMOs aim to provide a basis for facilitating international
recognition of cross-border applications of subnational,
national, regional and international carbon pricing initiatives.

> The potential to build a new international carbon market

 Extant Climate Mitigation Policies

Explicit carbon prices Regulatory instruments

• ETS – cap & trade • Renewable energy target
• ETS – baseline & credit • Renewable energy certificate scheme
• ETS – voluntary • Electricity supply or pricing regulation
• Carbon tax • Technology standard
Subsidies and (other) taxes • Energy efficiency regulation
• capital subsidy • Mandatory assessment, audit or investment
• feed-in tariff • Synthetic greenhouse gas regulation
• tax rebate or credit • Urban or transport planning regulation
• tax exemption • Other regulation
• preferential, low-interest or guaranteed loan Support for Research & Development
• other subsidy or grant • R&D – general & demonstration
• fuel or resource tax • R&D – deployment & diffusion
• other tax
Direct government expenditure Other
• Government procurement – general • Information provision or benchmarking
• Government procurement – carbon offsets • Labelling scheme
• Government investment – infrastructure • Advertising or educational scheme
• Government investment – environment • Broad target or intergovernmental work
• Voluntary agreement
Extant Climate Mitigation Policies

• Cost effectiveness?
– A wide variety of estimated cost per
unit for emissions reduction
- differ between program in each
country and across countries
– Policies for small scale renewable
generation have required high costs
but delivered little abatement
– ETSs were relatively more cost
effective amongst all
 3.
Carbon Market: An Overview

21
Marketplace for carbon exchange
• Worldwide standard unit of measurement
• The currency for trading carbon emissions is a carbon credit.
• A carbon credit is a generic term for any tradable certificate or
permit representing the right to emit one tonne of carbon dioxide
or carbon dioxide equivalent (CO2e).
• Bought, sold, traded, and hedged as other global commodities.
• Considered “retired” or “cancelled” if used to cover emissions
 Carbon Currency
Carbon Pricing : putting a price tag on carbon pollution

The right to pollute:

Carbon Credits (offsets) = Carbon Allowances (permits)

Carbon Trading = Emissions Trading Scheme (ETS) = trading the

right to pollute
 Carbon Currency - examples
For Kyoto compliance (international)

Allowances Credits
CER Generated via
Certified Emissions CDM projects in
AAU For international Reduction developing
Assigned emissions trading countries
Amount Unit ERU Generated via JI
Emissions projects in
Reduction Unit developed
countries
 Carbon Currency - examples
Non-Kyoto units (regional/national)

Allowances Credits
EUA For European CRT US offset units
European Union Union Emissions Climate Registry developed under
Allowance Trading Scheme Tonne Climate Action
(EU ETS) Registry Standard
NZU For New Zealand CFI Specifically for
New Zealand Unit ETS Carbon Financial Chicago Climate
Instrument Exchange (CCX),
disbanded in 2010
RGGI For Regional RGGI offsets Generated from
Allowances Greenhouse Gas projects in RGGI
Initiative (RGGI) states
 Carbon Currency - examples
Non-Kyoto (international)

Allowances Credits
VCU Generated from
Voluntary projects using
Carbon Unit Voluntary Carbon
none Standard (VCS)
methodologies
Gold Standard VER Generated from
Voluntary projects using Gold
Emissions Standard
Reduction methodologies
How Emission Trading works?
Emissions limit
after trading
(60tCO2)
Carbon dioxide/ GHG emissions

Units bought +10

Emissions limit
before trading
-10 Units sold (50tCO2)

Emissions limit after

trading (40tCO2)

50 50

Company 1 Company 2

Source: UK Emission Trading Group

Carbon Price
in Numbers

Source: Worldbank 2016

Map of
Carbon
Pricing
Initiatives

On a regional,
national and
subnational level,
about
40 national
jurisdictions and over
20 cities, states, and
regions are putting a
price on carbon in
2016

Source: World Bank 2016

Carbon
Prices on
1 Aug
2016

Source: World Bank 2016

Different Types of Global Carbon Market
• Compliance schemes: Regulated emissions trading schemes
(ETS) – also called cap-and-trade systems
• European Union ETS
• Kyoto compliance: International ETS
1. CP 1 (the 1st commitment of Kyoto Protocol): ended on
Nov 18, 2015
2. CP 2: 2013-2020
• Voluntary schemes – beyond formal regulation
• The calculation and the certification of the emission
reduction are implemented in accordance with a number of
industry created standards
What is the voluntary market
• The seller undertakes actions that will result in less greenhouse gas
being emitted to the atmosphere.
• The vendor quantifies and verifies the amount of CO2 equivalents to
be saved. Verification is often by a third party
• The buyer purchases the CO2 equivalents, usually to offset
emissions and become carbon neutral
• All players act voluntarily, but the final contract is usually binding
Voluntary Market: Transacted Volume & Price in 2015

Source: Worldbank 2016

 4.
Carbon Market:
Opportunities

34
 Business Perspective

2 options to manage emissions liability:

 Reduce carbon footprint
 Acquire adequate emissions permits at the lowest price
Another illustration for ETS

Company A can reduce 1000 Company B can reduce 1000

tons CO2e at $2/ton = $2000 tons CO2e at $6/ton = $6000

SELL BUY

1000 tons CO2e at $4/ton = $4000

$2000 Profit $2000 Savings

Company A - Seller
Company B - Buyer
Source: UK Emission Trading Group
The Way of Emission Trading

Make or Buy decision

Carbon market Developing countries

Company

CO2 €
Carbon Credit
€

Invest in
energy
efficiency
Fuel switching
Modification of Emission Sustainable
operation procedure trading Development

Source: UK Emission Trading Group

 3.
Carbon Market:
Challenges

39
 Challenges
1. Lack of policy integration
aligning carbon pricing with the broader policy landscape
2. Lack of capacity and resources:
There are stringent procedures and methodologies involved > usually
require engaging professional consultants.
3. Lack of business case:
Long term policy certainty for businesses and investors is needed
4. Lack of access to investment
Policies can overcome market barriers to facilitate investment and
innovation
5. Lack of implementation support
Provision of affordable green technologies
Summary
Carbon pricing in the forms of
international carbon market
(under Article 6 of the 2015 Paris
Agreement)
can be the corner stone of long-run
global climate policies

41
Resolution

twitter @carbonvestment