As world leaders prepare to attend next week's signing ceremony of the Paris Agreement, how are the 90 countries that mentioned carbon markets in their commitments initiating the conversation on trading? What are the key barriers to setting up markets or trading "clubs"? During today's OnPoint, Dirk Forrister, president and CEO of the International Emissions Trading Association, discusses a new joint paper with the Environmental Defense Fund that analyzes the role markets could play in helping countries go beyond their minimum targets.
Monica Trauzzi: Hello and welcome to OnPoint. I'm Monica Trauzzi. With me today is Dirk Forrister, president and CEO of the International Emissions Trading Association. Dirk, thanks for coming back on the show. It's nice to see you.
Dirk Forrister: Thanks Monica. Good to be here.
Monica Trauzzi: Dirk, IETA this week is releasing a new report, "Carbon Pricing: The Paris Agreement's Key Ingredient." It's a joint paper with the Environmental Defense Fund. Carbon pricing is a topic of much discussion both here in the U.S. and abroad. Why do you consider it such a crucial element to the Paris agreement?
Dirk Forrister: Well, one of the things that it does is brings countries together so that hopefully they can accomplish more by being joined together in a market-based approach that has improved efficiencies so that actually has a feature of enhancing the ambition. It makes the climate issue more affordable in the end so that countries can do more.
I think that's why we have a whole set of world leaders coming here to Washington this week for meetings at the World Bank under the banner of carbon pricing leadership to talk about how to take these things forward. It's that ambition piece.
Monica Trauzzi: Explain how INDCs could become the base level of ambitions for countries to reduce emissions post-Paris.
Dirk Forrister: Well, I think most countries went in with their initial offer and potential for strengthening it. One of the interesting things about a lot of the INDCs is that on their face they actually offer more. Many from the developing world. Mexico would be an example where it says well, if it's inside our own borders and we're doing it ourselves, we'll cut our emissions from business as usual down by 22 percent, but if we have access to international market, we could take that up to as much as 40 percent.
So the base level is I think for most of them what they think they could actually accomplish. It's a very realistic thing, but a number of them offer this extra push that they could offer.
Monica Trauzzi: Is the Paris Agreement though only successful if countries go beyond those minimum targets?
Dirk Forrister: Well, when you look at what it says it wants to accomplish in terms of the temperature goal of 2 degrees and best efforts toward 1 ½ degrees, well the INDCs, the base level don't add up to enough to give you that. I think the best estimates are it's more like 3 degrees; maybe a little better than that.
So you need countries to be inspired to do more and to have the tools to be able to do more. So that's why I think this market piece is so important is it could unleash that greater ambition.
Monica Trauzzi: There's a group of countries who specifically highlighted carbon markets in their INDCs as a way to achieve those additional reductions. What are the barriers that currently exist to making that happen?
Dirk Forrister: Well, I think in some cases they have technical capability and do they have the governance in place to be able to pull it off. That's one of the really encouraging things I think about the efforts that the World Bank has made in its partnership for market readiness. It's been giving that technical assistance to countries.
I think the next thing is political lift. So this week's meetings are with CEOs and ministers talking about how they can collaborate to give more political oomph behind it in a lot of these places so that you could get good, stable regimes in place.
I think the business buy-in is really, really important in many of these countries. I think businesses get it that it's in their own interest to start to address this problem sooner rather than later. So I think that's a new force that's coming in after the Paris Agreement to say OK, we want to be a willing partner in this rather than an opponent. That could make a big difference.
Monica Trauzzi: If carbon markets are such a vital tool, though, why have only half of the countries who submitted INDCs mentioned markets in their INDCs?
Dirk Forrister: Well, I don't expect every country would use a carbon market. Some of them are small enough that it may not make sense for them.
One of the other interesting things is that the biggest jurisdictions that you would have expect to have mentioned it actually don't mention it much. By that I mean the European Union's target, which is dependent on domestic emissions trading within the E.U. It didn't condition its commitment on getting carbon market. It already has one.
So it's not Canada in the 90 nor is China because China's INDC mentions interests in using domestic emissions trading, but it doesn't talk about the international linkages that it might want to do in the future, but it didn't make that part of its INDC.
Then finally the United States didn't. The United States is a domestic commitment. So those are the three biggest jurisdictions. When you think about it, those are jurisdictions that have wide sets of opportunities to reduce emission, broad geographic scope. In some sense is this ability to link to markets matters more to the smaller ones, like New Zealand or Switzerland or Norway or Canada or Mexico or Morocco. All of those do mention it.
So I think it'll be key to bring a lot of those forward, and I also think that the big jurisdictions will ultimately link into these markets.
Monica Trauzzi: So at what stage is the conversation between countries on creating carbon markets? Where are things now?
Dirk Forrister: Well, I think the big thing was in Paris to get the foundation laid. The next step I think is in a few discussion groups that are taking place. There was a meeting in Switzerland early this year that started the ball rolling.
The New Zealand government issued a declaration in the final hours of Paris with 18 countries that were expressing interest in working together on market design issues. The U.S. was part of that, but a number of countries across the developed and developing country divide.
So that group is just starting to have conversations about how it's going to formulate its work plan. They will probably meet in and around the midyear negotiations in Bonn.
The other group that's meeting is the G-7 where Germany put forward a G-7 platform. Again, the U.S. is part of that, obviously a part of that discussion. I think they're meeting in Japan in early May to talk about what their work plan is going to be.
So this is all now talking about operationalizing the principle that was agreed to.
Monica Trauzzi: What's a carbon market club? What would a well-designed carbon market achieve for the countries involved?
Dirk Forrister: Well, so we don't exactly know what the club will be. In theory it's the concept where a group of countries that have a common view about how a market should be established could come together, set up their domestic systems in a way that they could link.
Probably the best example in a way is the California-Quebec example here in North America where those two, the state and the province, run their program as a joint program even though it crosses international borders. Ontario intends to join that in a couple years' time. They're working on regulations to do that.
Mexican states are also interested in possibly having a link into California. That could be a club that operates under the banner of what we used to know as the WCI.
So I still think that basic concept about jointly operating a program, having common rule sets maybe connected in a common registry, it boils down to really what's recognized for compliance in those places and are there rules harmonized enough so that they can link up. That's what a club could be.
Monica Trauzzi: So if the United States does not set up regional markets through the Clean Power Plan, say if the courts overturn the rule, how does that impact the U.S.'s ability to go beyond its baseline goals?
Dirk Forrister: Well, I think it would possibly put people at EPA back to the drawing board in a sense. It's not the only authority they have within the Clean Air Act and within energy policy arena of various tools that they could use. So I don't think the issue goes away.
I think it's more likely to be that they would be told to tweak it in a few ways because the court's been pretty consistent in saying that if EPA believes it endangers human health, they've got the authority to act on it.
So I think it would just possibly steer them in different directions under the Clean Air Act and related authorities that they have.
Monica Trauzzi: We'll end it right there on that. Thank you for coming on the show. Nice to see you again.
Dirk Forrister: Thanks Monica.
Monica Trauzzi: Thanks for watching. We'll see you back here tomorrow.
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