A Status Report on Global Emissions Trading, with Stephanie La Hoz Theuer

Notable Quotes

• Subnational programs gain traction in North America: “At the subnational level in North America, there's also the Regional Greenhouse Gas Initiative (RGGI), and this is a system of 10 US states that covers emissions from the electricity sector, specifically … There is also an effort in the US to build a regional market for transportation emissions, called the Transportation and Climate Initiative, which could potentially include a number of the same states as RGGI. And in the meantime, there's lots of other subnational governments pushing for ETSs in North America. Nova Scotia launched a system in 2019, and we have US states like Oregon, Pennsylvania, Virginia, and Washington that are also in the works.” (10:54)
• Merits and drawbacks of pursuing solely carbon pricing policy: “Achieving emission reductions through regulatory measures is often more expensive than through carbon pricing. Now the thing is that the objective is to drive deep decarbonization, and that's very difficult to do with carbon pricing alone … There are both political and economic reasons to pursue a mix of policies for net zero emissions, instead of just carbon pricing alone.” (18:34)
• The quandary of reducing agricultural emissions: “Agriculture is indeed a challenging sector from a carbon pricing standpoint … This is partly because we're not talking about a few large companies with high emissions, but often about tens of thousands of small farms and land owners, each of them with small emissions that, in the aggregate, come to a very large sum. Now, carbon pricing can provide incentives for mitigation in those farms and can provide for flexibility in achieving targets, but it can be administratively really complex.” (23:26)

Top of the Stack

• "Emissions Trading Worldwide: Status Report 2020" by the International Carbon Action Partnership (ICAP)
• "An amateur Chinese marathon runner under coronavirus lockdown ran 31 miles in his living room to pass the time" by Business Insider
• Thinking, Fast and Slow by Daniel Kahneman
• Collapse by Jared Diamond

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. This week we talk with Stephanie La Hoz Theuer, senior project manager at the International Carbon Action Partnership, or ICAP. Each year, ICAP releases a valuable report on the status of emissions trading programs around the world, and the report is just out last week. Stephanie will give us updates on emissions trading policies from around the world, including Europe, North America, Asia, and more. We'll also talk about other policies that countries are deploying to reduce emissions, including in non-energy sectors such as agriculture. Stay with us.

Okay. Stephanie La Hoz Theuer from the International Carbon Action Partnership. Thank you so much for joining us today on Resources Radio.

Stephanie La Hoz Theuer: Thank you so much for having me.

Daniel Raimi: So Steph, we're going to talk today about an annual report that your organization, ICAP, released recently. But before we get into that, can you tell us a little bit about how you ended up working on environmental issues in the first place?

Stephanie La Hoz Theuer: Sure. In my case, it was really luck at first and then a lot of passion afterwards. I'm a production engineer. And during university, working on environmental issues was really not much of a thing in Brazil at the time. So I was completely convinced that I would spend my work days on a factory floor basically. But this was 2005 during my studies, and I was looking for an internship, and I found a position in a carbon markets consultancy, and I had no idea what this was. And this was the early days of carbon markets under the Kyoto Protocol. And I applied with the plan of staying maybe four, maybe five months, but now it's been 15 years. And I spent the first few years working on carbon credit projects. Then I worked for many years at the United Nations Climate Change Secretariat and now I work at ICAP focusing on domestic and international carbon markets.

Daniel Raimi: That's fantastic. So you started in 2005? That was the first year of the first phase of the EU ETS, right?

Stephanie La Hoz Theuer: Yes. That's right.

Daniel Raimi: So you've been with it from the beginning. That's really fantastic.

Stephanie La Hoz Theuer: From the very beginning. Yeah. Yeah. It's been quite a ride.

Daniel Raimi: Excellent. And I just used an acronym before spelling it out, which I usually try not to do. So let me just tell our audience that we're going to be using the phrase ETS quite a bit in today's conversation, and ETS means ‘emissions trading system.’ So we're going to talk about emissions trading programs around the world. That's what this annual report does from ICAP. You've just recently released the latest version of that report on ETS programs around the world. But before we get into the details of some of those ETS programs, can you tell us a little bit about ICAP and the purpose of publishing this report on an annual basis?

Stephanie La Hoz Theuer: ICAP is an intergovernmental organization that focuses on the design and implementation of ETSs, as you were saying, or cap and trade as they often go by in North America. We have 36 members and observers, and these are governments that either have an ETS in place or are actively developing one. So we do research on areas of interest, we prepare knowledge products, we hold events for members to share knowledge and experiences. And we also deliver capacity building, especially for jurisdictions that are designing their emission trading system.

Now, the status report on emissions trading worldwide is ICAP's annual look at what is happening with ETSs around the world. It gives both a global picture of aggregate trends as well as a more up-close, detailed view on each system and its latest developments. So we feature articles by ETS policymakers with insider views on each of the systems, which is really interesting. And we also provide details on all 21 systems in force and all of the other 24 systems that are still in the works. So ultimately the goal of the report is to present the status and developments in emissions trading around the world and try to act as a reference guide to everyone in the field.

Daniel Raimi: Thank you. That's really helpful background. And let me just sort of recommend this report to all of our listeners. If you're at all interested in the state of climate policy, I think this is kind of an essential document to help you understand, where emissions trading programs are being implemented, how they're designed, how they differ, how they're working, what the prices are, all that stuff. It's a really great resource.

So let's dig in now and talk for a few minutes about some of the most significant ETS programs that are either in operations or are maybe just getting started around the world. And I think it probably makes sense to start in Europe because that's where at least these large-scale programs really got going around 2005. So can you give us a brief overview of what's been happening lately in the EU ETS, including a question that I've been thinking about a lot, which is: what is the status of the UK in the context of Brexit?

Stephanie La Hoz Theuer: Yeah, so the EU ETS, or the European Union Emission Trading System, is indeed, as you were saying, the system that started operating in 2005, and it makes it the oldest and also the largest ETS today. It covers emissions from electricity, industry, and aviation in all EU member states, and this is about 45 percent of EU emissions. It's been a super important program not only as a cornerstone of European climate policy but also as a source of knowledge and experience really for all subsequent ETSs we've developed over the years. Now, 2019 was a really important year for the EU ETS for two reasons. The first one is over the last decade since basically since the 2008, 2009 financial crisis, the EU ETS had been struggling with an excess supply of allowances in the market. Which meant that regulated entities had only little incentives to reduce their emissions. In 2019 an instrument to address this issue took effect and it's called the Market Stability Reserve, and what it does is it adjusts some of the supply based on how many allowances are in the market.

Now prices have increased significantly as a result from around 10 euro in January 2018 before the Market Stability Reserve was introduced, then reformed to 25 euro a few weeks ago. Now the economy as we know is taking a big hit from the coronavirus outbreak, and carbon markets are not an exception to that. EU ETS prices have plummeted to around 15 euros last time I checked. And the hope is that the Market Stability Reserve should help steady the EU ETS in times like this. And in fact most mature ETSs have market stability mechanisms precisely for such situations.

Another important development in Europe over the last year was the operationalization of the link between the EU ETS and the Swiss ETS. And this has been in the works for a really long time and could provide a blueprint for future linkages, which indeed takes us to your question on what happens to the UK in the context of Brexit.

So the UK will eventually exit the EU ETS, but it will remain until the end of this year, until the end of 2020. They are still exploring their options on future carbon pricing and have done consultations and policy analysis for this. But they have said in a public report that the preferred option of the government is to have a national system that is linked to the EU ETS much like Switzerland is now. So now we have to see what comes out of negotiations between the EU and the UK in the next months.

Daniel Raimi: Great. That is really interesting and really helpful. And you were talking about prices, and I would just refer listeners if you're following along at home to with the report itself. Page 38 has a really nice graph of prices in a variety of emissions trading programs around the world, and you can really clearly see the increase in EU ETS prices over the last couple of years and put it in context of other programs that are out there.

So that's a sort of very brief whirlwind tour through what's happening in Europe. Let's move now to North America. And we can't travel very much by airplane today in the real world, but we'll do a virtual version of it now. Can you give us a brief update on what's happening with emissions trading programs in the US, which as our listeners will know, we're mostly talking about state level programs in the US. But there's also activity in Canada and Mexico. So can you give us a quick tour through those jurisdictions?

Stephanie La Hoz Theuer: Sure. There's really a lot happening in North America. It's a very, very interesting region, and it's also really cool to see as you were saying just now that this happens at different levels of government. So at national level, Canada has the pan-Canadian approach to pricing carbon pollution, which is not an ETS, but it mandates Canadian provinces to establish carbon pricing, which can be a carbon tax in ETS or something else with a specific minimum level of stringency. So it's really a broad framework for carbon pricing in the country.

Mexico, as you were mentioning, also just launched an ETS as a pilot in January this year and they should transition into full implementation phase in 2023. It's also really nice to see that elsewhere in Latin America there's a lot of interest as well. Colombia, for example, has a legal mandate for an ETS and is designing its system that builds on the carbon tax they already have.

So, this is at national level. If we look at subnational level, California and Quebec operate a linked system that covers more than 80 percent of their emissions, and it includes electricity, industry, and fuels for transport in buildings. California had a pretty quiet year on the policy side, but Quebec is working on reform to change how manufacturing industries receive allowances. The idea here is to reduce the number of allowances that are distributed for free, which will expose regulated companies to more costs, but at the same time devoting additional funding to those companies to help them adopt low-carbon practices.

At subnational level in North America, there's also the Regional Greenhouse Gas Initiative or RGGI, and this is a system of 10 US states that covers emissions from the electricity sector specifically. And they've been operating since 2009. RGGI adopted new market rules, which we'll see the cap being reduced more sharply in the next years and also introduces a mechanism to adjust supply in cases of low prices. There is also an effort in the US to build a regional market for transportation emissions called the Transportation and Climate Initiative, which could potentially include a number of the same states as RGGI. And in the meantime, there's lots of other subnational governments pushing for ETSs in North America. Nova Scotia launched a system in 2019 and we have US states like Oregon, Pennsylvania, Virginia, and Washington that are also in the works.

Daniel Raimi: Great, thank you Stephanie. That's a such a succinct and helpful summary of what's happening across North America. I'm kind of amazed at how nicely you just described all of that for us. It's really great. Let's do another kind of whirlwind jump across the world and head over to Asia now and ask you to give us an update about what's happening in Asia, particularly in China and South Korea, or maybe any other jurisdictions that you'd like to highlight.

Stephanie La Hoz Theuer: Sure. China is laying the groundwork for what is going to become the world's largest emission trading system. They are preparing the launch of their national ETS, which should start with the electricity sector and then gradually expand to other sectors. Even just covering electricity, they will be the largest ETS worldwide, which is really amazing. We expect that simulation trading will start this year in the electricity sector followed by full operations hopefully in 2021. How the coronavirus outbreak will impact that timeline is still unknown.

China also has eight regional pilot systems that have been operating for several years and will be gradually incorporated into the national system as it expands. And these regional pilots have been really important to create knowledge and capacity inside of China and really provide a basis for the development of the national ETS that is now in the works. The South Korean ETS is already in force. It started operating in 2015, and it covers 70 percent of national emissions. 2019 was a really important year for them. They started auctioning a portion of allowances and distributing another portion in more sophisticated ways using benchmarks. They also released several reforms, which will include a stricter cap, more auctioning, and more benchmarking. And this reflects the process that we've seen in many systems where we usually start with free allocation based on historical emissions and then gradually transition to more economically efficient allocation methods.

Elsewhere in Asia by the way, you also see countries like Japan, Indonesia, Thailand, and more recently, also the Philippines considering the establishment of national ETSs to contribute to decarbonization efforts.

Daniel Raimi: Great. That's so interesting and yeah, once again the report itself has really nice resources on each of those jurisdictions that you described as well as neat maps that kind of give you a visual sense about where different countries are considering different options.

I also want to let our listeners know that we're going to have an episode in just a couple of weeks that will come out featuring RFF's Dick Morgenstern who is going to be talking in detail about the design of the Chinese emissions trading program. So be on the lookout for that as well.

So Steph, you've given us a great summary of what's happening in some key regions and nations around the world. Let's move now and talk about the role that other policies play alongside emissions trading programs. Sometimes these are referred to as complementary policies, and they're typically policies that take steps other than a carbon market to try to reduce greenhouse gas emissions, which might be through regulation or subsidies for clean energy or standards for the electricity sector or other mechanisms. And when we look at existing trading programs around the world, most of them, if not all of them, have at least some of these complementary policies in place. So can you talk a little bit about which types of complementary policies are most common across regions?

Stephanie La Hoz Theuer: The focus of complementary policies depends on the emissions profile of each jurisdiction, but there are definitely a lot of commonalities. Measures related to technology and transport are very common. This includes support for research and development, which the EU for example focuses on a lot and fuel efficiency standards and support to electrification of transport, which California and Quebec focus on for example. Jurisdictions also often have policies directed at electricity, like mandatory coal phase outs, feed-in tariffs for renewable energy, and support for clean energy infrastructure like smart grids.

Buildings are another common area, and they are often targeted with energy efficiency requirements, updated building codes, and also support for retrofitting. Jurisdictions often use the revenues raised by their emission trading systems to support these policies. Quebec for example, has virtually no electricity emissions, so electrification is a massive area of focus for them. A lot of the revenue they generate from their ETS flows into electric vehicle infrastructure and incentives to increase the number of zero emission vehicles. And if we look at the aggregate numbers across all ETSs, most of the $78 billion collected in auction revenues to date has been invested into innovation, further emission reductions, and support to disadvantaged communities. So this is definitely a very big area.

Daniel Raimi: Great. That's really helpful. And when we think about complementary policies, there's so many different types of them of course. And economists have looked at a bunch of them and I think I have come to the conclusion that some of them are probably more efficient than others in terms of helping to reduce emissions at low costs. Policies that, for example, support research and development, I think they have pretty broad support across people who have studied them. Whereas other policies, things that subsidize wind and solar, there's a little bit more argument around how economically efficient they are. So can you kind of give us a little bit of context about why or what rationale states and nations are using that encourage them to add these policies on top of their trading programs?

Stephanie La Hoz Theuer: Yep. Complementary policies do indeed bring troubles to carbon pricing instruments. They can reduce allowance prices, and they often interfere with the economic efficiency of carbon pricing. Also, as you were mentioning, achieving emission reductions through regulatory measures is often more expensive than through carbon pricing. Now the thing is that the objective is to drive deep decarbonization, and that's very difficult to do with carbon pricing alone. Dallas Burtraw from RFF published a great summary on this. There are both political and economic reasons to pursue a mix of policies for net zero emissions instead of just carbon pricing alone.

So first politically, policies like energy technology standards and subsidies have greater political viability in part because the price signal is less evident. This creates opportunities for new industries, and that can facilitate the shift towards less carbon-intensive technologies. Now this in turn makes other policies like carbon pricing less costly and more politically viable. So this is one important reason as to why jurisdictions pursue complementary policies often before they introduce carbon pricing. These policies can also address negative impacts of carbon pricing and disadvantaged communities, which is also very important for feasibility of climate action.

Economically, these complementary policies also make sense because they can help address other externalities, externalities other than greenhouse gas emissions, like air pollution or barriers to technological innovation. They can also address sectors that are difficult to reach through carbon pricing like buildings, agriculture and land use. And importantly, these companion policies can also provide incentives for climate action when carbon prices are not being enough.

And this last point is actually quite important because although we've achieved a lot of progress in carbon pricing in the last years, carbon prices are still too low to drive the level of transformation we need. A 2017 report estimated that in order to achieve the temperature targets of the Paris agreement, we'd need prices between $40 and $80 per ton of CO2 to in 2020, so now. And between $50 and $100 in 2030. Now, current prices are mostly between five and $20 per ton, which means that really important parts of the economy are not getting the signal they need to trigger the transformation we need, and system reforms that raise prices also face real political challenges.

So the reality is that complementary policies can indeed present difficulties in designing carbon pricing and they also may be second best when it comes to economic efficiency, but they can be really essential to drive emission reductions in the economy. In California, for example, more than two thirds of emission reductions are driven through regulatory measures, and the ETS acts as a safety net that guarantees specific environmental outcomes. So it's really important to design policy packages in a way that takes these interactions between policies into account. For ETSs, this means in particular having instruments like price floors, which are often used in North America and the Market Stability Reserve in Europe to make sure that these policies fit better together and account for the emission reductions that are achieved in those different policies.

Daniel Raimi: Great. That's really well said, and I think there has been an increasing recognition among economists in particular who studied these issues, that complementary policies, which may have been sort of out of favor in the economics community before are increasingly being recognized for all of the elements that you just mentioned. And so Dallas' summary is really useful in that context.

So last question now before we move on to our final top of the stack question, which is our audience I think is pretty familiar with the energy system and how the energy system is affected by programs like the ETS or different ETSs as well as these complementary policies we were just talking about. But we haven't talked much about agricultural emissions and policies to reduce emissions from that sector. Can you give us a sense of how governments are starting to address those emissions, whether through training programs or through other policies?

Stephanie La Hoz Theuer: ‘Starting to’ is exactly the verb there. Emissions and agriculture come primarily from nitrous oxide and fertilizers and methane from livestock. Agriculture emissions accounted for 16 percent of global emissions in 2016, and this is without counting for impacts on land use change in forestry, which are another 9 percent, so this is a massive source of emissions. Agriculture is indeed a challenging sector from a carbon pricing standpoint. And we're really still starting to figure this out. This is partly because we're not talking about a few large companies with high emissions, but often about tens of thousands of small farms and land owners, each of them with small emissions that in aggregate come to a very large sum. Now carbon pricing can provide incentives for mitigation in those farms and can provide for flexibility in achieving targets, but it can be administratively really complex. California, for example, has acknowledged in its climate policy planning that they have to do more to address emissions from agriculture and they're still developing strategies for the sector.

I think that New Zealand is the jurisdiction that is leading the way on this issue in terms of carbon pricing so far. In large part because so much of their emissions come from agriculture—about half of New Zealand emissions come from agriculture, in 2019 after long negotiations—they decided to price agriculture emissions from 2025 onwards, and they are now working on the design. That may end up looking like a mix of ETS and a farm level tax. The manufacturers and importers of fertilizers would be incorporated into the New Zealand ETS, whereas individual farms could see a levy system to address livestock emissions. But all of that is still under discussion, but it's a really interesting space to watch.

Daniel Raimi: Yeah, that's great. And we will certainly be watching that closely and this conversation and overview, Steph, that you've given us today has been so good. I want to invite you back next year when this report comes out again, and you can give us another update on what's happened in the last year or so on emissions trading and other policies around the world.

Stephanie La Hoz Theuer: I'd be very, very happy to.

Daniel Raimi: Great. And hopefully next year we'll be able to go on real tours of other parts of the world instead of virtually visiting them from the comfort and space of our own homes. But let's move on now to our Top of the Stack segment where we ask you what you've been reading or watching or listening to that you've enjoyed and would recommend to our listeners. And I would first just obviously recommend this report to our listeners. We'll have a link to it in the bottom of the show page. And then along with that, when I'm taking breaks from work or trying to relax these days, I'm watching videos in a variety of forums.

And Stephanie, actually in our conversation before this podcast, just introduced me to one of my favorites that I've seen in quite a while, which is a video and news story of a man running a marathon inside his own apartment in Hangzhou in China near Shanghai. And it's just really fantastic to see the creative ways people are dealing with quarantine and being isolated in these times. So it doesn't have anything to do with energy or the environment, but I think you'll get a kick out of it. So we'll have a link to that in the show notes as well.

How about you, Stephanie? What's on the top of your literal or metaphorical readings deck?

Stephanie La Hoz Theuer: So you've provided a recommendation on nourishment for the body, and I shall provide recommendations on nourishment for the soul. I will recommend two books: one that I hope could help us make better individual decisions and one for better societal decisions. On individual decisions, I'd recommend Thinking, Fast and Slow by Daniel Kahneman. It's not a book about the environment per se, but it's an amazing read on the many ways in which we're much less rational than we think we are and the many ways in which I think we can make better decisions also about the environment by taking our biases and mental shortcuts into account. It's really an amazing read. I cannot recommend it enough.

On societal decisions, I'd recommend Collapse by Jared Diamond, which gives really amazing accounts on how societies over human history have responded to environmental changes. I'm midway through the book and I found it really inspiring because it shows how important societal choices are in shaping the outcomes and that the outcomes of those environmental changes and the consequences of those changes on society really, really depend on our own decisions, and I found it really inspiring and empowering.

Daniel Raimi: Fantastic. Two really great recommendations. I'm familiar with both of those books actually and would second those nominations. So one more time. Thank you so much, Stephanie La Hoz Theuer, for joining us today on Resources Radio and telling us about emissions trading programs and other policies to address climate change all around the world. We really appreciate it.

Stephanie La Hoz Theuer: Thank you so much for having me.

Daniel Raimi: You've been listening to Resources Radio. Thanks for tuning in. If you have a minute, we'd really appreciate you leaving us a rating or a comment on your podcast platform of choice. Also, feel free to send us your suggestions for future episodes. Resources Radio is a podcast from Resources for the Future. 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. Learn more about us at rff.org.

The views expressed on this podcast are solely those of the participants. They do not necessarily represent the views of Resources for the Future, which does not take institutional positions on public policies. Resources Radio is produced by Elizabeth Wason with music by me, Daniel Raimi. Join us next week for another episode.