Unpacking the Growth in Global Carbon Markets, with Stefano De Clara

Notable Quotes

• Emissions trading systems are common around the world: “As of today, we do have 36 ETSs in force in different regions of the world. Those 36 ETSs jointly cover 9.9 gigatons of [carbon dioxide] emissions, which roughly accounts for 18 percent of global greenhouse gas emissions … One-third of the global population currently lives under an ETS in force … At the same time, jurisdictions making up 58 percent of global GDP are using an ETS in some parts of their economy.” (3:07)
• More emissions trading systems, more policy innovation: “There’s no single blueprint to develop an ETS, but each single country takes the concept and the idea behind an ETS, and they go about adapting that and tailoring that to their specific needs, circumstances, and policy priorities, which means that we are seeing an increasing amount of new ideas and new system designs that are emerging right now.” (6:24)
• Maintaining support for climate policy: “Climate policy in general, and carbon pricing specifically, tends to be the subject of heated political debate, especially at a time of high inflation and high energy prices … One key area that is worth looking at will be how governments worldwide will navigate this problem [of potential public opposition] … We know that there are tools and provisions that can be put in place to make sure that you do have ambitious action on carbon prices without impacting consumers.” (29:20)

Top of the Stack

• Emissions Trading Worldwide: 2024 ICAP Status Report from the International Carbon Action Partnership
• Silent Spring by Rachel Carson

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 welcome back to the show Stefano De Clara, head of secretariat at the International Carbon Action Partnership, or ICAP.

Stefano is here to give us all an update on the state of emissions trading systems around the world, drawing from ICAP's annual status report, Emissions Trading Worldwide. Like the report, our conversation will highlight key trends in emissions trading systems at a global level and then dive into developments across the world, including well-known programs in the European Union, but also emerging ones in places like China, Indonesia, Brazil, and more. Stay with us.

All right, Stefano De Clara, welcome back to Resources Radio.

Stefano De Clara: Thank you, and thanks for having me again. It's always a pleasure and a privilege to be here.

Daniel Raimi: We're grateful for you joining us once again. I mentioned in the introduction a little bit about the report we're going to discuss today, but could you tell us a little bit about the International Carbon Action Partnership, or ICAP, the organization where you work and that releases this report each year?

Stefano De Clara: Yeah, sure. I’m happy to, and it'll actually be good to understand why we do this in the first place. ICAP is a partnership, as the name says, that brings together more than 40 governments and public authorities from different regions, different continents, and different levels of governance to get together to work on design and implementation of emissions trading systems as a policy tool to put a price on carbon dioxide (CO₂) emissions and as a way to reduce CO₂ emissions. As part of our work on emissions trading system design and implementation, we also track emissions trading system–implementation trends globally. In the context of this, we also develop the yearly report looking at the state of play in emissions trading systems implementation globally.

Daniel Raimi: That's great. Just so folks know, we're going to be using this term a lot, “ETS,” and it stands for emissions trading system. The name of the report, of course, is Emissions Trading Worldwide. We'll have a link to it in the show notes, so you can follow along with the report if you'd like to during our conversation. But I'd love for us to start, Stefano, with some big-picture highlights. The report itself begins with some very high-level statistics about the scope and scale of emissions trading programs globally. Can you share some of those with us?

Stefano De Clara: For context, an ETS or an emissions trading system is a policy tool that governments can put in place to cover emissions from a sector or more than one sector to make sure that those carbon emissions are priced and that they decline over time in line with long-term environmental objectives. As of today, we do have 36 emissions trading systems in force in different regions of the world. Those 36 ETSs jointly cover 9.9 gigatons of CO₂ emissions, which roughly accounts for 18 percent of global greenhouse gas emissions. So, 18 percent of global greenhouse gas emissions is under an ETS cap as of today.

To give you a few more statistics, beyond the 36 emissions trading systems already in force, there are 14 more that are currently under development in different countries and different regions around the world and eight more that are under consideration.

Looking at those 36 in force, those systems cover roughly one-third of the global population, meaning that one-third of the global population currently lives under an ETS in force. That gives an idea of the widespread uptake that these policy tools are having. And at the same time, jurisdictions making up 58 percent of global GDP are using an emissions trading system in some parts of their economy.

Daniel Raimi: That's great, and it’s such a helpful reminder. Every year when I read this report, I'm reminded of how broad emissions trading programs are and how much interest there is in them. One of the things that the report does, which I always appreciate, is highlight some big-picture trends that you and your colleagues have observed across the many programs that are in force and that are under development around the world. Can you share some of those big-picture trends with us?

Stefano De Clara: Happy to. The first one is literally what you were mentioning just now. We are seeing increased and continued momentum behind the development and implementation of emissions trading systems globally, and emissions trading systems are increasingly becoming a policy tool of choice for governments to put a price on carbon and to reduce their emissions. We've done this report for 11 years in a row now, and since the first edition, the number of emissions trading systems in force, as well as the percentage of global emissions under an ETS cap, has more than doubled, which means that there's a great momentum behind the development and implementation of an ETS as a policy tool to reduce emissions. Diving a bit more into the substance, the second key trend that we are observing is that, as emissions trading systems are being developed and implemented in more and more regions and in more and more countries around the world, we're also seeing that innovative system designs are emerging.

It's becoming increasingly clear that there's no single blueprint to develop an ETS, but each single country takes the concept and the idea behind an ETS, and they go about adapting that and tailoring that to their specific needs, circumstances, and policy priorities, which means that we are seeing an increasing amount of new ideas and new system designs that are emerging right now. I mean, we can go into this a bit later in our discussion, but for example, there's an increasing level of attention to intensity-based emissions trading systems that are becoming particularly popular in emerging economies.

At the same time, and perhaps as a third key observation, the established emissions trading systems—those that have been in operation for a while now—are constantly improving, expanding, and increasingly aligning with the net-zero targets. It is a fascinating process, because you are really seeing now how those policy tools are starting to look at the long term and are starting to look at what role they will play in achieving net-zero emissions by 2050 in most cases. As part of that, you have a whole process around understanding what system design and what rules you need to get there and also an overall process around expanding the coverage of these systems to the new sectors that were not subject to a carbon price before.

Perhaps as a very quick last point, and looking even more into detailing the state of play for ETS globally, we are seeing that despite economic and geopolitical challenges in 2023, which followed a 2022 that already was quite an eventful year, the allowance price in the systems relatively held if you look at systems across the board globally, and that guaranteed another record a year for the collection of auction revenues—the collection of revenues and proceeds generated by these systems.

Different regions showed different price trends. Most recently, for example, you had declining price trends in Europe in the EU ETS and in the UK ETS, but other systems, especially those in North America, did show price gains. No overall trend, but prices held despite significant uncertainties, both from an economic and from a geopolitical point of view, which is quite remarkable and a really good sign of resilience.

Daniel Raimi: That's really well said on all of those points, and the prices are particularly interesting to me. There's a great infographic on page 29 of the report that shows the distribution of prices across a lot of the different programs ranging from less than $10 per ton to more than $70 dollars per ton in the European Union and Switzerland.

Now, let's do a bit of a whirlwind tour of carbon markets. Of course, we won't be able to touch everywhere in the world where these programs are operating, but we'll get a smattering. Let's start in Europe, which is the OG of carbon markets. The European Union ETS has been in place for almost 20 years now. Tell us about what happened this year in the EU ETS.

Stefano De Clara: That is a really good example of most of the key trends that we just talked about. The European emissions trading system was the first ever to be launched—all the way back in 2005—and now, with almost two decades of operation, is really going through what we were describing earlier: an overhaul and a revision process to align it with long-term targets and to align it with, basically, what comes after 2030.

The European Commission and the European Union just finished a really extensive revision process, which was concluded in the first half of last year, and now we are getting to the implementation of it. Again, there's a lot to unpack in there, but just to name a few key things: We do have more ambitious reduction targets for 2030, which are starting to align with a net-zero-by-2050 trajectory. We are also seeing the development of a separate system that will cover additional sectors starting in 2027.

This will be a system that will work alongside the main EU ETS; it'll be called EU ETS2 and will cover road transport, buildings, and the emissions associated with burning fossil fuels in those two sectors. At the same time, the ETS1—the existing system—will be expanded to cover the maritime sector, which was not covered before. You can really see that what we talked about in terms of long-term, net-zero alignment and sector expansion is at play in Europe.

At the same time, another development that caught a lot of headlines last year was the introduction of the EU Carbon Border Adjustment Mechanism as a competitiveness and carbon-leakage protection to complement the carbon-leakage provisions that were already in place in the EU ETS1. The EU Carbon Border Adjustment Mechanism entered a pilot phase in October of 2023, and as time goes by, we will see in the coming months and coming years the full rollout of what it is—effectively, a really innovative design feature and a really innovative policy tool to provide carbon-leakage and competitiveness protection to the sectors covered by the EU ETS.

Daniel Raimi: It's really awesome to watch that program develop and become more and more ambitious, broad, and really looking towards those net-zero targets. Fascinating.

Most of our listeners probably knew that there was a big emissions trading program in Europe, but one region we haven't talked about much previously, and the role that carbon markets play there, is Latin America. There are a variety of programs that are at various stages of development in the region, and I'm wondering, Stefano, if you could share a couple highlights.

Stefano De Clara: Happy to. Latin America is a really good example of different jurisdictions following different pathways to development of an ETS and also making progress at different speeds, or at least being at different stages of development. If you look at where countries are, they range all the way from Mexico, which has effectively an ETS pilot already in force and is taking steps to fully move to the operational phase of their national ETS, to countries that are at different stages of development of a new system. This includes, for example, Colombia and Brazil.

Brazil is especially an interesting one, because after the new administration came in last year, they really started to move full speed ahead with the development of a national emissions trading system. If you ask me, it's one of the key systems that we can expect to see coming online in the next few years.

You also have countries like Chile or Argentina that had the previous experience with carbon taxes—different forms of carbon pricing—and now are making plans, or they're at least considering the idea of moving from the carbon tax to the development of an emissions trading system as, again, a next step in their carbon pricing journey, so to speak; in the next step of the development of their domestic carbon pricing and the climate policy suite. It's really fascinating to see how different countries in the region are also, to some extent, learning from each other or are going through this journey at different stages and at different speeds. I think we can expect a lot of interesting things to happen in Latin America in the coming months and years.

Daniel Raimi: That is fascinating, and it’s so notable that most of the really big countries in the region are either moving forward with these programs or at least seriously considering them.

Let's go across the Pacific Ocean over to Asia. Let's start with China. Can you talk a little bit about what sectors China's national ETS covers and then give us an update on what happened in those markets over the last year?

Stefano De Clara: Sure. China has a national ETS, which came online in 2021 with retroactive compliance obligations all the way back to 2019. But in 2013, China set up eight different pilot emissions trading systems in different provinces and in different regions within China as a way to test the concept of an ETS, see how the implementation would work out, and then inform the development of the national system.

Which brings us, now, to roughly three years of operation in the national ETS, which, as of today, only covers the power sector in China, which still makes it, given the emission profile of China, the largest emissions trading system in operation today, with a cap size of roughly 4.5 gigatons of CO₂-equivalent. What's worth noting is that the Chinese ETS also covers captive power stations in other industrial facilities, which means that at least some share of industrial emissions—at least those that are related to power production—are already covered by the Chinese ETS.

Over the last few months, China has done a lot of work to fully operationalize the national emissions trading system. Two noteworthy developments that happened over the last 12 months can also indicate the way forward for the system. One was the relaunch of the China Certified Emission Reduction program, which is the domestic offset protocol that can supply offset units to compliance entities under the Chinese ETS. The second one was the provision of a sounder legal foundation for the system, which might sound really bureaucratic and uninteresting, but if you read a bit between the lines, it really provides a clear pathway and a strong legal foundation for the Chinese ETS to further develop over the next few years.

Seeing the direction of travel, I think two main macro topics will be the key areas of discussion in the Chinese ETS going forward. One will be the sector expansion—the expansion of the system to new sectors beyond the power sector, which is currently covered. The second discussion will be around moving from an intensity-based cap, which the system has now, to an absolute cap that actually declines over time. That discussion is likely to pick up as we move closer to 2030—as we move closer to the timeframe when China's emissions are expected to peak and then decline over time.

Daniel Raimi: That is so interesting. Because it’s the world's largest emitter by a pretty long ways now, it's such an important market. I was just looking at the prices this year, which were around $10 per ton, which I think is fairly consistent with previous years. It'll be really interesting to see how that develops.

Let's turn to another enormous Asian economy that we haven't talked about before, which is Indonesia. Indonesia began an ETS in 2023. Can you tell us a little bit about that program?

Stefano De Clara: Yes, happy to. Indonesia is another country that is more or less on the same journey as China in a way, and there, we can really see how having these examples of other developing countries that are implementing ETSs can also foster more countries to do the same.

Effectively, what Indonesia is doing is that they launched an emissions trading system at the beginning of last year, which, similarly to the Chinese one, is covering, for now, only coal-based power production. But this is meant as a pilot or as a trial phase, which will then be expanded and built on over time towards the development of a fully fledged ETS. Another thing worth noting or that’s quite interesting in Indonesia is that they're really aiming to combine different elements of carbon pricing in their policy suite, and it goes back to what we're discussing about the innovative and hybrid systems that are being developed in different places around the world.

Indonesia in the policy suite is thinking about combining this ETS, which will be intensity-based, like the Chinese one, and will also have elements of a carbon tax, in terms of having a fixed-price compliance option. At the same time, Indonesia is also planning to move ahead with the crediting activities. With the development of carbon credits, both for the voluntary market, but also for Article Six of the Paris Agreement in different sectors that might not be covered by the ETS at the beginning.

It'll be really interesting to see how the different pieces of this policy tool and this policy package will interact with each other going forward. Again—this is a trend. The development of new systems with new features and the integration of different forms of carbon pricing—this is a trend that we are seeing in more and more places, especially in emerging economies.

Daniel Raimi: Really interesting. Stefano, you're doing such a great job of giving us these thumbnail sketches of such complex and rich topics.

Let's jump to North America now. We'll travel back across the Pacific Ocean, and there's lots of programs in North America that we could talk about. One of the programs that I was looking at a little bit this year is Alberta in Canada. Can you talk a little bit about Alberta's regional program, and how it fits into the broader, nationwide Canadian carbon pricing program?

Stefano De Clara: Sure. Alberta is also quite an interesting example, because Alberta, as a province, has had a carbon price ever since 2007. It was one of the early adopters of a carbon pricing framework. It evolved through different iterations all the way to what they have now, which has been in place since 2020 and is called the Technology Innovation and Emission Reduction Regulation—TIER, for short.

It's quite interesting, because this policy tool also combines an emissions- intensity element … Instead of having an absolute cap, such as the EU ETS, it puts in place emissions-intensity limits, or emissions-intensity goals per unit of production, that covered entities have to stick to. But by doing that, it also puts in place a trading system that allows the same flexibilities and the same trading dynamics as in a normal cap-and-trade system. It's also interesting to see how, by doing this, Alberta can reconcile different levels of governance when it comes to an ETS.

Because as you were hinting at, what Alberta is doing and what different provinces and territories in Canada are doing has to fit within the broader pan-Canadian carbon pricing framework, which, in a way, and without going too much into the details, sets out minimum standards and default regulations that provinces can implement. But it also gives quite a lot of flexibility to provinces to develop their own programs as long as they are equivalent in stringency and in price levels with what the federal framework foresees.

This is effectively what Alberta is doing. They have modified their existing regulation to align it with the Canadian federal framework; it now follows the same price trajectory, but at the same time, it is developed in a way that fits Alberta's needs, priorities, and circumstances, pretty much in the same way as, for example, Quebec. So, a different Canadian province is doing the same through a different regulation, which, in Quebec's case, resembles a traditional cap-and-trade system a bit more.

It's quite fascinating to see how Canada developed this framework that gives provinces quite a lot of freedom and flexibility while still finding a way to reconcile all of that towards a similar standard, and towards an approach that can also be translated to federal level emission reductions, and federal level emissions-reduction targets.

Daniel Raimi: Alberta is such a fascinating case. The oil sands sector there is so energy intensive. It's a very emissions-intensive industry, just to extract the oil and make it marketable. Even there, you have a carbon price that is currently at $48 and, by 2030, scheduled to reach $125. It's a really fascinating case.

Stefano De Clara: If I can add on this specific point—Canada more broadly, the Canadian federal government, is also working on a national cap-and-trade system; an absolute one, not an intensity-based one, specifically for emissions from the oil and gas sector, which again, as you were pointing to, is quite a large emission source in Alberta, but also in Canada more broadly. This will be pretty much along the lines you were describing: a new system that will be tailored specifically to address emissions from that sector, which will work alongside the federal carbon pricing framework in Canada and alongside the different programs that are in place in territories and provinces in Canada.

Daniel Raimi: That's great. There's so much richness here that we could talk about for any of these programs. You've done a great job of giving us a brief sketch of each of them, and I hope listeners will check out the report to learn more.

We're almost out of time, but I'd love to ask you, Stefano, before we go to the Top of the Stack, to tell us briefly about some things you'll be watching in carbon markets over the next year.

Stefano De Clara: Sure. It's interesting to look at this from two different levels. From the pure policy-design and policy-development point of view—the level that the policy geeks such as ourselves like to look at—what will be really fascinating will be to see how this alignment process with the net-zero targets that we were talking about earlier will play out in the context of the existing emissions trading systems and in the context of the emissions trading systems that will be developed in the coming years.

For one thing, we know that emissions trading systems can play a key role in getting us all the way from where we are today to net-zero emissions in 2050. But to do that, it'll have to function in a really different way than it does today. It'll be interesting to see how different jurisdictions and different governments will go about tweaking and modifying their systems to make sure that they're fit for purpose to develop net-zero emissions by 2050. And at ICAP, we're doing quite a lot of work on that front.

The second level, and perhaps a more high-level consideration, is that, as we all know, climate policy in general, and carbon pricing specifically, tends to be the subject of heated political debate, especially at a time of high inflation and high energy prices. Pricing carbon, which effectively can contribute to higher costs for consumers, can be subject to debate and faced with public opposition.

One key area that is worth looking at will be how governments worldwide will navigate this problem and what kind of solutions that they will put in place to make sure that you can still implement ambitious climate action and carbon pricing policies, but in a way that maintains societal support for them, as that will be quite key to the success, but also to the existence of this policy tool in the future. We know that there are tools and provisions that can be put in place to make sure that you do have ambitious action on carbon prices without impacting consumers and cover the entities.

But this will have to be carefully designed to make sure that we do all of this and tackle climate change while keeping society on board with these measures.

Daniel Raimi: That's really well said. Sitting here in the United States, we are very familiar with the political challenges of pricing carbon.

This has been great, Stefano. Thanks so much for coming back on the show and sharing these insights with us. Congratulations, again, on the release of the report. I hope people will check it out. We'd love to ask you now to recommend something to our listeners that you think is great. It can be related to the environment or just anything else that you think is great. Stefano, what's on the top of your literal or your metaphorical reading stack?

Stefano De Clara: Sure. In full disclosure, whenever I do leisure reading, I try not to focus too much on climate change topics or carbon pricing topics. At least after a long day of reading and writing carbon pricing reports, I tend to look at or read something different. But one thing that I started to do recently is to look back at some of the classics for climate protection or for environmental protection.

One book that I'm in the process of rereading is Silent Spring, which is not a new book—it was published all the way back in 1962—and it's often thought about as the seminal book that sparked a global environmental movement. I guess we all read it—either the full thing or in part—during our studies or in the past, but I think it's quite fascinating to give it a reread right now and see how that relates with the challenges and with the macro topics that we're facing today.

It's really insightful and quite inspirational to look back and see how at the end of the day, one way or other, we are always grappling with the same issues, and we will hopefully get food for thought, but also hope, thinking that we did manage to solve environmental or climate crises in the past. Hopefully—I know this will be a particularly challenging one—we'll be able to do that again with climate change and through the work that we're currently doing.

Daniel Raimi: That's a great recommendation. I should go back and read that, as well, and see exactly what you're talking about—what similarities and lessons we can draw for today.

Well, once again, Stefano De Clara from the International Carbon Action Partnership, thank you so much for coming onto the show and sharing your breadth and depth of knowledge with us. We really appreciate it.

Stefano De Clara: And thank you, again, for having me. It's really always a pleasure to be here.

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