Building Competitive Green Industries

63 64 65 66TABLE C5. Legal and regulatory frameworkName ofinstrumentDescription ofinstrumentEvaluation .(summary of strengths /weaknesses)CommitmentperiodExampleCap-and-tradeemissionschemesThe trading ofpermits, normallybetween privateentities, for the rightto emit X tones ofindustrial gases (CO 2,SO 2, NO x) or extractnatural stock (forinstance, fishingquotas), subject to anationally-set limit(cap)This is the most commonmarket mechanism toincentivize investment in cleantechnology, popular with bothgovernments and businessesin OECD nations for the easeof administration. Howeverunless the caps are revised inline with technological changeand economic growth then theprice signals may be too weak toinfluence investment behavior.More effective if permits areauctioned instead of being givenaway, within a broad cap so as topresent “leakage.” Furthermore,it is difficult for developingcountries to implement ETSand offset schemes as manydon’t have the data or capacityto establish GHG emissionsbaselines and projections.To be effective capand-tradesystemsneed to be in placeindefinitely, withclear indicationsthat caps willbecome tighter overtimeEuropean Union‘s EmissionsTrading Scheme (EU-ETS)is the world‘s largest andlongest-running, coveringaround 12,000 industrialinstallations responsible for45 percent of the EU‘s totalGHG emissions. 63 Similarschemes are operating orplanned in emerging markets,for example in China where7 cities are launching theirown ETS, starting withShenzhen which covers 635installations. 64 However noETS has, as of 2013, managedto push carbon prices upto levels likely to stimulatesignificant investmentin climate mitigationtechnologies, mainly becauseof weak caps.EmissionReductionCredits 65A system wherebusinesses arerewarded forreducing emissionsbelow a baseline,usually intensitybased(for instance,CO 2emissions perunit of production).These reductionsare converted intotradable creditswhere liable partiesmust purchasecredits and thensurrender them tothe regulator at theend of each year,to meet their shareof an economy orsector-wide reductiontargets.As with cap-and-trade systems,baseline-and-credit tradingcan provide simple economicincentives to invest in cleantechnology. However sincebaselines are normally setagainst intensity targets,increases in total productioncan outweigh the emissionsreductions. Furthermore, itcan be difficult to establish“additionality,” that is, to knowif the emissions reductionsawarded credits under thescheme would have occurredanyway.To be effective inreducing emissionsin the long term,baseline-and-credittrading needs to befollowed with longtermcommitmentsby all countries toreduce absoluteemissions levelsThe Clean DevelopmentMechanism 66 (CDM) is thebest known example of thetrade in Emission ReductionCredits, which issues 1 billionCertified Emission Reductions(CERs) credits between 2001and 2012. However the priceof CERs collapsed to below 1EUR by 2012 following hugeoversupply in the EU-ETS andthe failure to secure a post-Kyoto agreement on globalreductions. Furthermore, 60percent of CERs have beensold by Chinese companiesfor the destruction ofnon-CO 2gases, as opposedto investment in low-carbontechnologies.ontinued on next page63 For detailed analyses of the EU”s ETS see: www.carbontrust.com/resources/reports/advice/eu-ets-the-european-emissions-trading-scheme64 For a summary of the Shenzhen pilot ETS see: www.economist.com/blogs/analects/2013/06/carbon-emissions65 For a succinct explanation of Emission Reduction Credits, see the Australian government’s Department of Environment (2010) guidanceon “Baseline and credit schemes” http://climatechange.gov.au/sites/climatechange/files/files/reducing-carbon/mpccc/baseline-creditscheme-pdf.pdf66 For detailed analysis of CDM projects in emerging economies and developing countries, see: http://cdmpipeline.org/cdm-projectsregion.htm104 Building Competitive Green Industries: The Climate and Clean Technology Opportunity for Developing Countries