The International Emissions Trading Association (IETA) has put forward three suggestions for how emissions trading could be applied on a sectoral level internationally to ramp up clean-tech investment in high-emitting industries across the developed-developing country divide.

In a discussion paper released last week, IETA says sectoral emissions trading, or sectoral crediting, could take many forms but that most effective will be those options that mobilise private sector capital to the task.

There is a growing push for an industry-by-industry approach to carbon emissions reductions internationally to resolve a number of problems holding back a global low-carbon transition. First, the UN CDM mechanism has not delivered the scale of investment required to drive emissions reductions and technology transfer on the scale needed to meet the global emissions reduction challenge. Beyond that, Copenhagen made scant progress on a global agreement on a set of national emissions reduction targets and commitments that also would drive a big international investment effort.

At the national level, domestic emissions trading schemes are proving difficult to implement in the US, Japan and Australia. One of the key arguments against domestic emissions trading schemes – that emissions controls risk driving industries offshore to countries with no scheme in place – could be addressed if whole industry sectors world wide were subject to one scheme designed just for it. The steel, aluminium and cement industries are often cited as those that could benefit by such an approach.

IETA’s paper, “Thinking Through the Design Possibilities for a Sectoral Crediting Mechanism: Three Options to Encourage Discussion” was motivated by the uncertainty for the private sector in any move to upscale emission reduction action and technology transfer from levels the CDM has delivered.

Developing nations by and large would prefer that low carbon investment come by way of developed world governments directly funding clean technology programmes. IETA argues that the sheer size of the low carbon transition challenge means private capital, rather government funding programmes, is the most realistic avenue for realising greater volumes of investment faster.

IETA suggests three possibilities for the form sectoral crediting mechanisms might take in high-emitting industries. All involve the setting of an worldwide emissions baselines for each industry, but not necessarily legally binding at an international level:
  • Centralised crediting, where national governments commission industry bodies to coordinate a baseline and credit scheme in that industry, generating tradable offset credits for emission reductions below the baseline.
  • Domestic emissions trading, where a cap and trade scheme is implemented across one industry, capping emissions at or below the international baseline. Domestic allowances are issued up to the cap, and any excess for beating the cap can be turned into internationally tradable offset credits.
  •  Installation-level crediting, where national governments set emissions reduction targets for each individual factory or installation subject to the overall international baseline. Beating the target generates international credits directly.
The discussion paper outlines possible financing structures and the advantages and risks inherent in each one.

The paper is timely given the direction US Congress moves on cap and trade appear to taking – with a sector-by-sector approach now rumoured to be the thrust of compromise legislation being drafted in the Senate. There is strong speculation that cap and trade might be laid down in a Senate bill for the electricity generation sector only – probably analogous to IETA’s option two.


Download:
Thinking Through the Design Possibilities for a Sectoral Crediting Mechanism: Three Options to Encourage Discussion IETA