Upcoming Mallesons seminarsAnyone who is considering the design and effect of an emissions trading scheme.
What do you need to do?Carefully consider the nature of a scheme or proposed scheme, the effectiveness of its environmental goals, ease of implementation and its impacts on the geographical area and industry sectors it covers and participants.
Christopher Tung (董彥華)
Partner
Christopher Tung
(董彥華)
Partner
T +852 3443 1082
Beijing
John Shi
(史衛)
Sydney
Dominic Bortoluzzi
Melbourne
Louis Chiam
Emissions trading is a market-based mechanism used by regulators to meet environmental goals cost effectively. It aims to reduce the level of polluting emissions such as sulphur dioxide (SO2) and nitrous oxides (NOX) below existing levels or what is known as “business as usual”. An emissions trading scheme may be contractually based and voluntary or compliance based and mandated by legislation. In either case, the essential elements of an emissions trading scheme are:
- environmental integrity: a clear environmental objective that reduces polluting emissions below business as usual (also known as a baseline)
- a sufficient number of participants in the scheme with differing marginal costs of abatement (the marginal cost of abatement is the cost to individual participants of taking action to reduce their emissions. These costs would be low where large energy efficiency gains can be made cheaply but high where clean and efficient equipment make further energy efficiency gains expensive)
- a quality emissions inventory
- clear and simple eligibility, assessment, monitoring and verification requirements
- clear and simple trading mechanism
- effective administration and enforcement
- a clear legal basis
- reasonable transaction costs
- the active engagement of industry, business and the local communities
The three main designs for an emissions trading scheme are described briefly below.
Cap and trade scheme
In a cap and trade scheme, the regulator sets an overall emissions limit or “cap” for a pollutant or “caps” for a range of pollutants. The participants in the scheme are allowed to emit a specified quantity of the pollutant(s) (the “allowance”) over a fixed compliance period, and the emissions of a participant are generally assessed and accounted for on a yearly basis. The regulator determines the amount of allowances to allocate a participant based on historical emissions performance. The allowances may then be granted free or auctioned to participants. To fall within the cap, a participant has the option of taking steps to reduce its emissions by increasing its efficiency (such as by using new technology or switching to cleaner fuels) and/or buying allowances from other participants that have a surplus. Examples of cap and trade emissions schemes include the European Union Emissions Trading Scheme and the US Acid Rain Program.
Baseline credit scheme
In a baseline credit scheme, the regulator determines the business as usual baseline of a participant. The participant then takes steps to reduce emissions below the baseline, the difference between the baseline and the actual emissions reduced earning the participant emissions reduction credits. Accordingly, the participant must earn emissions reduction credits before it can trade them. If a participant exceeds its baseline during a compliance period, it must purchase credits equal to its excess emissions to ensure that it complies with its obligations. Conversely, where the actual emissions of a participant is lower than its baseline, it will have emissions reduction credits to sell or bank for future compliance. A leading example of the baseline credit emissions trading model is the New South Wales Greenhouse Gas Abatement Scheme.
Hybrid scheme
A hybrid scheme is a scheme with characteristics of both cap and trade and baseline credit schemes. A good example of such a scheme is the Kyoto Protocol where a cap and trade mechanism, International Emissions Trading, is combined with two baseline credit mechanisms, Joint Implementation and the Clean Development Mechanism.