IEA Reviews Emissions Trading Schemes

November 2010: The International Energy Agency (IEA) has released an information paper titled “Reviewing Existing and Proposed Emissions Trading Systems.”

The paper underscores that, without the pricing of greenhouse gas (GHG) emissions, creating the economic change necessary to meeting the Copenhagen Accord goal of limiting global temperature rise to 2ºC will be markedly more expensive and difficult. It then discusses key design features of 15 national, sub-national and international emissions trading schemes under consideration or in force in 2010, focusing on their effects on the energy sector. Although the features and reach of the schemes outlined in the paper vary widely, one aspect common to them all is the tension between achieving rapid carbon emissions reductions and maintenance of strong economic activity and retention of jobs. It finds that these concerns are greatly over-exaggerated compared to the experiences with systems currently in place. Another commonality among the systems is that emissions-intensive industries generally receive generous allocations of free emissions despite that “economic analyses do not generally reveal why this should be in the wider economic interest.”

The paper offers six recommendations for the design and practical implementation of such systems: targets should be ambitious; no free allocation of carbon allowances should be given to electricity generators; clear, long-term investment signals must be created; enough flexibility must be built in to allow changes after an initial trial period; economic costs and other impacts should not be over-estimated; and complimentary and supplementary policies are likely to be required. [The Paper]