PARIS - If you ask a carbon trader when there will be a single, efficient, international price on carbon dioxide emissions, s/he may reply, "How patient are you?" Over 40 carbon trading markets exist worldwide (commonly referenced in the US as "cap and trade"), but they are separate, fragmented, and collectively inefficient, and a singular international market, as exists at least de facto for a range of other commodities, may be decades away. However, the Paris agreement expected next week may get us one baby step closer.
"Having Paris allow for cooperative approaches and these internationally transferred mitigation outcomes (ITMOS) is an important first step," said Katie Sullivan, North America director for the carbon market trade association, the International Emissions Trading Association (IETA). "Along with common global accounting and an international mechanism to allow for parties to invest in emissions reductions using the market, these would move the objective of a common carbon price one step closer."
While the final agreement will not likely be hammered out until this weekend, the Wednesday draft did provisionally mention internationally transferred mitigation outcomes and did contain provisions for UN accounting for individual country verification of their Individually-Determined National Contributions (INDCs), the "bottom up" pledges each country has made. The cumulative effect of these INDCs - some 80 out of 185 of which mentioned the need for carbon market access - will determine the scale of the agreement's collective ambition.
Existing carbon pricing schemes have taken two forms: outright carbon taxes, which are considered by most economists to be the most efficient system (as funds go straight to national treasuries without overhead costs), and, the second system, represented by IETA and championed often by diplomats and business leaders, emissions trading systems (ETS). Some 40 national ETS exist, and at least a score of 20 subnational trading systems exist.
Both existing systems have set carbon prices woefully low. According to a recent World Bank study, carbon prices range from below US $2 per metric ton (some of the Chinese regional markets, Estonia, Japan, Mexico, for example), to Sweden's high tax of $130, which has been ratcheted up since the 1990s, and is said to represent close to the "true cost" if carbon markets are to disincentivize emissions. Most prices are clustered below US $10 per metric ton, which is inefficient.
In addition to the dozens of national ETS (and the scores of nations seeking access to the market access, credit, and monitoring, reporting and verification - MRV - these offer), subnational ETS have arisen over the last several years. China possesses the largest Emission Trading System at the subnational level, which the nation hopes will reduce the carbon intensity of the economy by 40-45 percent by 2020. Six of the seven pilot schemes began trading in 2013, and one began in 2014. The seven pilot locations account for a population of approximately 137 million people. It has seemingly been successful as the country's national ETS will come online soon.
The US also has a few subnational ETS, including the California-Quebec agreement, and the US is poised to pioneer sector-specific emissions trading in the electricity sector, regardless of whether the Paris language gets un-bracketed and the US Congress cooperates. President Obama's Supreme Court-affirmed executive action establishing the Clean Power Plan has created a demand for emissions trading in that sector only, with each US state charged with conceiving implementation strategies over the next few years. As Congress did not formally approve a cap and trade law, the scope of the Clean Power Plan is domestic only, and limited to that sector, but the electricity sector emits the largest percentage of greenhouse gases, and hence the US claimed important gains as part of its INDC.
A single world carbon price is at least a decade from fruition, but the new language in Wednesday's draft agreement shows, at least, that this issue is on the table. If the UN can help regulate the emerging markets with a singular and transparent mechanism, this will save all of us a lot of time and energy. Patience may be a virtue, but in this case it is overrated.