Rethinking Global Emissions Trading

The first global climate pact, the 1997 Kyoto Protocol, created the foundation for global emissions trading by allowing developed countries to purchase carbon offsets from areas of the globe where the cost of reducing greenhouse emissions was lowest.

Yet emissions trading under the Kyoto framework was far from perfect.

Too many projects failed to deliver carbon reductions beyond what would have happened anyway. And even where climate benefits were real, projects often weren’t built to last and deliver ongoing reductions on the scale needed to address the long-term challenge of climate change.

Suzi Kerr, chief economist at the Environmental Defense Fund, discusses a new framework for global emissions trading under the Paris Climate Accord, intended to incentivize ambitious and sustained emissions reductions. The plan, called Climate Teams, organizes small groups of countries that are economically committed to each other and establishes financial and technological conditions for addressing climate change over the long term.

Full Transcript

Andy Stone:  Welcome to the Energy Policy Now podcast from the Kleinman Center for Energy Policy at the University of Pennsylvania. I’m Andy Stone.

Climate change is a global challenge, and for this reason, the Paris Climate Accord has a number of provisions that allow countries to look beyond their national borders to reduce carbon emissions and the atmospheric concentration of carbon dioxide. The first Global Climate Pact, the 1997 Kyoto Protocol, created the foundation for global emissions trading, by allowing developed countries to purchase carbon offsets from areas of the globe where the cost of reducing emissions was lowest. Yet emissions trading under the Kyoto framework was far from perfect. Too many projects failed to deliver carbon reductions beyond what would have happened, anyway. And in many cases, even where climate benefits were real, projects weren’t built to last and deliver ongoing reductions on the scale needed to address the long-term challenge of climate change.

On today’s podcast, I’ll be talking with an economist whose work focuses on building international partnerships to reduce greenhouse gas emissions within today’s Paris framework and in creating opportunities for economic development that will make those reductions durable over the long term. Suzi Kerr is the chief economist with the Environmental Defense Fund. Over the past 20 years, her work has focused on strengthening international cooperation on climate change. Suzi, welcome to the podcast.

Suzi Kerr:  Kia ora, Andy.

Stone:  You’ve been working on international cooperation to address climate change, and much of that effort has involved your native New Zealand. Tell us about the focus of your work and your most recent role at EDF. 

Kerr:  Well, thank you. So at EDF I’m the chief economist, and so my job is to ensure the economic integrity of EDF’s positions and programs. EDF is guided by science and economics, and it tackles urgent threats with practical solutions. We’re one of the world’s largest environmental organizations. We have more than 2-1/2 million members and activists, and a staff of 700 scientists, economists, policy experts, and other professionals. I lead a group within that of economists and analysts who provide the support for the wider organization and collaborate with other outside academics — for example, people at UPenn.

Stone:  And what were you doing in New Zealand before you came here?

Kerr:  I had a similar role, but obviously at a much smaller scale, because it’s a much smaller country. And there the focus of my work was on how we could move towards a low-emissions society in New Zealand, and one where people really thrive. And so specifically, a lot of my work was around design of emissions pricing systems that were effective in encouraging people to reduce emissions. But a key part was also on how we can meet our Paris commitments and go beyond those by being more ambitious by funding mitigation in developing countries.

Stone:  So let’s talk about global emissions trading, which really began under the Kyoto Protocol, which dates to 1997. Tell us briefly how global emissions trading works.

Kerr:  So all countries have to reduce their emissions to net zero before the climate is going to stop changing. And the faster that happens, the less climate change we’re going to experience. And some countries are in a position where they’re willing, and they have the resources to act fast. But although there’s a lot that they can do in their own country, after a while, it gets really expensive and difficult, and they can’t reduce easily very fast. For example, in some countries, to reduce emissions really rapidly, the main option might be getting people to move to electric cars. But if you push people into electric cars very fast, then there aren’t many options available. You might not have the infrastructure, and then it’s going to be quite disruptive.

Stone:  And expensive, I’d imagine.

Kerr:  And expensive. Yes, that’s right. So those countries might be able to contribute more, and more effectively, by working with other countries. And there are other countries which have really a lot of opportunities for low-cost reductions in emissions, and that could be because they are growing fast. They are investing a lot in infrastructure, and they can choose if that’s going to be green or continue to be more dirty, because maybe they have high levels of deforestation that could be avoided — maybe because their economies are very inefficient, and there’s a lot of improvements in efficiency that will just coincidentally also reduce emissions.

And often, in some of the developing countries particularly, if you can reduce the use of, for example, coal to produce electricity, you also reduce air pollution really dramatically, and that has huge health implications. So that’s a really big issue in a country like India, for example. So what global emissions trading does is it brings these countries together. The countries with the resources help the countries who have the opportunities for mitigation. And working together, that means that they can stop the climate change faster. And there’s modeling that suggests that if we do this sort of cooperation across countries and get the mitigation happening in the efficient places, with the same amount of resources that we would spend to achieve our current Paris goals, we would be able to achieve twice as much mitigation. That’s not enough to stabilize the climate, but it’s a really good movement in the right direction. So it’s not a small thing. It’s potentially really a game changer.

Stone:  Now the Kyoto emissions trading framework had some key drawbacks. What were they, and why were they a problem?

Kerr:  So two of the biggest problems are what’s called “leakage” and “additionality.” Leakage is kind of like pushing on a balloon. When you push in one place on a balloon, it bulges out somewhere else. And everything we do to reduce emissions is part of a much more complex system. And so you might reduce emissions in one place, but it might not lead to emission reductions overall. It might lead to an increase somewhere else that can be hard to identify. That’s not always a true approach. It could be a leverage point, where it leads to a cascading positive impact. For example, it establishes a new clean technology in a country that then becomes something that lots of companies want to roll out. But quite frequently, the reduction in one place is actually just offset by something somewhere else.

So the other problem is additionality. Offsets are rewards for reductions. These are supposed to be additional to what would have happened anyway, but you don’t observe a reduction. You only observe the emissions. And you’ll never really know what the emissions would have been without the project, so you can’t directly measure reductions. And that creates real problems. For example, in China, natural gas power plants were rewarded with offsets under the Kyoto Protocol because they had lower emissions than coal-fired plants. And people argued that they would have built coal-fired plants otherwise. And it might be credible in each case that there was a viable alternative to a coal-fired plant. But when you look across the whole of China, it’s not really credible that they wouldn’t have built any natural gas power plants at a time when everybody was building natural gas power plants.

So they probably got a lot of non-additional units over the whole of China in that period. And this problem is exacerbated because offsets are voluntary. Not everybody participates. So the people who are going to participate are the people who know they’re going to win. They are the people who really want to do the projects, anyway. And that could just happen unconsciously. I remember talking with environmental groups in California, back in the early 2000s about projects to protect forests, and they were really keen to protect the forests, for all sorts of biodiversity and other reasons. And they admitted that they had a tendency to overstate the risk to their forests, because it made it easier for them to get funding to protect the forests. And that probably — even if they hadn’t gotten the funding — they would have found a way to protect that forest, anyway. So it’s not necessarily that people are being devious. But of course, if they are being devious, it’s very easy to hide from a regulator what your actual intentions were, and that you really were going to build that one farm, anyway.

Stone:  So intentionally or not, there was, to some level, gaming of the system. So how have the Paris Accord rules been updated with respect to the treatment of these cooperative efforts to mitigate carbon?

Kerr:  So the Paris rules are quite different, and Paris doesn’t have a clearly defined mechanism yet for these sorts of transfers across countries. They are trying to develop one, but there’s a part of the Paris agreement that is incredibly flexible, and it allows countries to define their own way of transferring mitigation across countries. And that’s the space in which we’re working, because in that space, you don’t have to stick with these old-style projects and offsets. You can try to build something that’s got a lot more integrity.

Stone:  Are there other key ways in which the Paris Accord is different?

Kerr:  So the biggest difference in the Paris Accord is that under Kyoto, only a very small number of countries have commitments. And Paris has turned it on its head now — more than 180 countries have commitments. And that means that when you are transferring mitigation or trying to do extra mitigation in a developing country, they also have their own compliance target. And so now the governments of those countries really care about whether they are transferring mitigation that they need for their own compliance. They don’t want to be out of compliance, and they don’t want to have other people come in and do cheap mitigation, claim the credit for it, and then leave the country with all the difficult mitigation to actually achieve the target. And countries are only beginning to work out how to deal with that, but they now have a much more of a real stake in making sure that reductions are real.

Stone:  Can businesses enter into their own partnerships?

Kerr:  So businesses can do anything they like if they don’t want to get credit for it. So there’s nothing to stop a business from investing in low-emissions activity or working towards reduced emissions with others, and that’s a fantastic thing for them to do. And they might be able to help the countries to achieve goals that they wouldn’t have achieved otherwise. Or they might enable the countries they are investing in to achieve more ambitious goals. Where they can’t act entirely on their own now is if they want to get credit for those efforts. So they need to do some coordination with the government if they want to use them for voluntary commitments, or if they want to use them in compliance markets. Because otherwise you get the problem of double counting. A company would claim that they’d reduced emissions in a country, but then the country will use the same reduction because they’ll just be looking at their total emissions. And they will use that to say, “We achieved our Paris target.” But they can’t both have done the same reduction. It doesn’t add up right. So now there needs to be recognition by the country that that company has the right to claim that particular reduction, and that the country won’t claim it.

Stone:  So you’ve been working on a new framework to address all these issues, and that framework is called “climate teams.” What are climate teams?

Kerr:  So a climate team is an agreement among a small group of cooperating governments and which includes both a host — which would be the developing country — and partners, which are the richer countries. And so hosts of the countries have had these opportunities to reduce the emissions ambitiously, and the partner countries have the resources. And by bringing these partners and these partner countries and host countries together in small teams, we can align the economic incentives of all the actors and create strong, cooperative relationships.

So how it works is that the group of countries enter into a multi-year contract — so it would be a legally binding contract. And that includes a multi-year emissions baseline for the host country for all of the emissions in that host country, not just at the level of a project or a sector. And they would create that baseline starting from what the country has already said they’re willing to do — their nationally determined contribution. But they may need to make it more ambitious to make it a truly credible baseline for reductions.

And then they would agree it’s a contract, so they would agree a price range — a price range for the units that would be transferred across the countries — and end a pre-commitment of the total money that is available to buy those mitigation outcomes if they actually happen. So if the host is successful in reducing, they can be guaranteed that there is money available to give them resources afterwards. And then, every time the host creates a national emissions inventory, to measure what their emissions actually were —

Stone:  The host actually being the country that is doing the emissions reductions?

Kerr:  The host in the country who is doing the reductions. They look at the measurement of their total emissions, and they compare that to the baseline. And if their emissions turn out to be lower than the baseline, that allows them to sell those credits in a really credible way.

Stone:  Now you mentioned that the money is dedicated up front. Is that different from what you would have seen under Kyoto, and if so, why is that important itself?

Kerr:  That’s important because politics is unstable in countries like New Zealand, and in richer countries, too. So we may make an agreement with Chile, but five years later, we might have different politics. We may have different leaders. We may have a budget crisis. And we may change our minds and decide that we don’t really want to buy those units after all. So if it’s not legally binding, we may not buy them.

We saw this with the Clean [UNINTEL] mechanism. There was a lot of encouragement for developing countries to develop these projects. It takes years to develop a project and get the actual reductions. And by the time the reductions came through, nobody wanted them. And people were stranded. And people in developing countries who tried hard feel quite burned by that experience.

Stone:  So the investing country in this example you just gave, New Zealand, cannot have a situation where it changes its politics a few years down the road and suddenly just walks away. That’s a legally binding commitment, the investment commitment that it has made.

Kerr:  Yes, that’s right.

Stone:  Okay, got it. All right. Another aspect of the climate teams concept here is that it calls for a broad working relationship between the funding countries and the countries where the reductions take place, and a high level of mutual responsibility, which you already alluded to a little bit. Can you talk about this shared responsibility and why it’s so important?

Kerr:  Yes, it’s really important because transforming to a low-emissions economy is really complex. It’s not just about implementing new technology. It’s shifting what is a dynamic economic system onto a new path. And we don’t really know how to do that, but we can learn together how best to do that, and we’ll all need to keep adapting as new opportunities come up and new challenges arise. So we need to do that best — we can do that best — if we have stronger relationships and stronger trusts. It’s easier to trust people in a small group than in an anonymous market where you’re dealing with somebody you don’t even know.

So the teams can work together. Once they’ve got the legally binding contract, they can also have collaborative activities that they do together. They can provide technical support, and they can facilitate relationships with private investors and companies who will come in and be involved in helping with the host’s transformation.

Stone:  So the sponsoring country really gets in there and helps to make this all work out, because it’s in everybody’s interest that this works out.

Kerr:  Exactly. That’s the situation you’re trying to create.

Stone:  You’ve pointed out in the past that climate teams really shouldn’t be thought of as individual projects, and you alluded to that a minute ago. But I just want to go a little bit deeper on that. Why is that distinction important?

Kerr:  So projects are problematic for a number of reasons. One, and I think the biggest one, is that they are not transformational. If you’re trying to shift a system, you have to change policies, infrastructure, investment flows, laws — a whole series of things have to change to make this a durable shift. And projects can help that, but they’re not sufficient on their own.

Also the way that it gets framed when people talk about offsets in projects is as though it’s about saving money. And that’s a very negative way to look at it. It’s not just about offsetting some emissions you’re doing somewhere else. It’s about increasing the ambition. Also projects have got a bad rep. There are a lot of phony projects, and people are very concerned about that. Often when people are talking about “offsets,” they’re talking about trees. And they’re limited to trees, and they forget actually that there are a lot of other mitigation options in the economy.

Stone:  Now there aren’t any climate team agreements in place, but some are in the works. What agreements might we see, and where?

Kerr:  So we’re looking for host countries that have strong institutions because to sign an agreement like this, you need to have strong institutions that have lots of short-run mitigation potential. And then we’re also looking for them to find partner countries who they have strong working relationships with. So an example that we’re working with actively is Chile. Chile could potentially work with New Zealand, Switzerland or Canada, where there are strong trade relationships already and very similar economies. Chile is in a situation where it’s strengthening its Paris commitment, so it could have a credible baseline. It really needs to reduce its emissions in ways that also reduce poverty and inequality. It has large opportunities in its electricity sector. Closing power plants, coal power plants, is a real opportunity, and Chile has a plan to do that already. They could potentially do that faster. And slightly scarily, they have these things in Chile — these areas called “sacrifice zones,” where the air pollution is so bad close to the coal power plants that it’s having huge health implications for the local communities. So closing those power plants could have really big implications, really big benefits for some of the local communities.

Stone:  What exactly would the investment fund, then? It would fund the closure of these coal-fired power plants, and then facilitate the building of what new resources?

Kerr:  So it would close them faster than they would otherwise close. They’ve already committed to closing them by 2040, but closing early is costly. And the new power sources primarily are solar — large scale solar — which is already happening a lot in Chile but would be accelerated. Also there are really big opportunities for electrification of transport, which would then enable increases in the scale of electricity and make the whole system work more easily.

Stone:  And then presumably these changes and these reductions would be less expensive in Chile than they would be in New Zealand, for example.

Kerr:  Much less expensive in Chile because there’s the strong social benefit from the pollution reduction, and also they are a growing economy.

Stone:  So could you tell me a little bit more about the incentive that New Zealand has to be involved with this? How important are these reductions to New Zealand actually being able to meet its own Paris commitment?

Kerr:  Right. So New Zealand is committed to doing really significant reductions in New Zealand. We are committing to a pathway to net zero long-lived gases by 2050. That legislation is in Parliament now. And also significant methane reductions from livestock. And we’re working hard on it, but that doesn’t constrain our total ambition — what we can do domestically. And so we have a commitment that probably would be extremely expensive to achieve locally. And in 2050, even if we got to net zero in New Zealand, that doesn’t mean that we can stop, because we’re still living on the same planet, and at that point, the only option we have to contribute will be outside of New Zealand.

Stone:  So you talked a few minutes ago about the fact that a host country — the countries where the projects would actually take place — must also have their own Paris commitments. And any reductions that would come from the climate team must be in addition to that. Now that sounds like that sets a pretty high standard for these countries to seek new emissions reductions. Would that maybe be prohibitive for a country to participate in the process?

Kerr:  Yes. So host countries have to have not only a commitment, but an unambiguous, clearly defined commitment, which lots don’t have. They need to have strong emissions inventories, and they have to have the ability to actually influence their emissions at a national scale, so that they can go beyond. And lots of countries won’t be able to do that, now or ever.

It is a very high standard, but there are countries that can do that, and it sets an aspirational target for those other countries to move towards. Because if you could get a climate team agreement, you might be able to mobilize really significant investment resources that would create an incentive for the countries to work towards having the infrastructure and the institutions so they can actually do that, and they don’t get stuck just accepting what is essentially aid — money — for projects.

Stone:  I think it’s really important what you just said about in developing countries, the advantages really stem from the mobilization of private capital or investment. Can you talk more about how that benefits the host countries?

Kerr:  So the countries are going to have to get to net zero at some point; otherwise the climate just keeps getting worse. To do that, estimates are that we need more than 3 trillion of capital investment every year in clean capital. At the moment, we’re getting about 500 billion, so we’re nowhere [UNINTEL]. And so for countries to be able to make that transition, they need to attract that capital. That capital is not coming from aid. It’s just way beyond the capability of any government to provide that sort of money. So they need to be able to create local economic environment and local regulations and maybe some incentive programs that will bring in that capital and that give the investors the confidence that this is not a short-term policy that will disappear but it’s actually a long-term strategy.

Stone:  And that goes back to the legal commitment that we talked about.

Kerr:  That goes back to the legal commitment and the trust among the parties and the large scale that’s involved.

Andy, there’s one thing that I wanted to add. We tend to think about the reductions that are needed, rather than the ultimate goal we’re trying to reach. And that’s old, incremental thinking. There’s no fixed amount of reductions that we need globally. What we have globally is an emissions budget, a cumulative emissions budget. And that’s a level of emissions that will keep us below 2 degrees, or even below 1.5 degrees. And within that budget, every country needs to reach net zero emissions. And these international partnerships can help countries reach that goal by helping them invest in new infrastructure, building policy, changing behaviors, changing technology. And along the way, if a country has lower emissions in one period because they get help from outside, they are likely to find it easier and not harder to have lower emissions the next period. You’re not taking away their emissions reductions. It’s only problematic for them if those reductions are temporary and quickly reversed.

So if they’re investing in durable systemic change, then the international help is only going to make it easier.

Stone:  When do you expect to see the first climate partnerships in place?

Kerr:  Well, we were hoping to get some progress in Chile at the COP, and after the recent protests, that’s obviously looking very, very unlikely. And the focus in Chile, appropriately, is directly on dealing with social issues, which I think is marvelous. I lived in Chile for a year, so it’s a country I love deeply.

But in the longer term in Chile, climate mitigation and social well-being really can go together. So as I talked about earlier, the obvious mitigation action in Chile is closure of these high-polluting coal-fired power plants. They cause terrible health impacts, and the health impacts on poor people who are the people who are in the streets protesting, to a certain extent. So closing those early could really help those communities.

And the current crisis in Chile was triggered by an increase in the cost of public transport. If an agreement like this would enable them to build an improved, low-cost service, that could be really attractive, and it could provide really real and visible benefit to millions of ordinary Chileans. So that makes me optimistic that we could design this in such a way that it could work alongside the need to reduce inequality in Chile.

Stone:  Suzi, thank you very much for talking.

Kerr:  Thank you very much.

Stone:  Today’s guest has been Suzi Kerr, chief economist with the Environmental Defense Fund. Hear more conversations like this one by checking out Energy Policy Now on iTunes and on the Kleinman Center for Energy Policy website which also has a wealth of energy policy-focused blogs and digests, and our calendar of upcoming events. Our web address is KleinmanEnergy.upenn.edu. Thanks for listening to Energy Policy Now, and have a great day.