Main Schemes Under the Compliance Carbon Market
As seen previously in this lesson, the Compliance Carbon Market landscape encompasses many different schemes serving as regulatory frameworks for entities to fulfill their emission reduction obligations and collectively contribute to the major goal of reducing greenhouse gas emissions and fostering sustainable development.
Each scheme has its unique characteristics, mechanisms, and geographical scope, reflecting the diverse approaches adopted by countries and regions. Understanding the main schemes under the compliance carbon market is crucial for comprehending the intricacies of emission trading and the global efforts to combat climate change. In this overview, we will explore some of the main schemes within the CCM, shedding light on their operations, structure, and contributions to the broader climate mitigation agenda:
- European Union Emission Trading Scheme
- California Cap-and-Trade Program
- China National Emission Trading Scheme
European Union Emissions Trading Scheme
The EU ETS is operational since 2005 and it is the oldest ETS in force. This scheme includes all European Union member states, as well as Norway, Iceland and Liechtenstein. It is currently the largest in terms of value and trading volume.
This scheme covers around 38% of the global emissions (data from 2021) which involves 10,000 installations in 3 sectors: power, industry and aviation operating in the EU. The phases of the scheme are as follows:
- Phase 1: 2005 – 2007 with unlimited use of CDM and JI credits.
- Phase 2: 2008-2012, where the use of CDM and JI credits were allowed with some restrictions and a limit of 50% of the overall reduction.
- Phase 3: 2013-2020, same as during phase 2, but more restrictions where applied.
- Phase 4: 2021-2030, during this period, the use of carbon credits is not allowed.
The EU ETS is linked to the Swiss ETS, this authorizes that allowances issued in one of the schemes can be ceded for emissions accounted by the other scheme.
Since the start of Phase 4, new reforms have been proposed to update the goals with the 2030 agenda climate targets to reach at least 55% of the emissions reductions compared with 1990 levels.
Carbon Border Adjustment Mechanism (CBAM)
The CBAM is a measure developed by the EU with the aim of preventing “carbon leakage” which will set a tariff on carbon intensive products.
In this context, carbon leakage “…occurs when industries transfer polluting production to other
countries with less stringent climate policies, or when EU products are replaced by more carbon-intensive imports.” (Accessed: EC 2023 CBAM fact sheet)
The CBAM will include 6 goods that are most at risk of carbon leakage:
- Iron & steel
How will this work?
- EU importers of goods covered by the CBAM will need to buy CBAM certificates to cover for the embedded GHG emissions of their imported inventory.
- CBAM certificate prices will be calculated based on the weekly average auction price of EU ETS allowances expressed in €/tonne of CO2 emitted.
- It is possible for importers of goods to deduct carbon price payments in the production of goods from their CBAM certificate calculation as long as the claim is supported by verified information.
California Cap-and-Trade Program
The California Cap-and-Trade Program started operations in 2012 and it currently covers around a 75% of the state´s emissions. Although it is only implemented in California, it is the biggest carbon trading program in the United States and one of the largest in the world.
This scheme covers 400 facilities in sectors such as, power, industry, buildings and transportation and it is implemented under the authority of the California Air Resources Board (CARB). The California Cap-and-Trade Program had a first compliance period from 2023 to 2024 and a second compliance period from 2015 to 2030.
This mechanism is part of the Western Climate Initiative (WCI) since 2007 and it is linked to the Québec Emissions Trading System since January 2014.
Under the California Cap-and-Trade scheme, the use of carbon credits as compliance instruments is allowed. The allocated credits must be issued by CARB, the scheme authority or a linked mechanism and must be generated from eligible projects under the 6 compliance protocols established: US forests, rice cultivation, Urban forests, mine methane capture, livestock, and ozone depleting substances.
From 2013 to 2020 the share of carbon credits used to fulfil the compliance obligations was a maximum of 8%, decreasing to 4% between 2021 and 2025 and expected to increase to 6% from 2026 to 2030.
China National Emissions Trading System
The China National Emission Trading System, which started operations in 2021, is the world´s largest scheme in terms of emissions covered (4,5 billion tCO2). This mechanisms currently represents around 44% of the nation total emissions.
Initially covering only the power sector, the scheme regulates more than 2,000 entities, however it is expected to expand during the next years and include a wider scope of economic activities.
China Certified Emissions Reductions (CCERs) credits issued from projects not covered by the national ETS can be used to offset up to 5% of the verified emissions. In 2009 the CCER offset program was developed and since 2015 started to register a broad range of project types. The CCER registry is operated by the Beijing Green Exchange.
Besides having a established national ETS, China also counts with 9 Pilot Programs operating in different cities and regions along the country: the cities of Beijing, Chongqing , Shanghai, Shenzhen, Tianjin and the provinces of Hubei, Fujian and Guangdong.