Kiwi expertise leading the world on emissions trading

Mar 8, 2016

A New Zealand economist has just helped launch a report that will help any country in the world set up an emissions trading system.

“Many countries have indicated that they intend to use emissions trading systems as part of their effort to meet their commitments under the Paris Agreement,” said Suzi Kerr, Senior Fellow at Motu Economic and Public Policy Research and co-author of an authoritative Emissions Trading in Practice: A handbook on design and implementation published by the World Bank and International Carbon Action Partnership.

As of 2016, emissions trading systems were operating in 35 countries, 12 states or provinces, and seven cities, covering 40% of global GDP. Additional systems are under development in a wide range of locations. This is the first ever handbook designed to help any country in the world design a system to suit their locally specific needs.

An emissions trading system is a policy tool and it can be designed to achieve a range of outcomes – environmental, economic, and social. Emissions Trading in Practice: A handbook on design and implementation sets out a ten-step process for designing such a system. At each step, there are a series of decisions or actions that will shape major features of the system.

“Every country or jurisdiction has different requirements, due to its emissions profile, the strength of its emission reduction commitment relative to its local mitigation opportunities, its political priorities and its existing regulatory structure.”

“What this handbook provides is a generically useful way forward that we know can be used straight off the bat in places like Egypt, Chile, Colombia, and Mexico. Even better, we know it can help them design a system that will work for their local conditions,” said Dr Kerr.

Considerable experience with the New Zealand Emissions Trading Scheme (NZ ETS) and long study of environmental markets in diverse jurisdictions made Dr Kerr the obvious choice to co-lead the project with an economist from the Environmental Defense Fund in the USA in collaboration with the World Bank Partnership for Market Readiness and the International Carbon Action Partnership. The project had contributors from around the globe and the team of key authors included Dr Kerr and Motu Policy Fellow, Catherine Leining, who as a government official helped to design the NZ ETS and participated in international climate change negotiations on market mechanisms.

“We worked really hard to present different choices for features across systems with no bias, and to apply the wide range of lessons learned from practical experience in different countries. It is really important that each emissions trading system is tailor made for each location so that we avoid a ‘do we have a solution for you’ type of deal,” said Dr Kerr.

“The handbook doesn’t get down into the highly technical detail required to implement design choices, but we think it explains enough of the complexity to provide fundamental guidance so governments will be able to see how they can fit pieces together to construct their own effective emissions trading system,” said Dr Kerr.

The Handbook will be a key resources for the World Bank, which supports the development of ETS and other market mechanisms in more than 20 of the largest emerging economies through its Partnership for Market Readiness. For example, the Partnership is currently supporting the development of a national Chinese ETS with an US$8 million grant and is carrying out analytical work and consultations on several essential components of the ETS design.

“If well designed, emissions trading helps to achieve low-cost emissions reductions in ways that mobilize private sector actors, attract investment, and encourage international cooperation,” said Pierre Guigon, Environmental Specialist at The World Bank.

“However, to maximize effectiveness, any ETS needs to be designed in a way that is appropriate to its context. This handbook is intended to help decision makers, policy practitioners, and stakeholders achieve this goal,” said Mr Guigon.

The handbook will also be used by the International Carbon Action Partnership to help with capacity building particularly in countries with developing economies. In addition, Dr Kerr hopes the handbook will fill the void as a textbook for tertiary students and policy practitioners who want an entry-level guide to emissions trading.

“Our team wanted to help people avoid mistakes that have been learned through experience. We hope this publication will stop countries trying to set up carbon copies of other markets that may be inappropriate for their situation,” said Dr Kerr.

This handbook is timely for New Zealand. The government is currently reviewing some fundamental features of the NZ ETS and considering how best to adapt it to be effective in the post-Paris world.

“The handbook can help us navigate through the complexities of interrelated ETS features. Other countries have tried new things since we created our system. We can learn from them,” said Dr Kerr.

The Emissions Trading in Practice: A handbook on design and implementation was prepared jointly by an international team of experts led by Motu Economic and Public Policy Research and the Environmental Defense Fund, with a significant contribution from Vivid Economics and international reviewers. It can be downloaded from the World Bank website.