Carbon Markets Update: ETS Reforms, Carbon Markets Alignments and Blockchain for Carbon Impact
Photo by IISD/ENB | Kiara Worth
story highlights

EU and California intensify cooperation on carbon markets.

New Zealand proposes emissions trading reforms.

Carbon Tracker Report predicts European Market Stability Reserve to prompt coal-to-gas switch.

Pilot Project in Thailand tests Blockchain application in solar energy for data verification and carbon credit automatization.

13 August 2018: In August and September, carbon market practitioners discussed New Zealand’s emissions trading reform proposals and price signals resulting from the European Union’s Market Stability Reserve. During the Global Climate Action Summit, the EU and California committed to deepen their engagement on carbon pricing solutions. The Summit also showcased a Blockchain application for verification and carbon credit, such as tested with Gold Standard in a pilot project in Thailand.

New Zealand Proposes Emissions Trading Reforms

The New Zealand Government proposed a range of reforms to improve its Emissions Trading System (NZ ETS) to be integrated into law by 2019. The reforms involve coordinating decision making on supply settings, auctioning, price ceilings, allocations and other measures. Specifically, the government proposes to:

  • set a limit on the number of New Zealand Units that can be released to the NZ ETS market each year;
  • auction a share of allowances;
  • implement a cost containment reserve to replace the current NZ$25 fixed price option that functions as a price ceiling;
  • limit the quantity of international units that may be used for compliance in the future;
  • reduce the share of allowances freely allocated to emissions intensive and trade exposed industries; and
  • introduce a permanent forest category in the NZ ETS.

The proposed measures will now be subject to public consultations. A final package of amendments is expected in mid-2019.[International Carbon Action Partnership Press Release] [Government of New Zealand Announcement of Consultations] [New Zealand Ministry of Environment Consultations Portal]

Is Europe Setting the Switch From Coal to Gas Into Motion?

The price of European carbon allowances (EUAs) has increased by 120% since the beginning of 2018. A report by Carbon Tracker, an independent financial think tank, explains this surge as a result of the market’s anticipation of the Market Stability Reserve (MSR), which will start in January 2019. The MSR is one of the European Commissions’ responses to the current surplus of emission allowances in the EU emissions trading system (ETS). It aims at improving the system’s resilience to major shocks by adjusting the supply of allowances to be auctioned. The €900 million allowances that were back-loaded in 2014-2016 will be transferred to the reserve rather than auctioned in 2019-2020.

The Carbon Tracker report argues that the supply squeeze caused by the MSR over 2019-23 will create a cumulative deficit for the power and aviation sectors of around €1.4bn tonnes, and that in order to clear the market over this period power generators will have to reduce emissions, primarily by switching from coal to gas. [Carbon Tracker Report] [SDG Knowledge Hub on Carbon Floor Pricing: Can Discourse Improve Carbon Markets?]

EU And California Step Up Cooperation on Carbon Markets

Almost 90 countries are planning to use carbon pricing to meet their Paris Goals, with 25 jurisdictions implementing cap and trade programs and 51 carbon pricing initiatives scheduled for implementation. During the 2018 Global Climate Action Summit, held in San Francisco from 12-14 September, European Climate Action and Energy Commissioner Miguel Arias Cañete and California Governor Jerry Brown agreed to strengthen bilateral cooperation on carbon markets.

Aligning carbon markets could amplify climate action and reduce greenhouse gas (GHG) emissions. The EU and California committed to jointly further explore the role of carbon pricing in:

  • sending investment signals for transformative technologies;
  • addressing economic competitiveness; and
  • maximizing public benefits of use of programme revenues.

Recognizing the need to engage other jurisdictions, including China, Canada, New Zealand, the European Commission and California announced further engagement through the “Florence Process,” initiated at a meeting of carbon market experts in May 2018 held in Florence, Italy. The Florence Process aims at collecting and disseminating empirical knowledge and information on the functioning of ETS worldwide, establishing a network bringing together ETS experts, and creating a forum enabling interaction among policy makers and ETS experts. [European Commission Press Release]

Blockchain Application for Carbon Credit Tokenization

Blockchain applications can be used to authenticate and track transactions using digital tokens, such as the transfer of carbon credits. South Pole, a consultancy working with businesses and governments to realize deep decarbonization pathways, is partnering with the ixo Foundation and Gold Standard to ensure that such transactions achieve their desired impact. The partners will develop an application and impact tokens on the ixo Protocol that will facilitate the monitoring, reporting and verification of data for compiling GHG inventories and originating carbon credits.

The pilot project tests the feasibility of such an application at a solar photovoltaic project bundle of 10 solar farms in Thailand, which is owned by Siam Solar Energy and registered under the coveted Gold Standard. The application protocol is intended to serve as a means of submitting verified data and automatically issuing certified carbon credits. [South Pole Press Release]

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The SDG Knowledge Hub publishes monthly climate finance updates, which largely focus on multilateral financing and cover, inter alia, mitigation and adaptation project financing news and lessons, institutional events and news, and latest developments in carbon markets and pricing. Past climate finance updates can be found under the tags: Finance Update: Climate Change; and Finance Update: Sustainable Energy.


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