Carbon Market Policy Dialogue

The Carbon Market Policy Dialogue (CMPD) is established with the aim of deepening cooperation between the European Commission and other ETS regulators. The CMPD consists of the interaction among the CEG members and their exchanges with external subjects. It culminates in three meetings which see the participation of the CEG and individuals among the targeted policymakers and relevant stakeholders. The CMDP addresses five topics highly relevant to international carbon market cooperation.

“Environmental ambition: scope, stringency, and policy mix” (Topic 1)

The scope and the stringency of an ETS (as measured, respectively, by the share of total GHG emissions covered, and by the total volume of allowances relative to business-as-usual emissions) determine its level of environmental ambition. The decision on both scope and stringency, however, needs to factor in the other existing or potential policies that also reduce GHG emissions (e.g. renewable energy and energy efficiency policies), i.e. the wider policy mix. How do the ETSs in the CMPD differ from one another with respect to environmental ambition? What are the implications of heterogeneity in this dimension for different possible forms of their integration?

“Price control: volume- and price-based mechanisms” (Topic 2)

While a well-functioning ETS can be expected to minimise the cost of achieving a given emission reduction target, this is only really true for the short term. External factors, such as variations in economic activity and in the wider policy mix, can have major impacts on emission allowance prices. Excessively low or excessively high carbon prices can compromise the cost effectiveness of the system over the long term. This eventuality calls for direct or indirect ways to control carbon prices to some extent. How do the ETSs in the CMPD differ from one another with respect to control of carbon prices? What are the implications of heterogeneity in this dimension for different possible forms of their integration?

“Carbon leakage prevention: free allocation and other measures” (Topic 3)

In an ETS, free allocation of emission allowances is the basic approach for safeguarding the competitiveness of regulated sectors exposed to international competition and, thereby, for minimising the risk of carbon leakage. Over time, however, the shrinking volume of allowances implies that free allocation becomes less effective and, therefore, further measures are needed. The main approaches complementary to free allocation are support to low-carbon innovation and minimisation of carbon price differentials with other economies. How do the ETSs in the CMPD differ from one another with respect to carbon leakage prevention? What are the implications of heterogeneity in this dimension for different possible forms of their integration?

“Environmental integrity: use of offsets and MRV” (Topic 4)

ETSs usually allow some use of so-called offsets (or emission credits) for compliance. The reasons are twofold: offsets can be convenient for cost containment (by tapping into cheaper abatement opportunities) and for effectively extending carbon pricing to sectors of the economy not covered by the ETS. The main risk coming with offsets is that they do not represent real additional emission reductions. If this was the case, the environmental integrity of the ETS would be compromised. The second main dimension concerning environmental integrity is that of Monitoring, Reporting and Verification (MRV) of regulated emissions. How do the ETSs in the CMPD differ from one other with respect to environmental integrity? What are the implications of heterogeneity in this dimension for different possible forms of their integration?

“Alignment: possible reforms for integration” (Topic 5)

At the end of the CMPD, the ETS regulators will need to start discussing how, in concrete terms, the integration of the ETSs may be best realised. Specifically, they will need to discuss: a) what rules they should change in the respective ETSs, and how they should change them, for the purpose of integration; b) how they should coordinate among themselves; and c) a timeline for carrying out these reforms. The conclusions reached concerning the four previous CMPD topics will be very useful for addressing these “what now?” questions.

Comparative assessment

A comparative assessment of the ETSs in the CMPD, with a view to their possible integration, will be produced. The purpose of the assessment is to feed the CMPD with useful information. So, it progresses in parallel with the CMPD and covers its topics. The month before each CMPD meeting, the participants in the meeting will receive a short report for each topic that they will discuss. The assessment will draw on the existing literature, the output of technical workshops and the CEG’s feedback.