Emissions Trading Worldwide International Carbon Action Partnership ICAP Status Report 2016 Editorial TeamMarissa Santikarn, Alexander Eden, Lina Li, William Acworth, Iurii Banshchikov, Aki Kachi, Martina Kehrer, Kateryna Stelmakh, Charlotte Unger, Kristian Wilkening, and Constanze Haug.Cite as ICAP. 2016. Emissions Trading Worldwide Status Report 2016. Berlin ICAP.The ICAP Secretariat expresses its gratitude to policymakers from the ICAP membership and further collaborators from the emissions trading field, who provided insightful, written contributions and carefully reviewed the reportSoffia Alarcn Daz Mexico, Marc Allessie Netherlands, Botagoz Akhmetova Kazakhstan, Marco Aurlio dos Santos Arajo Brazil, JeanYves Benoit Qubec, Suzanne Beurskens Netherlands, Ana Luiza Oliveira Champloni Brazil, Chen Zhibin Sinocarbon, Dave Clegern California, Mary Jane Coombs California, Claude Ct Qubec, Neil Cunningham Manitoba, MajaAlexandra Dittel European Commission, Bill Drumheller Washington State, Johannes Enzmann European Commission, Vctor Hugo Escalona Gmez Mexico, Marcus Ferdinand Point Carbon, Amelia GuyMeakin New Zealand, Kay Harrison New Zealand, Huang ChiaWen Taiwan, Satoru Iino Japan, Justin Johnson Vermont, Zhanel Karina Kazakhstan, Dalwon Kim European Commission, Masahiro Kimura Tokyo Metropolitan Government, Agnieszka Kozakiewicz European Commission, Jan Wouter Langenberg European Commission, Marat Latypov Russia, Lee Hyungsup Korea, Pongvipa Lohsomboon Thailand, Aloisio Lopes Pereira de Melo Brazil, Eva Murray New Zealand, Sachiko Nakamura Tokyo Metropolitan Government, Lois New New York, Yasushi Ogasawara Japan, Qian Guoqiang SinoCarbon, Nicole Singh RGGI, Beatriz Soares da Silva Brazil, Cameron Smith New Zealand, William Space Massachusetts, Sumon Sumetchoengprachya Thailand, Tony Usibelli Washington State, Sophie Wenger Switzerland, Harm van de Wetering Netherlands, Zeren Erik Yaşar Turkey, Olga Yukhymchuk Ukraine.The ICAP Secretariat is grateful to the Dutch Emissions Authority NEa for funding this report. adelphi consult GmbH lends scientific and technical support to the ICAP Secretariat and coordinated the implementation of the report.2Bildquelle, Bildunterschrift3international carbon action partnershipForewordLast December, the international community united in Paris to conclude a new global climate change agreement. Under the landmark Paris Agreement, all nations commit to contribute to climate change mitigation, with the goal of keeping global warming below 2C. While the current pledges may not yet be sufficient to meet this objective, the level of international commitment to this issue has never been as strong, and regular reviews will ensure that, as technology and policy evolve, countries continue to ratchet up ambition.More than 185 countries have now ted their Intended Nationally Determined Contributions INDCs, covering roughly 95 of global greenhouse gas emissions GHG. Nearly half indicate that they will use or consider using international carbon markets to reach their climate targets. At the same time, many subnational governments engaged in the fight against climate change are either using or considering domestic carbon markets as a tool to reduce their GHG emissions. Against this background, the Paris Agreement sends a highly welcome, positive signal on carbon markets. The Agreement endorses both the option for transferring mitigation outcomes among Parties and for making use of a mechanism to support mitigation and sustainable development that will succeed the Clean Development Mechanism CDM. This brings with it the need for a transparent and robust accounting framework to prevent doublecounting so that Parties can engage in marketbased cooperation on climate action while ensuring tangible emission reductions. Indeed, the Paris Agreement also delivered on this front. Now that countries have put forward their commitments and the international framework is in place, the focus is turning to domestic action. Each country will need to decide on the best way to meet their target, and the next few years will see a proliferation of domestic climate measures, including those that put a price on emissions. Emissions Trading Systems ETS are already the central element of climate policy in a number of national and subnational jurisdictions and this number will grow further in the years to come. Also beyond COP21 in Paris, 2015 has been a good year for carbon markets. Last September, Chinese President Xi Jinping officially confirmed that China will establish a national carbon market in 2017. The fact that the world’s largest emitter ally committed to strong climate action via an ETS not only strengthens the case for carbon pricing, but the announcement also gave significant momentum to the COP21 negotiations. Once operational, the Chinese national ETS will overtake the EU ETS as the world’s largest carbon market.The last year has also seen renewed interest in carbon markets in North America. With climate change moving up the political agenda in Canada, Ontario and Manitoba have both stepped forward to announce a new ETS in their respective provinces, implying that the Western Climate Initiative WCI carbon market of California and Qubec is set to grow in the upcoming years. The approval of the Clean Power Plan in the United States has also sparked interest in emissions trading as a policy option for states to meet their compliance obligations. Meanwhile, existing systems are initiating structural improvements. The overarching objective of these efforts is to ensure a credible carbon price signal over the longer term, a vision broadly shared by actors involved in emissions trading. For example, in the EU, policymakers are drawing on a decade of ETS experience to ensure their system continues to deliver emissions reductions and play its role as the key pillar of European climate policy. Other jurisdictions, like the Regional Greenhouse Gas Initiative RGGI and New Zealand are equally reviewing and adjusting their systems, in order to align with changing domestic circumstances and mitigation targets.This year’s ICAP Status Report presents an overview of all ETSs both in operation and under consideration, alongside articles from international policymakers and carbon market experts outlining the latest developments in their jurisdictions. As the report shows, the great advantage of emissions trading is that it offers policymakers a flexible tool to reduce emissions. From the city level, to the state, national, and supranational levels, an ETS can operate in a wide spectrum of political and economic settings. And as the global response to the climate challenge develops, systems will also adapt, enabling more ambitious targets to be set and eventually linking across borders to drive the global transition to a carbonneutral economy. With the Paris Agreement providing new impetus to climate policy worldwide, we are confident that the lessons learned from existing systems can in and inspire the next generation of ETS.Jean-Yves BenoitCoChair of the International Carbon Action Partnership, Steering Committee Director, Carbon Markets Division, Qubec Ministry of Sustainable Development, Environment and the Fight Against Climate ChangeMarc AllessieCoChair of the International Carbon Action Partnership, Steering CommitteeDirector, Dutch Emissions Authority NEa5international carbon action partnershipForewordJeanYves Benoit and Marc Allessie, CoChairs, International Carbon Action Partnership ICAPPractitioner Insights Designing Cap-and-Trade08 The EU ETS Preparing for Phase Four MajaAlexandra Dittel, Johannes Enzmann and Dalwon Kim, European Commission10 A Simple ETS is a More Future Proof ETSDutch Research Project The Administrative Burden of the EU ETS Can Be Reduced without Affecting the System’s ReliabilityHarm van de Wetering and Suzanne Beurskens, Dutch Emissions Authority12 The California Cap-and-Trade ProgramLooking Back on the First Phase Dave Clegern and Mary Jane Coombs, California Air Resources Board14 The Regional Greenhouse Gas InitiativeA Model for Implementing the Clean Power Plan Will Space, Massachusetts Department of Environmental ProtectionLois New, New York State Department of Environmental ConservationJustin Johnson, State of Vermont16 Emissions Trading in ChinaProgress on the Path towards a Unified National SystemQian Guoqiang and Chen Zhibin, SinoCarbon Innovation Investment Co. Ltd. 18 The Korean Emissions Trading SchemeImplementation of the Korean Emissions Trading Scheme and the Road AheadHyungsup Lee, Ministry of Environment of the Republic of Korea20 The Tokyo Cap-and-Trade ProgramNew Measures for the Second Compliance Period and Lessons Learned Masahiro Kimura, Tokyo Metropolitan GovernmentETS MapAt a Glance Global Trends in Emissions TradingDiving into the Details Planned and Operating Emissions Trading Systems Around the World30 Europe and Central Asia EU ETS ◆ Switzerland ◆ Kazakhstan ◆ Russia ◆ Turkey ◆ Ukraine38 North America Regional Greenhouse Gas Initiative ◆ Washington ◆ California ◆ QubecManitoba ◆ Ontario46 Latin America and the Caribbean Brazil ◆ Rio de Janeiro ◆ So Paolo ◆ Chile ◆ Mexico50 Asia-Pacific Japan ◆ Tokyo ◆ Saitama ◆ New Zealand ◆ Republic of Korea ◆ China ◆ Beijing ◆ Chongqing Guangdong ◆ Hubei ◆ Shanghai ◆ Shenzhen ◆ Tianjin ◆ Taiwan ◆ Thailand ◆ VietnamAbout ICAP Introducing the International Carbon Action Partnership71 List of Acronyms03072225 296967international carbon action partnershipPractitioner InsightsDesigning CapandTradeIn this section, ETS practitioners from around the world share the latest develop-ments in their systems and provide insights into the role that emissions trading plays in their climate policy mix. Firstly, Maja-Alexandra Dittel, Johannes Enzmann, and Dalwon Kim of the European Commission outline the latest preparations for Phase Four of the EU ETS. The issue of complexity is then taken up by Harm van de Wetering and Suzanne Beurskens of the Dutch Emissions Authority, who examine the potential for improving the EU ETS through simplification measures. Shifting to North America, William Space, Lois New and Justin Johnson discuss the role of the Regional Greenhouse Gas Initiative as a potential compliance model for the Clean Power Plan, while David Clegern and Mary Jane Coombs of the California Air Resources Board review the first phase of California’s Cap-and-Trade Program and discuss prospects for linking beyond Qubec. The focus then moves to Asia, whereby Qian Guoqiang and Chen Zhibin of SinoCarbon report on the latest updates in the Chinese pilot schemes and progress towards China’s national ETS. Hyungsup Lee of the Korean Ministry of Environment shares his insights into the implementation of the Korean Emissions Trading Scheme. Finally, Masahiro Kimura of the Tokyo Metropolitan Government reports on the innovative measures being introduced in the Tokyo Cap-and-Trade Program.8The EU ETS Preparing for Phase FourMaja-Alexandra Dittel, Johannes Enzmann Dalwon Kim The European CommissionBackgroundThe EU’s Emissions Trading System EU ETS is a cornerstone of the EU’s policy to fight climate change. It covers more than 11,000 installations in 31 countries 28 EU Member States, as well as Norway, Iceland and Lichtenstein including airlines pering aviation activities between EEA airports, and has created a functioning market infrastructure and a liquid market.Phase Four RevisionsIn July 2015, the European Commission ted a legislative proposal to the Council and European Parliament to make the EU ETS fit to enter Phase Four 2021–2030. The proposal is in line with the political agreement of the European Council of October 2014, to reduce greenhouse gas emissions by at least 40 domestically by 2030. CapIn order to contribute to the 2030 greenhouse gas emission reduction target, the sectors covered by the EU ETS have to reduce their emissions by 43 compared to 2005. Therefore, the overall number of emission allowances will decrease at an annual rate of 2.2 from 2021 onwards, compared to 1.74 in Phase Three 2013–2020. This means an annual reduction of 48 million tons CO2e amounting to an additional aggregate reduction of 556 million tons CO2e in Phase Four compared to continuing the current provisions.cutting emissionsFaster emissions cuts after 20202013–2020 2021–2030Additional emissions reduction 556 million tons CO2Figure 1 Emissions reductions in phase three and four of the EU ETS European Commission 2015, available athttp//ec.europa.eu/clima/policies/ets/revision/docs/ets_revision_slides_en.pdfAllocation and Carbon Leakage In view of the decision of the European Council not to reduce the share of auctioning, 57 of allowances will be auctioned in Phase Four. It is expected that around 6.3 billion allowances will be allocated for free in Phase Four. The proposal fully acknowledges the need to maintain the competitiveness of European industry. For this reason, it is proposed free allocation to sectors exposed to the risk of carbon leakage continues. However, the proposal aims at a more streamlined and targeted list of sectors that should benefit from free allocation under the carbon leakage provisions. Under the proposed measures, the carbon leakage list may be considerably reduced and finally only encompass around 50 sectors. In the light of the positive experience with benchmarkbased free allocation, and the fact that the ambition level of the existing benchmark values would decline over time due to technological progress, the proposal foresees that the 54 benchmark values be updated twice during the period 2021–2030 based on a ology that rewards innovative and fast moving sectors.“The proposal fully acknowledges the need to maintain the competitiveness of European industry.”Promoting Low Carbon InvestmentsIn view of the 2030 targets, the proposal is designed to promote low carbon investments and to support economic actors under the EU ETS to cope with the challenges they face in the transition to a low carbon economy. Two funds are set up to this end The Innovation Fund, under which 450 million allowances will be reserved, in order to support innovation in low carbon technologies and processes in renewable industry as well as to stimulate the development and deployment of environmentally safe carbon capture and storage of CO2. Demonstration projects of innovative renewable energy technologies will also be eligible. Projects in the territory of all Member States could benefit from the Innovation Fund. The Modernisation Fund, from which lowerincome Member States with a GDP per capita below 60 of the EU average will benefit. It is proposed to be financed by 2 of the total