Benefits of Emissions Trading Taking Stock of the Impacts of Emissions Trading Systems Worldwide Alexander Eden, Charlotte Unger, William Acworth, Kristian Wilkening, Constanze Haug Current version updated August 2018 First published July 2016, Berlin, Germany BENEFITS OF EMISSIONS TRADING 2 This paper has been drafted in response to a request from ICAP members to provide a consolidated overview of theory and empirical evidence on the benefits of emissions trading systems ETS. Its goal is to provide robust arguments in favor of ETS that can be used to communicate and to support decision-making on an appropriate climate change mitigation strategy. The paper is based on research conducted by the ICAP Secretariat, surveying official ination, grey and academic literature for evidence of the effects of ETS across the currently operating systems around the world. The findings and opinions expressed in this paper are the sole responsibility of its authors. They do not necessarily reflect the views of ICAP or its members. The authors would like to gratefully acknowledge the support and kindly provided by Jason Gray of the California Air Resources Board, Angelika Smuda of the German Federal Ministry for the Environment, Nature Conservation and Nuclear Safety, Christian Flachsland of the Mercator Research Institute on Global Commons and Climate Change, and Johannes Ackva, Kateryna Stelmakh and Marissa Santikarn of the ICAP Secretariat, as well as the comments expressed by ICAP members during discussions at the ICAP meeting of 2015. The authors would also like to thank Lisa Murken, Luke Sherman and Cecilia Kilimann for providing research assistance. BENEFITS OF EMISSIONS TRADING 3 Contents cutive summary 4 1. Introduction . 9 2. ETS ensures environmental effectiveness . 10 2.1 ETS targets emissions reductions . 10 2.2 ETS enables clear emissions reduction paths 11 3. ETS makes economic sense 13 3.1 ETS delivers cost-effective abatement . 13 3.2 ETS provides flexibility . 14 3.3 ETS encourages low-carbon development, decoupling emissions from economic growth . 15 3.4 ETS promotes the deployment and innovation of low-carbon technology 16 4. ETS supports further public policy objectives 18 4.1 ETS generates revenues 18 4.2 ETS produces emissions data and facilitates ination sharing . 20 4.3 ETS creates substantial co-benefits . 21 4.4 ETS can be adapted to country-specific contexts . 22 4.5 ETS is politically feasible . 23 4.6 ETS allows for linking with other systems, fostering international climate action . 23 Conclusion 25 Appendix 1. Summary table of evidence 26 Reference list 28 BENEFITS OF EMISSIONS TRADING 4 cutive summary The last decade has seen worldwide growth of emissions trading systems ETS for climate change mitigation. In 2017, there are 19 systems in operation, at the supra-national, national, state, provincial, and city level, and several others are under consideration. In 2018, the combined value of ETS worldwide not including the Chinese National ETS is estimated to be more than USD 34 billion, while jurisdictions with an operating ETS now generate more than 50 of global gross domestic product GDP. As experience with ETS continues to grow, so too does the body of literature which attempts to measure empirically its impacts. Drawing on academic literature and official reports, this paper reviews the theory and empirical evidence for the benefits of ETS under three broad categories the environmental benefits of ETS targeting emissions reductions, the economic benefits of ETS as a cost-effective market-based mechanism, and the potential for ETS to support broader public policy objectives. A summary of the evidence to date on the benefits of ETS is provided in Table E.S.1 at the end of this section. ETS ensures environmental effectiveness ETS targets emissions reductions. Evidence from existing systems shows ETS policy has driven emissions reductions, even when accounting for external factors. Estimates of emissions reductions attribute the EU ETS with 3 of aggregate emissions in Phase I. During the beginning of Phase II 2008-2010 when the policy was at its most influential, covered firms in Germany reduced emissions 25-28 more than comparable non-covered firms. For the RGGI states, modelling results indicate that emissions from covered entities would have been 24 higher in the absence of an ETS. Similar reductions from baseline emissions have been achieved under the Tokyo ETS 26; however, not all of these can be attributed solely to the ETS. ETS enables clear emissions reduction paths. The quantity-based approach of ETS ensures emissions remain at or below the specified emissions cap across the covered sectors. Jurisdictions implementing ETS have aimed to adopt progressively declining, credible caps in line with national climate targets, providing a clear emissions reduction path over the mid- to long-term. ETS makes economic sense ETS delivers cost-effective abatement. In OECD countries, studies have determined ETS to be a highly cost-effective mitigation option. A recent OECD study found that compared to other instruments, ETS and broad-base carbon taxes incurred the lowest costs per ton of abated emissions. ETS provides flexibility. ETS allows firms to choose where and when to reduce emissions. The cheapest abatement options are selected first. Moreover, participants can abate emissions when it is most cost-effective to do so. Furthermore, the price signal created through an ETS automatically adapts to changing economic conditions, making emission reductions cheaper when the economy slows and more expensive during periods of growth. ETS encourages low-carbon development, decoupling emissions from economic growth. ETS facilitates the transition to a low-carbon economy and supports countries in breaking away from a carbon-intensive development path. Many jurisdictions with an ETS are already trending towards less carbon-BENEFITS OF EMISSIONS TRADING 5 intensive economies. For example, the carbon intensity of California’s economy has fallen 33 since it peaked in 2001, while during the same period the state’s economy has grown by 37. From 2012-2015, emissions in the state steadily declined, while GDP, population and employment grew. Between 2008 and 2015, the RGGI states reduced CO2 emissions from the power sector by 30, while the regional economy grew by 25. Analysis also shows that during the first nine years of operation 2009-2017, the RGGI program led to 44,700 new job years. ETS promotes the deployment and innovation of low-carbon technology. ETS establishes a carbon price, which changes market conditions to favor low-carbon production processes, products, and technologies, and provides an incentive for innovation. Evidence shows that ETS contributes to the deployment of market-ready low-carbon technology, as well as technological innovation close to the market. For example, research indicates that from 2005-2007, the EU ETS constituted a main driver for small-scale investments with short amortization times in covered firms in Germany. Studies also show that ETS is driving innovation. According to recent research, the EU ETS increased low carbon patenting of regulated firms by 10 compared to otherwise similar firms. ETS supports further public policy objectives ETS generates revenues. Through auctioning allowances, ETS can generate an additional source of government revenue, which may then be used to invest in further climate action, lower other taxes, or compensate low-income households or adversely impacted groups. By the end of 2017, ETS jurisdictions have raised nearly USD 35 billion from auctioning. This figure is set to grow as the coverage of ETS and the share of auctioned allowances increase. From when auctioning was introduced until the start of 2018, the EU ETS raised more than USD 25.8 billion, RGGI USD 2.8 billion, California USD 6.4 billion and Qubec USD 1.6 billion in auctioning revenues. ETS produces emissions data and facilitates ination sharing. The monitoring, reporting, and verification MRV systems underpinning an ETS generate emissions data. This ination allows jurisdictions to take stock of economy-wide emissions, identify the abatement potential of covered sectors, and track progress towards mitigation targets. Evidence from the EU ETS suggests that participating in an ETS helps to raise awareness about climate change issues at the management level of firms and facilitates ination exchange among key stakeholders. Likewise, knowledge sharing between the regulator and covered entities has been a key element of the emission reductions achieved under Tokyo’s ETS. MRV systems are currently being established in Mexico, Thailand, Vietnam, Turkey, and Russia. ETS creates substantial co-benefits. ETS can have positive synergies with public health, energy security, job creation and land-use change objectives. In particular, it has the potential to generate long-term public health benefits by reducing local air pollution. From 2009-2017, the reduction in hazardous pollutants in RGGI states has led to an estimated more than USD 10 billion in health savings from avoided illness, hospital visits, lost work days, and premature deaths. ETS can be adapted to country-specific contexts. The jurisdictions of the 20 ETS currently in operation display notable geographic, political, and economic differences. The ability to adapt the ETS framework means that the policy can be designed to accommodate domestic priorities and fulfill different roles in a jurisdiction’s policy mix. BENEFITS OF EMISSIONS TRADING 6 ETS is politically feasible. Implementing an ETS has proven politically feasible across a range of jurisdictions. ETS is shown to be compatible with new and existing policy frameworks. Stakeholder concerns can be accommodated, for example, through targeted rules on allocation and revenue use, helping build support among domestic interest groups. ETS allows for linking with other systems, fostering international climate action. ETS policy enables distinct systems to be linked through the mutual recognition of emissions allowances. Linking reduces overall compliance costs, increases market liquidity, promotes market stability, and reduces the risk of leakage. There are already precedents for successful linking. For California and Qubec, modelling studies indicate that linking cuts overall compliance costs by one-third compared to achieving the same targets unilaterally. Table E.S.1 Summary table outlining the evidence for the benefits of ETS Benefit Jurisdictions Summary of evidence Sources Emissions reductions EU, RGGI, California, Tokyo ETS has driven emissions reductions, even when accounting for external factors  EU ETS impacts range from an estimated 3 of aggregate emissions to 25-28 at the firm level, with the impact on emissions being greatest during the beginning of Phase II 2008-2010  Based on modelling, RGGI contributed to around 50 of the emission reductions achieved in the energy sector of RGGI participating states between 2009 and 2012, and emissions would have been 24 higher in the absence of the ETS. California and Qubec verified emissions have remained below the cap Tokyo achieved a 26 reduction below baseline emissions European Environment Agency 20174, Martin et al. 20145, Abrell et al. 20116, Petrick and Wagner 20147, Bel and Joseph 20149, Murray and Maniloff 201511, ARB 201514, ARB 201715,Tokyo Metropolitan Government 201816 Cost-effective abatement Global OECD countries ETS and broad-based carbon taxes achieve lowest-cost abatement when compared with other instruments OECD 201324 Decoupling emissions from growth California, EU, RGGI Jurisdictions with an ETS demonstrate an overall trend towards decreasing carbon intensity not directly attributable to ETS  From 1990 to 2016, emissions intensity of the EU economy was reduced by around 50, and decoupling occurred in all member states.  The carbon intensity of California’s economy has fallen 33 percent since it peaked in 2001, while the state’s economy has grown by 37 percent. From 2012-2015, emissions in the state steadily declined, while GDP, population and employment grew. Between 2008 and 2015, the RGGI states reduced CO2 emissions from the power sector by 30, while the regional economy grew by 25.During the first nine years of operation, the RGGI program led to over 44,700 new job years European Environment Agency 20174, European Commission 201641, Denny Ellerman et al. 201642 California Air Resources Board 201740, Stutt et al. 201613, , RGGI 201543, , Hibbard et al. 201844 Deployment and innovation of low-carbon technology EU, Tokyo ETS promotes the deployment and innovation of low-carbon technology and processes close to the market. ETS has a small but positive effect on patenting of low-carbon technology in covered firms.  The EU ETS increased low carbon patenting of regulated firms by 10 compared to otherwise similar firms. At the aggregate level, the EU ETS has resulted in a 1 increase in low carbon patents compared to the counter factual.  For covered firms in Germany, from 2005-2007 the EU ETS constituted a main driver for small-scale investments with short amortization times. Tokyo’s ETS has resulted in energy efficient low-carbon technologies in the building sector particularly LED lights and efficient air conditioning units. European Commission 201545, Tokyo Metropolitan Government 201546, Martin et al. 201249, Martin et al. 2012b50, Hoffman 200751, Borghesi et al. 201252, Anderson et al. 201153, Delarue et al. 200854, Calel and Dechezlepetre 201655, Nishida et al. 201647 ETS generates revenues with various uses EU, Germany, California, Qubec, RGGI, Australia By the end of 2017, ETS jurisdictions had raised around USD 37 billion from auctioning emission permits. This revenue is used for various purposes, including furthering climate action and compensating low-income households. Revenues to the end of 2017 1  EU ETS – USD 25.8 billion since 2008; European Union 200969, RGGI 201710, RGGI 201870 Hsia-Kiung and Morehouse 201571, Gouvernement du Qubec 201873, Centre for Climate and Energy Solutions 201175 BENEFITS OF EMISSIONS TRADING 8  RGGI – USD 2.8 billion since 2009,  California – USD 6.4 billion since 2012 and  Qubec – USD 1.6 billion since 2013. Data production and ination sharing Global, EU, Tokyo Countries currently considering an ETS are developing MRV systems and gathering emissions data. ETS has also raised the issue of climate change to management boards of companies, and has facilitated ination sharing among key stakeholders. MRV systems are currently being established in Mexico, Thailand, Vietnam, Turkey, and Russia. Neuhoff 201176, Laing et al. 201477, Tokyo Metropolitan Government 201278 Co-benefits RGGI, China, USA, Germany, N