Market Forces

How Economists Can Leverage MethaneSAT Data for Climate Action

By / Bio / Published: March 28, 2024

This blog was co-authored by Maureen Lackner (Senior Manager of Economics and Policy Analysis, Environmental Defense Fund) and Lauren Beatty (High Meadows Postdoctoral Economics Fellow, Environmental Defense Fund).

Climate change is a pressing issue, partly fueled by methane: a greenhouse gas responsible for about 30% of today’s global warming. Reducing methane emissions will slow down the rate of near-term warming and help avert the worst climate damages. To tackle this problem, Environmental Defense Fund launched MethaneSAT, the world’s first satellite developed by an environmental non-profit. MethaneSAT aims to quantify regional emissions of methane across more than 80% of oil and gas production in the world, while disaggregating diffuse area emissions and high-emitting point sources. 

MethaneSAT will generate publicly available data allowing stakeholders to track emissions and hold polluters accountable. This data will empower various actors – governments, companies, and investors – to make informed decisions about emission reduction strategies. It will be an invaluable resource for economists and public policy researchers aiming to analyze and design effective climate policies.  Read More »

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“Nothing about us without us: The case of JREDD+ in Colombia.” The importance of including all stakeholders, especially affected communities, at the decision-making table.

By / Bio / Twitter profile / Published: March 16, 2023

This blog was authored by Environmental Defense Fund economist Luis Fernández Intriago and Universidad de Los Andes professors Jorge García López and Julián Gómez Gil.

The saying “Nothing about us without us” is widely used among Indigenous Peoples and Local Communities to emphasize the importance of involving them in policies that govern their territories and communities. The expression serves as a call to action, highlighting that those affected by specific issues should be included in making policy decisions around them.

However, policymakers and researchers consistently decide on policy design and construct models without consulting and considering the opinion of the affected communities and key stakeholders. Efforts to stop deforestation are a clear example of this: new policies go into place without any input from communities that rely on forests for their livelihoods, cultures, or basic survival. These local and Indigenous communities are an untapped source of wisdom, leadership, and capacity to support efforts to conserve rainforests.

To remediate this, Environmental Defense Fund, Universidad de Los Andes, and the Centro de Estudios Manuel Ramírez, right since the beginning of the project, started an engagement process in Colombia to demonstrate how engaging key local and Indigenous stakeholders could lead to better policy design to protect forests in the country.

Why Colombia?

Colombia faces enormous challenges with deforestation: 184,000 hectares per year of natural forests were destroyed between 2017 and 2021. Deforestation accounts for 33% of the country’s total climate-warming greenhouse gas emissions. Thus, halting deforestation is critical for achieving the country’s Paris Agreement commitments (called “Nationally Determined Contribution” or NDC).

As in many other countries, the AFOLU (Agriculture, Forestry, and Other Land-use) sector is not subject to regulations in Colombia. However, this presents an excellent opportunity for the Colombian government to leverage private finance from national sources—such as through the upcoming Colombian Emissions Trading System[1] , which must be implemented by 2030—and international sources —such as the LEAF Coalition— using jurisdictional REDD+ (JREDD+) crediting. JREDD+ programs extend the REDD+ framework for sustainable forest management and conservation by addressing deforestation at the regional or ‘jurisdictional’ level—protecting forests across wide regions instead of plot-by-plot and even resources.

Climate mitigation is now a top priority for many individuals, governments, and corporations, creating strong demand for ways to stop deforestation in tropical forest countries in high-integrity ways rapidly. Our research finds that government funding required to reduce deforestation levels consistent with Colombia’s NDC could drop from $900 to $75 million when national and international private finance is harnessed.

The Study

Our study aimed to identify inclusive, equitable ways to include JREDD+ in Colombia’s climate mitigation policies. We established three parallel and interconnected pillars: first, we focused on engagement with primary stakeholders. Second, we constructed a model to illustrate how JREDD+ may help Colombia meet its NDC target cost-effectively while benefiting local communities. Third, we prepared a policy design that government can use as a guideline to integrate these approaches.

Engagement

At the beginning of the project, we knew we had to start by engaging with stakeholders to explain JREDD+. Our ultimate goal was to include the feedback and reflect relevant stakeholders’ needs—including the national government and public institutions, Indigenous groups, smallholder’s associations, NGOs, and educational institutions—in our results. We knew that communication between our research group and people who could be interested or potentially affected by the research project was crucial if we were to produce and share credible and legitimate knowledge. The knowledge acquired through these interactions can set the stage for an effective and equitable JREDD+ program in Colombia.

Source: Photos by Julián Gómez Gil.

In 2022, we hosted four engagement sessions in Tena (April 23 & 24, Cundinamarca), Florencia (May 5 & 6, Caquetá), Bogotá (October 14), and Mocoa (October 26 & 27, Putumayo). These sessions focused on the participation of representatives of the Amazon Indigenous peoples (OPIAC, OZIP, ACILAPP, etc.[2]),  other local communities and land users (farmers, cattle ranchers, and smallholders associations), NGOs (Amazon Conservation Team, WWF, Natura Foundation, Fondo Patrimonio Natural, etc.), private organizations (Emergent, Amazon Global, Permin Global, ALLCOT, Asocarbono, etc.) and national and subnational government institutions (Ministry of Environment and Sustainable Development, Sinchi Institute, Corpoamazonía, etc.). During these community meetings, we worked hard to improve participation but also set realistic expectations, and engaged in open-ended discussions where training was provided to the attendees regarding the formulation of projects of conservation, carbon markets, REDD+ projects, JREDD+ programs, guidelines of the ART-TREES standard and the operation of the LEAF call for proposals, through technical presentations and educational activities, and promoting the constant participation of the actors to create scenarios for debate and resolution of doubts.

In the same way, these spaces were used to formulate questions to the different actors, which were resolved both through open debate dynamics and through collaborative work activities, taking advantage of a closer and more direct dialogue with each one of them and a greater availability of time to delve into topics of interest. This form of participation was very well received by the Indigenous Peoples, who invited the work team to implement similar activities more frequently and in the most remote territories so that capacity building can be held and the local context is better perceived.

Given the scale of a JREDD+ program, the interaction and negotiation between local actors, institutions, intermediaries, and current individual REDD+ projects are essential. According to the discussion with stakeholders, a common problem associated with the participation of key actors and interested parties in individual REDD+ projects is that these actors tend to be treated as beneficiaries rather than partners. As a result, local communities and interested parties perceive that the design of incentives, local capacity, delivery mechanisms, transparency provisions, and distribution are only partially fair. This led us to consider fairness, representation, and transparency as critical components of policy design.

Modeling

We modeled a mechanism to integrate the potential funds generated with a JREDD+ and a national emissions trading system (ETS) to accelerate the reduction of emissions from deforestation. Mainly, we considered a scenario under which Colombia applies the LEAF coalition model on a national scale of a JREDD+ at the national level. At the same time, to ensure representativeness, bargaining power, effective resource administration, and a fair distribution of benefits, we proposed an internal administrative division of Colombia into five jurisdictions: 1. Caribbean region; 2. Andean region; 3. Pacific region; 4, Orinoquía region; and 5. Amazon region.

Our modeling revealed that integrating a JREDD+ program with a National ETS could be a cost-efficient mechanism to reduce the externality costs and disincentivize the overall GHG emissions of Colombia following the country’s regulatory framework, the emissions trajectory, and the mitigation objectives. These mechanisms could be used to generate and allocate economic resources to ensure efficient emissions mitigation, the incorporation of safeguards (such as environmental education), and the minimization and/or compensation of adverse socio-environmental interventions. In addition, the modeling results imply the generation of co-benefits (economic, social, and environmental) that contribute to the development of ethnic communities, local communities, and other private land users.

Policy Design (Results)

After receiving input from stakeholders and results from our model, we prepared a policy design that the government can use as a guideline to integrate JREDD+ inclusively and equitably. Here are our results:

  • Inclusive negotiating for benefits-sharing: To build a JREDD+ in Colombia, stakeholders demand a significant role in negotiating the benefit-sharing system. In this regard, national and subnational agreements should be established to achieve at least the following three main objectives: 1) provide effective monetary and non-monetary incentives; 2) contribute towards building legitimacy through a fair and equitable distribution of resources, responsibilities, and bargaining power; 3) include local actors in the decision-making process and recognize them as partners rather than beneficiaries.
  • Use vertical and horizontal benefit-sharing to equitably distribute benefits and negotiating power: A vertical benefit-sharing approach uses national voluntary and regulated market funds (ETS) to distribute benefits among national and subnational governments, non-governmental actors, intermediaries, NGOs, and facilitators. These transactions are carried out to ensure the operability of the program. On the other hand, horizontal benefit-sharing seeks to distribute the remaining benefits as incentive payments among and within communities, households, and local stakeholders. A fair design of benefit sharing must be vertical and horizontal to guarantee the bargaining power of the actors involved in deforestation and conservation activities.
  • Centralize decision-making, but include regional representation: Our main policy proposal is to centralize the decision-making with a single National Board of Directors. This board would be responsible for making central decisions and directly managing the resource flow. On the other hand, a Jurisdictional Board of Directors composed of representatives from each of the six jurisdictions must be created to guarantee the representativity and bargaining power of the different actors. This board will function as a participatory body overseeing operational decisions that a respective Jurisdictional Operating Unit should execute. With this management structure, it is possible to use the three sources of funding (JREDD+ results-based payments, the ETS, and the carbon tax) and to effectively distribute the benefits among implementing partners (NGOs, private sector, etc.) and land users (Indigenous Peoples, local communities, farmers & ranchers, etc.)
  • Leverage allowances from emissions trading system to support efforts to conserve forests: In our study, we assumed that much-needed finance for forest protection may come from two different sources: a nationally managed fund constructed using resources from the international voluntary market and from a locally regulated market (a national ETS), where regional and local public and private institutions intermediate implementation with local communities; and a project-based fund where national or international funding goes directly to projects, with resources from both the national general budget and payment by results or other international cooperation (JREDD+). To integrate both mechanisms and be consistent with Colombia’s climate law, we propose that 20% of the cap established by the ETS can be offset with forestry emissions reductions using a jurisdictional approach. In that way, the allowances allocated by the ETS to the forestry sector will generate an additional source of income to reduce deforestation.

You can read more about our study and policy design here. In general, our recommendations in this project were derived and enriched from the participatory processes we carried out. The participants’ comments helped us to refine, redefine, and validate these recommendations.

As Colombia works toward implementing its Emissions Trading System by 2030, we encourage them to consider these recommendations to inclusively and equitably incorporate JREDD+. We encourage them to consult with stakeholders such as Indigenous and locally affected communities to develop climate policy.

 

[1] The Colombian Emissions Trading System is scheduled to be implemented by 2030 according to the Law 1931 of 2018 and Law 2126 of 2021.

[2] OPIAC- National Organization of the Indigenous People of the Colombian Amazon, OZIP- Organization of Indigenous People of Putumayo Department, ACILAPP- Association of Traditional Authorities of the Indigenous Peoples of Leguizamo Municipality and Upper Predio Putumayo Territories

 

 

 

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What policy instrument options are available to address methane emissions from the oil and gas sector?

By / Bio / Published: August 25, 2022

This blog was coauthored by Maureen Lackner, Huong Nguyen and Aaron Wolfe.

New EDF Economics Discussion Paper describes the instrument options available to policy makers in both oil and gas producing as well as importing countries.

Measuring to assess context and quantity of methane emissions in the EU. Photographer: Jarno Verhoef.

Policy makers around the world are increasingly recognizing the need to drastically reduce methane emissions in parallel with carbon dioxide emissions. More than a hundred countries have signed the Global Methane Pledge and made a collective commitment to reduce global methane emissions by 30% by 2030 from 2020 levels.

Reducing methane emissions in the oil and gas sector is considered particularly promising, not only because of estimated low or even negative net abatement costs for many of these emission sources, but also because most of these solutions involve mature existing technologies and work practices.

What public policy instruments can help reduce methane emissions from the oil and gas sector? We address this question in our recent EDF Economics Discussion Paper Policy Instrument Options for Addressing Methane Emissions from the Oil and Gas Sector from the perspectives of oil and gas producing as well as importing countries. Read More »

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Building North-South cooperation to fight the ‘tragedies’ of climate change

By / Published: March 29, 2021

This post draws from a chapter for a book I wrote in 2020: “Overcoming the tragedy of distance – cooperating with our friends’ friends” in Living with the Climate Crisis ed. Tom Doig. Bridget Williams Books, Wellington, New Zealand 

I believe that finding ways to work more intensively and effectively with people with very different resources, cultures and life experiences is critical to rapid global decarbonization.

For me, the unprecedented challenge from climate change is that most mitigation has to occur in countries with fewer resources. Key high-emitting countries such as India, China, Indonesia and Brazil, as well as smaller countries such as Laos, Ethiopia, and Peru are all projected, in business as usual forecasts, to have rising emissions as they develop.

These countries have strongly competing priorities, as they also need to address poverty or resolve internal conflict. They are unlikely to mitigate greenhouse-gases fast enough without help. Yet, to stabilize the climate, those countries and all others must reduce their emissions to net zero and the faster the better.

Models by EDF(2019, pp. 200-232) and IETA(2019) suggest that we could double the amount of global carbon dioxide mitigation to 2035 with no extra cost if richer countries can support emerging and developing countries effectively, but that’s hard. ‘International trading’ of mitigation, where richer countries, or their companies, support developing countries to reduce their greenhouse gas emissions, has long been a goal, but it has not yet lived up to its promise.

We will all benefit if we can resolve this together. I also think those of us with more resources owe it to poorer countries to help; they are the most vulnerable to climate change, to which they have contributed little. It seems deeply unfair to also expect them to bear the full burden of their transition to net-zero.

Tragedies of climate change

Humans however often struggle with cooperating and sharing with people who are far away from them, in either a physical or social sense. I struggle to empathize with people in India whom I will never meet, but who will need support when they replace coal-fired power plants with renewables as India moves toward net-zero emissions. I don’t think I’m alone in this and I imagine they feel the same about people like me who are not taking rapid action on climate change even when we can afford it.

Is our fundamental problem in mobilizing resources to support developing country decarbonization this “tragedy of distance?”

“Tragedies” are situations where we humans are brought down by our own flaws. These tragedies make climate change particularly challenging to address.

The “tragedy of the commons” suggests that if we can’t exclude people from use of a common resource, we are doomed to destroy it through overuse. For example, the fish stock in a particular area isn’t destroyed because people can’t see what is happening, but because if others are going to over-fish, whatever one individual does, it is in each individual’s personal interest to go fishing while the fish are still there. They feel they can’t protect it. That’s a self-fulfilling prophecy.

The “tragedy of the horizon” suggests that individual and collective myopia and selfishness lead us to take actions now although they will cause our future selves and future generations to suffer. The phrase was coined by Mark Carney (Former Governor, Bank of England) for climate change, but another classic example is most countries’ inability to invest enough of the wealth that they extract from non-renewable minerals, like oil, to sustain their citizens’ well-being in the future. Again, we can see this coming but struggle to avoid it.

These tragedies are not inevitable. Some communities solve them impressively (e.g., the many examples from the work of Nobel Prize winner Elinor Ostrom and her colleagues, or Norway’s Sovereign Wealth Fund). Others find partial solutions. New Zealand avoids the worst problems of overfishing by limiting catches through the Quota Management System, a system which, though imperfect, has now lasted for more than thirty years. Humans also have relatively good ‘institutions’ for making intergenerational decisions. Families tend to have strong bonds for at least a couple of generations. We may not make “efficient” decisions for our own future selves and our descendants, but we do, generally, care.

Climate change is an issue where all tragedies—of distance, of the commons, and of the horizon—are fully engaged. Climate change is global and cumulative, with extremely long-term, long-lived impacts. Although it is now clear that people alive today are already experiencing the impacts, the major benefits from our mitigation actions today will be experienced not by older people like me, but by our children and grandchildren.

We have worked hard for nearly thirty years to build institutions at the international, national and local level to coordinate mitigation efforts. We need to keep doing this. Despite our lack of obvious success so far, we have made considerable progress. However, these approaches depend very much on a hierarchical approach. That approach is appealingly elegant and logical in responding to a global problem, and is a critical part of the solution, but it’s not working fast enough. And having only one coherent institutional approach is inherently fragile.

We need both coordination and cooperation

United Nations climate agreements try to replicate the success of economic institutions in managing human activity. However, in contrast to institutions that aim to address climate change, many international economic institutions, such as those that govern commerce and banking are essentially addressing a coordination problem. Their success is not easily replicated when dealing with a global cooperation problem like climate change.

Maybe the approaches of more traditional and Indigenous societies have something to offer us as a complement. These societies have broad networks of relationships that extend into the natural world and rely on these and shared belief systems rather than institutions to manage goals and conflicting interests. Traditional ways of thinking of Māori, the Indigenous people of New Zealand, contrast strongly with the hierarchical assumptions about how humans relate to each other and the natural world, “the Great Chain of Being,” common in much contemporary Western thought.

Can we harness shared belief systems and existing North-South relationship networks and reduce the tragedy of distance? Could that help us build deep collaborations among small groups of countries to support the large-scale transfers of resources needed for efficient global climate action?

Is it better to think about transfers to support mitigation in developing countries as primarily about establishing networks of relational contracts, and the strong communication and trust that supports them, rather than centralized carbon commodity trading systems where all have to trust one system?

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Barriers to tapping the potential of carbon markets for agriculture

By / Bio / Published: January 21, 2021

An EDF analysis of carbon credits for rice growers shows great climate and cost-savings potential, but is that enough for farmers to participate?

In 2015, rice became the first crop for which agricultural carbon credits were valid for compliance in the California cap-and-trade system. Unfortunately, as of September 2020, no compliance credits have been generated. A newly released report by EDF explores the reasons why.

In the U.S., agricultural greenhouse gas emissions comprise approximately 10% of the economy-wide total emissions. The share of emissions from agriculture is larger for non-CO2 GHGs, making up approximately 78% of the U.S. total for nitrous oxide and 38% for methane.

Policymakers are eager to find mitigation opportunities in the agriculture sector, best evidenced by the bipartisan Growing Climate Solutions Act, which seeks to enable voluntary credit markets for producers to mitigate climate change.

As both policymakers and producers eye the potential of the agriculture sector to grow climate solutions, it’s worth taking a closer look at both the opportunities and the challenges that must first be addressed to tap this potential.

A case study of carbon credits for rice

EDF’s work on agricultural carbon credits began in earnest in 2007 after receiving the first of several U.S. Department of Agriculture grants to investigate how to bring agricultural emissions reduction credits to market. The objective was to design crediting systems that achieve the dual benefits of reducing GHG emissions while also providing meaningful revenue opportunities to landowners.

An EDF discussion paper summarizes some of the underlying analytics of these efforts for a series of crops and geographies. One specific example from the paper — rice in California — highlights both the carbon- and cost-saving opportunities associated with conservation practices like bailing and drainage, and the challenges associated with agricultural credits as a viable abatement measure.

The opportunity: Lowering costs and emissions

Rice is a GHG-intensive crop. It emits twice the amount of emissions per calorie as wheat, three times that of maize, and accounts for 5-20% of global methane emissions. EDF’s research focused on the nation’s two most intensive rice production regions — California’s Sacramento Valley and Mid-Southern U.S. These regions produce 26% and 72% of the domestic rice supply, respectively.

Our analysis began by using a biogeochemical model, DeNitrification-DeComposition (DNDC), to assess the abatement potential for current (baseline) practices and other lower-GHG alternatives in the California rice region. This led our scientists to discover a fairly large overall mitigation potential of more than 0.6 MMt-CO2e-100/year, or approximately 15%, of overall California rice emissions.

We then developed estimates of abatement costs by practice through cost budgets and consultation with agronomists. Combining this with the GHG modeling yielded the following marginal abatement cost curves (one for each practice).

Marginal Abatement Cost Curves for Rice Practices in California. Abbreviations: N (number of fields); WF (winter flooding of rice paddies); NWF (no winter flooding). WF/NWF practices follow a 60/40% distribution, historically, and play a role in determining the scale of achievable reductions.

These graphs illustrate that for all but one practice there are negative abatement costs with averages ranging from -$29.45/acre to -$0.45/acre, suggesting potential savings for farmers from implementing practice changes. For yields, the DNDC model projected that yields would remain relatively unchanged, aside from dry seeding, for which growers would experience an average 4.5% decrease.

These findings show great promise in terms of GHG abatement potential and cost savings for producers with minimal yield impacts (dry seeding aside). So, why aren’t growers already pursuing these practices? What barriers are getting in the way?

Three key barriers to entry

Our analysis identified a few potential barriers for farmers to generate carbon credits.

  1. Weak price signals

Understanding why growers are passing up potential cost savings from practices that reduce GHG emissions requires a closer look at farm economics. Adam Jaffe offers a useful typology for the various barriers to adoption, some of which I have identified below.

Putting the practice costs and yield impacts together, we can imagine a scenario where we have a carbon market in place and a carbon price of $10/ton (the California spot price at the time this work was carried out). In this instance, we’d find that with an average 0.7 ton/acre reduction, most rice growers would be looking at potential revenue from the market of approximately 0.5% of their overall crop sales revenue (typically $1,500/acre), or 2.6% of their net profit (approximately $250/acre), not including further potential gains from the negative abatement costs of certain practices and locations.

Unfortunately, in context of the overarching farm economics, this makes for a weak incentive.

If we now imagine a new scenario with a carbon price closer to today’s social cost of carbon ($42/ton), we find that the potential revenue from participating in the market rises closer to 2% of crop sales revenue and 11% of net profit. At this price, the incentive appears to be substantially more robust, which tells us that, from a social standpoint and with a strong price signal, the market could be viable. But as it currently stands, conditions are falling short of this potential.

  1. Large transaction costs

Another critical consideration for engaging in any market is transaction costs — for GHG markets in particular, monitoring, reporting and verification (MRV) costs.

Our analysis found transaction costs to be significant on a per-grower basis at approximately $14/acre for an average 1,000-acre California farm. At a market price of $10/ton, transaction costs are double the average expected return from carbon markets of $7/acre, providing a steep disincentive. Even with credits priced at the higher social cost of carbon ($42/ton), transaction costs would still equal nearly 50% of potential revenue, essentially cutting their expected financial gains in half.

Further economic modeling showed the importance of allowing a way to aggregate projects for MRV transations due to the very large third-party fees incurred to verify reductions. However, even if growers use aggregation as a means to cost-share, it will be critical to find ways to use technologies like remote sensing and automated data generation and analysis to streamline this process, realize savings and still guarantee accurate verification.

  1. Changing behavior is an obstacle in itself

Finally, behavioral factors represent a hurdle that cannot be ignored — the hidden additional cost of switching practices. This cost is difficult to quantify precisely, but we know from experience that behavior is hard to shift and farming practice changes typically require planning and close coordination with a number of consultants and business partners.

Understanding this, we performed a survey for corn and almond growers, asking how much participants in a carbon market would need to be paid to reduce fertilizer applications, and thereby decrease nitrous oxide emissions. To isolate the behavioral barriers, we designed the survey to encourage the farmers to assume no additional costs, risks or yield impacts.

Their responses ranged from $18-40/acre, when a representative farmer might only receive $7/acre in returns with a $10/t carbon price. This gap in the valuation likely represents factors such as personal or cultural values and aversion to risk and uncertainty that may be very difficult to overcome using market incentives alone[1].

Managing risk and risk perceptions is a challenge that must be addressed to see widespread uptake of mitigation practices.

Where do we go from here?

The agricultural sector has the potential to play a key role in contributing to national climate goals.

Crediting systems are just one tool to support this, but more research and pilot programs are needed to help overcome the barriers to entry, increase confidence in high-quality and cost-effective credits, and also evaluate and correct for potential inequities and injustices.

EDF is launching a new phase of research dedicated to this work, in addition to developing complementary finance and policy tools that correct for existing disincentives and inequities to create a more just and resilient food system.

With the right combination of tools in the toolbox, we can unleash the power of carbon markets to boost long-term resilience on the farm and beyond.

 

[1] It is important to note that all of the numbers depicted above represent averages, and there are certainly cases for which incentives are large at the individual level, and some growers may have zero or even negative switching costs, so many farmers have ripe potential for carbon market participation.

 

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Canaries in the mine of climate cooperation

By / Published: August 9, 2020

Strong emissions trading system prices encourage and facilitate climate action but also reflect private sector confidence in governments’ commitments to long-term transformation.

Every evening in my Brooklyn neighborhood we come out onto our stoops with our children, dogs, bells, horns and pots (my contribution – inspired by the Colombian cacerolazos I witnessed protesting – non-violently, though I can’t say quietly – in Bogotá). We make a big noise to thank and celebrate the generosity and selflessness of the medical personnel and essential workers who are keeping life going during the crisis. Their example is an inspiration to us all and reminds us that humans are at essence a cooperative species. This same spirit of cooperation, backed up by strong social and political institutions including effective emissions trading systems, can help protect our climate in these difficult times.

Our focus now must be on flattening the curve, caring for the sick and vulnerable, and then getting back to work. But as we recover from this crisis, we need to do so in a way that helps us confront the next one: global climate change. Lawmakers in many countries are beginning to pivot from relief to recovery, focusing on the longer-term work of getting the economy back on track. We need that economy to have low greenhouse gas emissions.

No one should take false hope from the temporary decline in greenhouse gas emissions we have seen recently. In the short term, when economic activity falls, pollution falls. During the financial crisis of 2007-9 global greenhouse gas emissions did drop, slightly and briefly. The current economic crisis is deeper but will also pass and when it does, so too will the dip in climate pollution.

To make declines in emissions permanent, we need to seize this moment of fundamental change to ensure effective, efficient, resilient policies to lock in economic and behavioral shifts that do contribute to a transition to a low emission future where all people thrive.

One key element of the policy mix in an increasing number of countries and jurisdictions is an Emissions Trading System. These systems limit greenhouse gas emissions while allowing flexibility around where and when emissions occur.  They provide price signals to help guide clean investment and other climate actions. The limit, or cap, controls emissions; the marginal cost of achieving that limit, which depends on technology and other climate policies among other things, drives the ETS price.

What drives emission prices?

Those ETS price signals have been affected by COVID and its economic consequences. The climate challenge is no less urgent, but is the private sector feeling less pressure from governments to act? Are the canaries who sing in the healthy cooperation mine falling quiet?

Initially both the European Union and New Zealand ETS prices dropped dramatically, but they have since clawed back much of their initial losses. Will they recover and even move to levels consistent with modeled estimates of prices required to stabilize the global at less than two degrees above pre-industrial levels? A recent survey by IETA suggests not. It finds private sector expectations of emissions prices over the next 10 years have fallen relative to expectations a year ago by 12% (EU and the Western Climate Initiative (WCI) – California and Quebec), 27% (Regional Greenhouse Gas initiative), and 35 – 38% (New Zealand and Mexico). What does this mean?

During a recession, when capital is scarce, because ETS units are assets their price will also tend to fall in a similar way to other assets. As the financial sector recovers, asset prices should also recover. These price adjustments, like those driven by new information about mitigation technology provide useful signals. However, general economic factors and new information about the true costs of achieving our climate goals are not the only drivers of these changes in prices.

Because an emissions trading system is a market created by regulation, the price in each ETS is deeply dependent on expectations about the future stringency of that regulation. Because allowances in emissions trading systems are ‘bankable’ (they can be saved for future use by those who emit less and hence surrender fewer allowances today), as long as there is a ‘bank’ of units available their price depends on what people expect demand and supply will be in future, not just on current scarcity. That makes ETS prices a barometer of both the stringency of policy that politicians are willing to implement—and also of the private sector’s expectations about how stringent policy is likely to be over the long term.

In 2008 there was some international optimism about climate action. The Kyoto Protocol had come into force in 2005; obligations began in 2008. Climate policies were gaining traction in many countries. The EU emissions trading system started its second phase with a healthy price, and New Zealand’s ETS kicked off with similar prices. These reflected that optimism. In the US, the Regional Greenhouse Gas Initiative held its first auction in 2008, and California was moving forward after passing the ambitious Global Warming Solutions Act in 2006. But by December 2009, the price of carbon allowances in the EU emissions trading system had fallen, partly as a result of economic contraction, and more importantly things were beginning to fall apart internationally starting with an unsuccessful U.N. Climate Summit in Copenhagen. By the end of 2012 emission prices had largely collapsed (though prices in the California ETS, launched one year later, were protected by a price floor). Recession was not the only driver, and it’s always hard to disentangle various causes, but the financial crisis did not help.

After the financial crisis and recession, the private sector clearly did not believe that policy makers would impose stringent caps in emissions trading systems; this kept prices low. Optimism around government-led climate action had evaporated. Emission prices, and the signals they provide to investors and companies, only really recovered after 2016 in New Zealand and 2018 in Europe. We can’t wait that long again.

How we can protect climate action from shocks like COVID

Recessions don’t have to lead us to fall even further behind in addressing climate change. The way we manage ETS can help protect the continuity of climate efforts and returns on clean investments against short-term loss of confidence in governments’ commitments to climate cooperation. Possibly the smaller shifts in expectations of prices in the EU and in California and Quebec reflect their more mature institutions and price management approaches—the Market Stability Reserve in the EU and the auction price floor in California and Quebec. Market players have more confidence that the institutions will manage short-term shocks. Critically though, they also have more confidence—though still not enough—that these jurisdictions have a sustained commitment to real long-term change.

When ETS participants believe in society’s commitment to long-term, transformational change to low emissions, ETS prices will reflect only the cost of achieving that.

Recent reductions have come at an enormous cost to human wellbeing. This is not what a transition to a low-emissions economy looks like. The good news: there is still time to stop climate change in ways that allow people and nature to prosper together, and human well-being to burgeon. But the window for such action is rapidly closing. We need a positive and attractive transformation, not economic crises that cause distress and bring only temporary reductions.

We can’t avoid the worst impacts of climate change unless we transform our energy and food systems—changing not only our production but also our culture and the stories we tell ourselves about how we can flourish in balance with our environment. This requires a shift in the fundamental assumptions of all key actors (politicians, business people, officials) and a change in institutions (public and private—e.g. banks, regulations, education, supply chains) so they support of a new set of clean investments and activities and discourage emissions-intensive activities. This won’t happen through forced change. It needs leadership and steady effort.

Once the immediate health crisis from COVID abates we don’t want policy makers (and the public) to lose sight of climate policy and action and focus only on short-term economic concerns. This is what we experienced after 2009 when unemployment levels stayed high long after the global recession passed. We need to find a way to address these critical economic needs while also moving even more aggressively towards a strong, longer-term economic future that offers high wellbeing in a stable climate.

When ETS market players believe we are really on this track, ETS prices will reflect their prediction of the costs of achieving global climate goals—not their assessment of political will.  Maybe we are closer than we think. Prices in the EU-ETS recently passed €30 for the first time since 2006 (briefly before falling a little with bad economic news) and NZ-ETS prices have reached their highest level ever around NZ$34 despite the announced closure of a major emitter. I’m optimistic. The canaries are singing again.  We need to help them to sing even louder.

 

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