A Whirlwind Tour of Global Carbon Markets, with Stefano De Clara

Notable Quotes

• Emissions trading systems are becoming more prevalent: “As of today, we have 29 different emissions trading systems in force, with about 20 more either under development or under consideration in different parts of the world … More or less, one-third of the global population lives under an [emissions trading system] in force at the moment. In terms of the share of global emissions, about 17 percent of global emissions are currently under an [emissions trading system] cap. Jurisdictions accounting for roughly 55 percent of the global GDP are using an emissions trading system to cover parts of their economies.” (2:55)
• Major emitters are working to expand their emissions trading systems: “China has, at the moment, the largest emissions trading system in operation, if you look at the size of the cap or emissions covered. It has been in operation for two years … but pretty much still [is] in pilot mode … The system is operating and compliance is ... enforced, but the system is also being increasingly and progressively reformed to make sure that it functions in a correct way and that all the building blocks are in place … The system will be progressively expanded to other sectors … At the moment, it only covers power generation.” (10:52)
• US states essentially are creating their own carbon markets: “In the United States, at the state level, things are happening on the carbon pricing front that basically make up for the federal-level inaction on explicit carbon pricing … If you look at the [emissions trading system] map in our report, basically all of the West Coast is colored in …, thanks to the addition of Washington in 2023 and Oregon in 2022, on top of the California program, which has been around for more than a decade now. The East Coast is progressively being colored in.” (23:04)

Top of the Stack

• Emissions Trading Worldwide: 2023 International Carbon Action Partnership Status Report from the International Carbon Action Partnership
• The New Map: Energy, Climate, and the Clash of Nations by Daniel Yergin
• The Ministry for the Future by Kim Stanley Robinson
• “Facing Fears and Imagining Innovation for Climate Change, with Kim Stanley Robinson” from the Resources Radio podcast

The Full Transcript

Daniel Raimi: Hello and welcome to Resources Radio, a weekly podcast from Resources for the Future (RFF). I’m your host, Daniel Raimi. Today, we talk with Stefano De Clara, the Head of Secretariat at the International Carbon Action Partnership, or ICAP. A few months ago, ICAP released its 10th annual update on emissions trading around the world.

In today’s episode, Stefano will walk us through some of the biggest developments from carbon markets in Europe, Asia, Africa, and the Americas. As we discuss—although the last few years have been rocky for global energy markets—carbon markets have proven to be quite resilient and are increasingly being used to help cities, states, and nations around the world achieve their climate goals. Stefano will break it all down in this week’s episode. Stay with us.

Stefano De Clara, from the International Carbon Action Partnership, welcome back to Resources Radio. It’s great to have you again.

Stefano De Clara: Thanks, it’s always a pleasure to be here.

Daniel Raimi: So, Stefano, as many of our listeners know, we talk just about every year with you, and, previously, it was with some of your colleagues about a report that you put together each year on emissions trading systems around the world. That term, “ETS,” or “emissions trading system,” is one that we’re going to use a lot today.

The report is such a valuable summary, at least from my perspective, of trends in ETSs around the world, what’s been happening, and really getting into some of the details of policy design and lessons learned over time. It’s a great resource. We’ll have a link to it in the show notes. I hope people will check it out. We’re going to be talking about some of the key findings from the report today. Does that sound good? Do you want to add any additional context?

Stefano De Clara: No, it all sounds good. Again, it is a yearly report that takes stock of what happens in the ETS space. Just for clarity—we look specifically at compliance emissions trading systems, which is a subset of the broader carbon pricing landscape. As you said, we also evaluate at a yearly point at which we can pause for a second and take stock of what happened over the last 12 months. I’m more than happy to dive into the latest report with you.

Daniel Raimi: Excellent. Because we’ve had you on the show before, we’re going to skip our usual get-to-know-you question and dive right into the substance—also because we have tons of ground to cover. Can you get us started by giving us a sense of the scale and scope of emissions trading programs around the world? How many people live in regions with an ETS? What proportion of global CO2 emissions are covered, and can you provide other relevant stats like that?

Stefano De Clara: Sure. Starting from the bare numbers, as of today, we do have 29 different emissions trading systems in force, with about 20 more either under development or under consideration in different parts of the world. If you look at the ETS map as a whole, emissions trading systems either under development, under consideration, or already enforced really span the globe and all continents. More or less, one-third of the global population lives under an ETS in force at the moment. In terms of the share of global emissions, about 17—or just over 17—percent of global emissions are currently under an ETS cap. Jurisdictions accounting for roughly 55 percent of the global GDP are using an emissions trading system to cover parts of their economies.

Daniel Raimi: That summary information is captured really nicely, as it is each year, with some infographics that start on page 28 or 27 that people can check out in the report—some really great maps and infographics helping to understand the scale and scope of these programs.

When you look over the last year or so, are there any big-picture trends that stand out to you that carry across all the different programs that you look at?

Stefano De Clara: Yeah. Again, as I mentioned earlier, the status report is always a nice stocktaking opportunity, and this year’s edition was even more so, mainly because it was the 10th one. We’ve been doing this report for a decade now, and by doing the 10th edition, we also look back at what changed over the last decade. Since we did the first edition, both the number of emissions systems in force, as well as the global share of emissions under an ETS cap, more than doubled. That is quite significant and really testifies to the moment that there has been behind the implementation and design of these systems over the last decade, and still now as we see the big pipeline of new systems that we’re expecting to come online in the coming years.

So, the big trends—number one is definitely the momentum that we saw—and that we’re still seeing—behind ETS design and implementation. The second key trend is the remarkable resilience that most systems worldwide have shown to what was the first-ever global energy crisis. As we all know, 2022 was quite an eventful year, but across the board, almost all of the emissions trading systems did show a great level of resilience. And if you look at how things played out with the previous crisis from the COVID pandemic, but also looking back at the 2008 financial crisis, having that kind of resilience in emissions trading systems could not be taken for granted.

We can really thank the implementation of stability measures and reforms that improve the systems’ functioning for the great resilience that systems have shown. On the back of that, I think the third and last thing worth noting is that prices across most systems remained stable throughout 2022, which, again, is a sign of great resilience that it remains stable at relatively high prices, because over the years of 2019, 2020, and 2021, we saw quite a lot of gains in ETS prices almost across the board.

2022 turned out to be yet another record year for the collection of auctioning revenues, as prices stabilized at high levels, and auctioning was used in more and more systems around the world. This is quite significant, because, as we all know, auctioning revenues are quite an important tool at the disposal of governments or ETS regulators to either further advance climate action or to protect exposed parts of the population from high energy prices or unintended effects from carbon prices.

Daniel Raimi: That’s a great high-level summary and really nicely illustrates some big-picture trends. Let’s go to the regional picture now. We’re going to again do a little bit of a lightning tour around the world, and I think we’ll start in Europe this year. That’s partly because the European ETS is the longest-running system globally—at least I think it is; it’s been active since 2005. What were some of the most important developments for the EU ETS this year and for some of its big member countries?

Stefano De Clara: Yeah, we saw a lot happening in Europe over the last few months. I mean, earlier this year, what is called the “Fit for 55” package was finally adopted after a long negotiation process within the different European institutions. That package is the single biggest climate package that the European Union has ever adopted.

It spans a lot of different fronts. It’s much broader than just ETS, but it has deep implications for the functioning of the EU ETS. First of all, we have a new and more ambitious target for 2030, which aligns the ETS trajectory with the eventual 2050 net-zero target. We now have plans to launch a second, separate ETS that will cover the sectors of road transport and the fuels used for heating in buildings. We will have the inclusion of the maritime sector in the first ETS and something that caught quite a lot of headlines around the world: we will also see the implementation of the carbon border adjustment mechanism (CBAM), as a way to protect competitiveness of European producers vis-à-vis third-party competitors. Again, this is the first time ever that an instrument like that will be designed and implemented in conjunction with the carbon pricing policy.

Daniel Raimi: It’s going to be fascinating to watch how that evolves. Some colleagues of mine at RFF have done some work on the CBAM. Such a fascinating topic. I wish we could talk more about Europe, but there’s so much more to talk about in other parts of the world.

Let’s jump over to Asia, where China has the largest ETS in the world, I believe, in terms of emissions covered. Can you give us an update on what’s happening in China, and, in particular, how the economic slowdown it’s experienced has affected the national- and city-level pilot programs, if at all?

Stefano De Clara: Yeah. As you pointed out, China has, at the moment, the largest emissions trading system in operation, if you look at the size of the cap or the size of emissions covered. It has been in operation for two years now. It was launched all the way back in 2021 in the middle of the pandemic, when China was first starting to see that economic downturn that you pointed out; that hasn’t really slowed down plans for the ETS rollout, but it has obviously created some additional complexities.

Overall, I think the Chinese ETS is enforced but pretty much still in pilot mode, so to speak, meaning that it is trying to find the right footing to move forward. If you think about the sheer size of the system and the sheer size of the Chinese economy, it’s not an easy fit to design and implement such a massive system.

What is happening at the moment is that the system is operating, and compliance is being enforced, but the system is also being increasingly and progressively reformed to make sure that it functions in a correct way and that all the building blocks are in place and are functioning in a correct way to then build onto it in a second phase, when the system will be progressively expanded to other sectors. I think it’s worth stressing that, at the moment, it only covers power generation. It is still in that phase where it’s trying to find the right footing to then be consolidated and expanded over time.

Daniel Raimi: Okay, got it. One thing that people wonder about with China sometimes—and I wonder, too, with the ETS—is the degree of transparency in the market. How is that shaping up in terms of transparency of prices and trading and all that stuff?

Stefano De Clara: It’s a good question. I think it’s still a bit early to say, because we are in the early days, and a lot of the infrastructure around trading and around the disclosure of trading data, for example, is still being put in place. I think looking at the regional pilot systems in China could be a good reference. There, you find both examples of relatively sophisticated pilots—that trade with a good degree of transparency and can also attract foreign investors and foreign traders to the markets—all the way down to others that are way less transparent and more illiquid.

I think it’ll be interesting to see which direction the national system will take. Again, going back to the previous point, I think the other regulator at the moment is mainly busy trying to make sure that the system functions before they really open up to foreign traders or before they really open up to investors to play in the market.

Daniel Raimi: Yeah, that makes a lot of sense. Let’s move south and west from China to India, which, according to demographers, overtook China as the world’s most populous country this year. India is now planning for its own national ETS. Can you talk a little bit about where India is in its development of its program and what we know about it so far?

Stefano De Clara: Yeah, it’s a really interesting example to look at. Over the last 12 months or so, a lot of things happened, and India is moving forward at a great pace. I think it’ll be one of the most interesting countries to look at in the coming months. India did publish a blueprint announcing plans to develop what they call a domestic market, and then more details emerged over time.

I think it’s now clear that the development of this market will be staggered over a few different phases. In the first phase, a voluntary market will be developed, which will be supported by a domestic, project-based offset mechanism, which is referred to as the carbon offset mechanism. Things will start to be set up and be put in place through a voluntary market framework, which, in a second phase, is expected to evolve and morph into a compliance market with mandatory participation for regulated entities and more characteristics of an actual compliance emissions trading system. I think there’s an interesting potential there, but again, it’ll be a phase-in process, and we’ll have to see how things move forward.

Daniel Raimi: Do we know, at this point, what sectors we would expect to see covered? For example, in the voluntary market, are we talking mostly about forestry-related projects? Are we talking about energy projects? And then, once we get into the compliance phase, are we talking about the electricity sector? Are we talking about industry? Do we know any of those details yet?

Stefano De Clara: Not formally, but, for example, the voluntary-market phase will be built on the back of an existing mechanism that is basically an energy-efficiency certification mechanism that does work in the energy sector—across the power sector and industry. I think that can be expected to be the bulk of the new system. But then, I think once they put that in place, it can also be expected that they will go broader than that and possibly branch out to other sectors, as well.

Daniel Raimi: Very interesting. A lot to watch, certainly, in India and China and elsewhere, of course, but those are two of the most really dynamic elements. Another place where ETS programs are under consideration is Nigeria, which I was really interested to see on the map. Nigeria is, of course, Africa’s most populous nation by a long shot, and it’s really fascinating to see them looking into an ETS, as well. Can you give us a sense, similar to India, of where they are in the process, what sectors we might expect to be covered, and how ambitious you think policymakers might be in terms of the cap and its trajectory?

Stefano De Clara: Yeah, and that’s quite an exciting development. As you pointed out, for the first time this year, Africa got colored up on the ETS map, which is a really welcome development. We do not have a massive amount of details at the moment. There was an announcement at the last Conference of the Parties in Sharm el-Sheikh from high-level representatives from Nigeria that announced the plans for the development of a carbon market and an emissions trading mechanism.

I think details are being worked out as we speak, basically. I would expect more bits and pieces of information to emerge over the coming months. If you ask me, my guess would be that Nigeria is maybe a bit similar to India and also quite likely to mix some elements of a crediting mechanism with some elements of a compliance emissions trading system. I don’t think it’s realistic to expect developing countries in general to be going for an EU ETS–style blueprint for what they would do domestically, but I think they’re likely to look at hybrid forms of carbon markets and carbon pricing that mix elements of compliance systems with elements of voluntary-market mechanisms.

Daniel Raimi: That’s interesting.

One question that I’ve been wondering about as we’ve been talking about the voluntary markets: Another way to think about this is that private-sector actors purchasing carbon offsets is certainly one big piece of a voluntary market, and I think there’s a lot of skepticism out there about offsets—and I think there’s some good justification for that, at least in some historical examples. What do you see in terms of the reliability of offsets in voluntary carbon markets moving forward? Do you think we’re making progress globally on developing better and more reliable additional offsets, or is there still a risk that there are going to be offset projects stood up and paid for that don’t really reduce emissions?

Stefano De Clara: Yeah, it’s a really good point, and I think we are making progress, but there are still obviously some issues with at least some parts of the voluntary market instruments. I think it is objectively a really challenging effort to basically figure out in the first place what it means for the voluntary market to be Paris-aligned or Paris-compatible. I think it’s also quite normal that there are some pain points in the way, but I’m quite hopeful that progress is being made, and there are initiatives out there that are trying to come up with quality criteria or at least share standards and benchmarks for how the voluntary market and voluntary market instruments can operate in a Paris-Agreement world.

I think we are likely going to see an increasing level of scrutiny, which will also bring an increased level of quality and integrity to the voluntary market going forward. Obviously, the heavy lifting will still lie with compliance markets, but voluntary markets can play an important role in complementing what is happening on the compliance side.

Daniel Raimi: It is very helpful that we now have better technologies to be able to do monitoring and verification. Things like satellite-based technologies and other tools will probably be really useful in that context.

Stefano De Clara: Yeah, for sure. I think we’re making progress on a few different fronts from the governance aspects of it, all the way down to the enabling technologies that are making the market function. It’s not an easy process, but we can be hopeful that we’ll land in a good place.

Daniel Raimi: Yeah, I certainly hope so. Let’s move further west, all the way west, at least on the map, to the Americas and, in particular, North America, where RFF is based and where many of our listeners are. In North America, one of the exciting developments here is that the states of Oregon and Washington State are now up and running with their ETSs. Can you give us an overview of those programs?

Stefano De Clara: Sure. Exciting developments in this context—you can really see how, in the United States, at the state level, things are happening on the carbon pricing front that basically make up for the federal-level inaction on explicit carbon pricing. Obviously, the outlook for climate policies with the current administration is much, much more positive than with the previous one. But again, carbon pricing is still not an easy topic for a federal-level discussion.

You can really see how an increasing number of states are moving forward with state-level action on carbon pricing. I mean, if you look at the ETS map in our report, basically all of the West Coast is colored in. We’ll get to this in a second, but that is thanks to the addition of Washington in 2023 and Oregon in 2022, on top of the California program, which has been around for more than a decade now. The East Coast is progressively being colored in, as we also have states and programs there that operate on that front.

Both the Washington State program and the Oregon State program are quite interesting. The Oregon one is interesting, because they went for the model of having an upstream emissions trading system that applies to fuel distributors. By doing that, you create a carbon price signal that then is passed down to the end user of these products. They really cover just a handful of fuel distributors, but, by doing that, they capture almost 50 percent of the state’s emissions.

Washington State is interesting, because it was explicitly developed, so to speak, with a linking-ready model that—not by default and not automatically, but with a relatively low level of effort—will make the program compatible for linking with the California cap-and-trade program, for example, or jointly with the California cap-and-trade program and the Quebec cap-and-trade program, which already interlinked with each other.

So, you can really see how, as soon as the other system is up and running, it’ll go and link with other systems to create a larger joint system, as is already the case again with California and Quebec. It’s quite an exciting development there.

Daniel Raimi: Yeah, it is really interesting to see the sort of bottom-up evolution of carbon markets in the United States, and I’m particularly excited to see that North Carolina’s on the map, because I grew up in North Carolina, and it would be cool to see it get it shaded all the way into the blue—to be fully active in a carbon market in the years ahead. But, then again, I’m not going to hold my breath.

One last question, Stefano, before we go to our Top of the Stack segment, which is looking forward a little bit. As you survey the markets and look ahead to the rest of this year and into 2024, what are some of the key topics that are on your mind that you’re going to be watching?

Stefano De Clara: First of all, I think it’ll be interesting to keep an eye on what will happen next in the ETS space and, more specifically, which new systems will come online. As I pointed out earlier, there are a lot of systems either under development or under consideration at the moment. This is especially true in some of the European-neighboring countries—such as Turkey, which is really moving toward the launch of an ETS—as well as in the Asia-Pacific and in Latin America. I’m looking forward to doing the status report again next year to find out which systems will have started to operate by then.

Then, topic-wise, I think some of the key topics that will characterize the months and years ahead in the ETS space will be alignment with the net-zero targets, which will be a really important topic for all of the jurisdictions that are operating an emissions system at the moment. The second topic will be around sector expansion. Again, systems are expanding to cover an increasing amount of emissions in more and more sectors, which is an active trend that we are seeing in many systems already.

Last but not least, going back to the question you were raising, I think there is a really important discussion around the interplay between compliance and voluntary carbon market instruments and in understanding how the two things can complement each other and go hand in hand. Especially because, again, the lines between the two are becoming increasingly blurry, to some extent, and especially because an increasing number of countries around the world are looking at implementing or taking advantage of both things at the same time. That will become a more important topic as we go forward.

Daniel Raimi: There is so much to watch and so many places to do the watching, which is why this report is so valuable and useful in its succinctness. I’m always impressed, Stefano, by your ability to summarize so much information in such a short period of time. Congratulations again on the 10th year of the report, and thanks for helping us understand it.

Now let’s go to the last question that we ask all of our guests, which is asking you to recommend something that you’ve read or watched or heard that’s related to the environment, even if it’s just a little bit related, that you think is really great and that you think our audience might enjoy. What’s at the top of your literal or metaphorical reading stack, Stefano?

Stefano De Clara: As a quick disclaimer, I will say that, when it comes to reading, I do tend to prioritize leisure reading over work-related reading, so I might not be super up to date, but a couple of books that caught my attention lately are a book called The New Map: Energy, Climate, and the Clash of Nations, which I think does an interesting job at describing the geopolitical aspects of the energy and climate discussion. It’s quite interesting, because it came out before the Russian invasion of Ukraine, but it already anticipated some of the bigger geopolitical matters that are playing a role in shaping the current political landscape. It’s quite interesting.

I also finally got around to reading Ministry for the Future, which I’m sure that a lot of listeners will be familiar with or will have heard about. I’m still going through it, but I do find it quite an entertaining read. It’s nice to see what we work with day to day being translated into a novel, which can be a bit daunting at times, but it also provides nice opportunities for reflecting how these things can be seen in perspective and what the broader implications of our work are. I’m enjoying my read there.

Daniel Raimi: Really interesting. And your definition of leisure reading is pretty impressive—those are both two very large, very heavy books. Dan Yergin’s The New Map and Kim Stanley Robinson’s Ministry for the Future. We actually interviewed Kim Stanley Robinson on the show about a year and a half ago—

Stefano De Clara: Oh wow, okay.

Daniel Raimi: That was pretty fascinating.

Stefano De Clara: I think I spotted a reference to one of your books in The New Map, in case you didn’t realize.

Daniel Raimi: Yeah, I actually did know that. It was definitely an honor to be cited by Dan Yergin.

Stefano De Clara: Congratulations for that.

Daniel Raimi: Thanks, Stefano. And thank you again for coming on the show and helping us understand carbon markets around the world. It’s been a fascinating discussion.

Stefano De Clara: No, it’s a pleasure. Thanks for having me, and I’m looking forward to coming back next year, if you want to have us back.

Daniel Raimi: Oh yeah, we’d love to do it again next year, so we’ll look forward to that, too.

Stefano De Clara: Perfect; thank you.

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