The urgency of rapid and ambitious climate action was made clear in last year’s IPCC Special Report on 1.5°C. The IPCC also stressed that strong carbon price signals, coupled with further policy instruments, can support ambitious and cost-effective emissions reductions. As jurisdictions look to implement domestic climate policies, carbon markets are emerging and evolving to fill a central role in the transition to a low-carbon economy. Worldwide, emissions trading systems have become an important part of the policy response, with 20 systems now operating across four continents.

Reforms begin to take effect

This edition of the International Carbon Action Partnership’s (ICAP) Emissions Trading Worldwide Status Report looks back on the major developments in emissions trading over the past year. For many established systems, 2018 was a year of implementing reforms in preparation for the post-2020 era. As these changes start to kick in, significant price effects can be seen.

The key determinant of the mitigation impact of an ETS is the cap and how it declines over time. Several major systems are now implementing ambitious caps out to 2030 that not only give businesses predictable planning horizons, but also line up with their economy-wide climate targets. At the same time, a balance must be struck between tightening the cap and protecting sectors genuinely at risk of carbon leakage. In this area, real progress is being made in designing provisions that can protect the competitiveness of covered industries while still driving low-carbon investment. A diverse range of market stability instruments are also coming into play to better guard markets against unforeseen developments.

The ICAP Status Report 2019 features articles from policymakers around the world that provide personal insights into the many innovative approaches to ETS design currently being implemented. As explained by Kim Jung-Hwan of the Ministry of Environment in the Republic of Korea, a market stability reserve is one of several design features that have helped to create an increasingly robust carbon market in the country. In an interview with Rajinder Sahota and Jean-Yves Benoit, readers can also get a behind-the-scenes look at the successful collaboration between California and Québec, the jurisdictions in the linked carbon market of the Western Climate Initiative.

A new generation of emissions trading

The experiences gained from established systems are also making it easier for new carbon markets to emerge. Indeed, significant progress is being made in the development of a new generation of ETS, most notably in the major economies of China and Mexico, both of which are working hard to lay the foundation for national carbon markets covering the power and industrial sectors. In this year’s report, Victor Escalona of Mexico’s Ministry of Environment and Natural Resources (SEMARNAT) discusses the development of Mexico’s pilot ETS regulation over the last year, reflecting on a constructive private sector engagement and lessons from international experience. With insights from China, Qian Guoqiang, Chen Zhibin, and Lai Han of SinoCarbon examine the dynamic development of the Chinese national ETS and the role of the pilot programs in the learning-by-doing process.

As one of the key fora for ETS policymakers worldwide to compare notes and share lessons learned, ICAP looks forward to continuing stimulating discussions in an ever-expanding circle of peers—pioneering and fine-tuning carbon markets as a key tool on the path towards deep decarbonization.

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