Instrument Overview
Cities own carbon trading system in which polluters can buy carbon credits generated by initiatives or organizations that are actively reducing or sequestering greenhouse gas (GHG) emissions [1].
Why it matters for cities
By putting a price on carbon and other GHG emissions, cities can [2]:
- Make climate action fairer
- Raise revenues for equitable climate action
- Accelerate private-sector transition to net zero
- Force greater disclosure and awareness about the carbon footprint of organisations, buildings, activities and more
- Trigger national or global action by demonstrating the viability of pricing policies
Key features
This approach brings cost certainty, as the city sets the prices, but does not establish a limit on emissions [2].
Like an emissions trading system, the scope and technical criteria for emissions charging schemes should be informed by an understanding of the city’s main emissions sources and include mechanisms for proper measurement and enforcement [2].
The main urban sectors targeted by emissions charging schemes to date are [2]:
- Polluting vehicles: Road pricing charges polluting vehicles for driving or parking on certain roads or in a designated zero- or low-emission zone and is well-suited to city-scale implementation.
- Fossil-fuel based electricity: Taxes or levies on electricity bills are more commonly established at national or regional level as a way of supporting renewable energy deployment and energy efficiency improvements, but have the potential to be deployed at city level if the city controls its own utility.
How It Works
This approach sets a cap on emissions, usually for a sector or segment within it – such as large buildings or industrial polluters. Those affected are given an emissions allowance, often through an auction, and can choose how to reduce their emissions. Allowances can be bought by actors who need to further reduce their emissions to remain compliant, and sold by those who are ahead of their targets – creating a market [2].
Emissions trading systems allow the city to set allowances according to climate targets, limiting the environmental impact of a sector. The price of emissions will fluctuate within the market according to those targets and other factors. Emissions trading systems can also be structured to deliver a predictable emissions reduction pathway through a steadily declining cap, becoming stricter over time and leading to a higher price for emitting GHGs [2].
To begin, determine the scope of the system – the sector(s) and segment(s) to target – and what should be regulated within them. Work with technical experts, including legal experts, to design these schemes. Focus first on the biggest emitters and/or where the city has greatest control, such as heavy industry and large buildings. The scope can be expanded later within the sectors and to new parts of the economy [2].
Benefits & Challenges for Cities [1]
Benefits
- Guarantees a minimum greenhouse gas (GHG) reduction level from those participating in the scheme.
- Provides additional revenue for those investing in measures to mitigate their emissions directly.
- Drives the cheapest options for GHG reduction first (where there is a demand for permits).
- Long term certainty to members.
- Flexibility for members in how they meet their requirements.
- Revenue generation for the government if permits are auctioned.
Challenges
- Price of allowances can be vulnerable to unexpected economic factors and disrupt market function (oversupply or low demand).
- Market-based approach supports the least-cost options, which can narrow the focus of mitigation efforts to a few winning sectors or technologies.
- Highly profitable projects are often not eligible for support through emissions trading schemes such as the clean development mechanism (CDM).
- Registration phase for projects can be long.
Use Cases
Tokyo’s Emissions Trading System [3]
The Tokyo Metropolitan Government (TMG) has developed the world’s first cap and trade program at the city level targeting energy-related CO2. Called the Emissions Trading System (ETS), the program took effect in April 2010 and covers 1,340 large facilities including industrial factories, public buildings, educational institutions and commercial buildings.
TMG began efforts to curtail Tokyo's CO2 emissions in 2000 by developing a program called the “Tokyo CO2 Emissions Reduction Program” under the “Tokyo Metropolitan Environmental Security Ordinance." This program included a voluntary emissions reduction plan with a mandatory reporting scheme for targeted facilities.
TMG prioritized CO2 emissions reductions from large-scale businesses and buildings in the industrial and commercial sectors, which represent less than 1% of all businesses in Tokyo, but account for 40% of all CO2 emissions. The initial target facilities – those using over 1,500 kL of crude oil equivalent annually – were identified using surveys under the national Energy Efficiency Law for No. 2 Type Specified Energy Conservation Facilities and through inquiries carried out independently by TMG. It has been estimated that one of these facilities emits the same amount of GHGs as 3,300 households (Miyazawa, 2010).
It took many years and a considerable amount of work to establish Tokyo’s ETS. The idea originated with the planning division of the Department of General Affairs, Bureau of Environment (BOE) of TMG in 2002, when TMG launched a project titled “Creating an Emission Trading Market” and began discussing possible emissions trading designs (Sakamoto, 2009)
TMG first developed the outline for the ETS through an expert panel and next consulted with other stakeholders to gain their acceptance. TMG collected opinions from communities, industries, municipalities, NGOs, scholars, research institutes and energy suppliers through public opinion surveys, internet-based monitoring questionnaires, and stakeholder meetings. A series of internet workshops were held to discuss (i) methods of calculating emissions, (ii) methods of categorizing emissions, and (iii) trading methodologies.
Despite this participatory approach, it was still not easy to build consensus with stakeholders. Many objections were raised by stakeholders, such as the Keidanren (Japan’s largest business lobby), during the planning process, including after the launch of Tokyo's Climate Change Strategy in 2007. Some constituencies argued that the ETS has the potential to restrict economic activities in Tokyo, and some facilities considered the proposed caps to be excessive.
Discussions concerning the emissions cap revolved around whether to make the cap mandatory or voluntary. In the end, the TMG-supported absolute cap on emissions prevailed.
The “Tokyo Metropolitan Environmental Security Ordinance” was amended by the Tokyo Metropolitan Assembly in July 2008 to include clauses for the establishment of emissions caps on large emitters, with effect from April 1, 2010. This amendment formed the legal basis for implementation of the ETS, and ETS implementation became a regulatory design issue.
Tokyo’s success in implementing the ETS can be attributed to a generally cooperative environment and the high level of technical and financial management capacity both within the government and in the private sector. Some notable features from this experience include:
- Mandatory reporting: The critical first step by TMG to establish a multi-year mandatory emissions reporting ordinance for the largest emitters in the city yielded a large database of information on GHG emissions by facility.
- Simplicity: Many companies complained that they did not have the technical capacity to develop an emissions report each year. The development of a simple reporting system that relied on existing data from electricity and fuel bills, and equipment inventory lists, was one of the most important elements of gaining acceptance for the ETS.
- Incentive Development: While the voluntary emissions reduction program yielded only minimal success in achieving actual reductions, it also afforded Tokyo the opportunity to learn about creating incentives
- Stakeholder Consultation: Interacting with stakeholders was repeatedly identified as a very important lesson learned in Tokyo. Including stakeholders from the beginning afforded TMG the chance to tailor the ETS to individual companies’ needs, while meeting TMG’s ambitious reduction goals.
- Legal Framework: Tokyo’s experience indicates that it is difficult to achieve ambitious reduction targets solely through voluntary efforts.
- Implementation Timing: Appropriately timing each step in the development of the ETS increased both private and public sector support.
- Appropriate ETS Design: Lastly, designing an ETS both appropriate to the conditions in Tokyo and responsive to the goals of TMG was essential.
When to Use It
An ETS works best as part of a well-thought-out policy package to achieve climate targets and drive sustainable development. Jurisdictions have taken different approaches to positioning their ETS relative to other policies. Ensuring the right policy mix can improve overall outcomes and help build public support for the introduction of an ETS [4].
References
[2] How cities can put a price on carbon
[4] https://openknowledge.worldbank.org/entities/publication/c0e89d6b-e90a-592b-a4c7-1c5a20d82f2c