Emissions Trading Worldwide: 2022 ICAP Status Report

Climate change is the defining challenge of this decade. Without concerted efforts to decarbonize economies around the world and reduce emissions, our collective goal of limiting global warming to 1.5°C, or even to 2°C, will be out of reach. Governments and companies are responding to the climate emergency by ramping up their ambition: setting new climate targets and committing to net zero by mid-century.

Achieving net zero in time will be challenging. Governments’ net zero commitments cover roughly 90% of global GHG emissions, but many are not yet supported by near-term policies. To reach these longterm goals, countries must rapidly implement adequate policy frameworks and those already in place must be bolstered. In this context, emissions trading will be critical, and will increasingly play a key role as the policy tool of choice to drive decarbonization. At the end of 2021 ETSs covered 37% of emissions in jurisdictions that have enshrined their net zero targets in law and 17% of emissions in jurisdictions where net zero targets are under development or discussion.

The 2022 International Carbon Action Partnership (ICAP) Status Report demonstrates how ETS developments are proliferating and picking up pace across the globe, with an increasing number of systems. There are now 25 such systems in force, covering 17% of global GHG emissions. 22 ETSs are currently under development or under consideration, mainly in South America and South-East Asia. Today, almost 1/3 of the global population lives under an active ETS.

Existing systems are maturing, becoming increasingly resilient to external shocks, and several governments around the world are undertaking reforms to align their ETS with net zero targets. This increase in global ambition has resulted in an increase in carbon prices across almost all systems, reflecting the expectations of more ambitious emissions caps in the future. Allowance prices in the EU ETS reached a record high of more than USD 100 at the end of 2021, and the market’s auctions generated a revenue of USD 36,7 billion in 2021, representing a growth of almost 63%. The rise in allowance prices and revenues can be observed in nearly all systems, from North America across to the Asia Pacific. In North America, the allowance price in California and Quebec grew from USD 18 to USD 28, and from USD 8 to USD 14 in the Regional Greenhouse Gas Initiative (RGGI). Across the Asia-Pacific region, significant pricerises were recorded in Korea, from USD21 to USD 30, and in New Zealand, from USD 27 to USD 46.

While carbon prices are rising against a backdrop of high energy prices in several regions around the world, public acceptance of carbon pricing is essential to its political feasibility, effectiveness, and longevity. Emissions trading offers tools to ensure that the most vulnerable are protected from negative impacts, such as California’s ring-fencing of ETS revenues to support disadvantaged and low-income communities and household rebates via utility bills. By the end of 2021, global ETSs had raised a record USD 161 billion in auctioning revenues, growing by just over 50% since the end of 2020.

In the years ahead, we must continue to learn from each other’s experiences on how best to design programs to support a just transition, communicate the benefits of carbon pricing, and how to mitigate its impacts where needed, to gain and maintain public support.

New systems are gaining momentum in their design and implementation. China’s national ETS commenced trading, becoming the largest carbon market in the world in terms of covered emissions. It covers over 4 billion tCO2 representing over 40% of its emissions. 2021 also witnessed the launch of national carbon markets in the UK and Germany.

This newest edition of the ICAP Emissions Trading Worldwide report lays out the latest developments and salient ETS trends from the past year. A series of infographics examine and compare ETS facts and figures, and detailed factsheets have been compiled on each system currently in force, under development, or under consideration. The report also features in-depth articles from policymakers and experts from key jurisdictions around the world.

To ensure that the maritime sector contributes to the EU’s climate ambitions, the European Commission made the proposal to extend the scope of the EU ETS to cover CO2 emissions from large ships. In its article, the Commission presents the key stages of this sectoral expansion, the main opportunities and challenges, as well as the need for further action in the framework of the International Maritime Organization. The article provides important insights for moving forward on maritime decarbonization.

Meanwhile, the UK ETS has now been up and running for one year. An article from the UK government provides reflections on the progress the UK has made and how it has aligned the system with its national net zero framework. As a frontrunner on net zero climate legislation, the UK’s experience yields valuable lessons on how to balance ambition with competitiveness and preserving stability for participants.

California has seen firsthand the destructive force of climate change, with wildfires ripping through the state this past year and exacerbating existing disparities in the community. Its article lays out the jurisdiction’s innovative approaches to ensuring a sustainable and fair transition to net zero. The California ETS provides policymakers around the world with an important real-world example of how distributional impacts of carbon pricing instruments like ETS can be addressed and environmental justice advanced. This issue will continue to grow in relevance as jurisdictions hotly debate how to strengthen and expand their own ETSs.

The world’s largest carbon market, the Chinese national ETS, is discussed by experts from SinoCarbon, a prominent Chinese think-tank. Having now completed its first compliance cycle, China is looking ahead at strengthening the system’s legal foundations, expanding the scope of the ETS to different industrial sectors, improving data quality, and making decisions on offset use and how to allocate allowances.

The Carbon Pricing in the Americas Platform (CPA) sheds light on the increasing interest in carbon pricing across the Americas. With its article, the CPA reflects on the role and prospects for carbon markets in the region, and how it will continue to support these discussions by fostering dialogue, sharing best practice, and facilitating the convergence of carbon pricing policies.

Finally, the International Energy Agency (IEA) details what it means to translate net zero targets into policy measures that can deliver the necessary level of emission reductions and removals. The article assesses the role of emission removals and the use of both domestic and international carbon markets to drive them. This is an emerging debate as we strive for net zero, and understanding the implications of these technologies will increasingly gain relevance.

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