The Expanding Horizons of Emission Trading Systems: Beyond Traditional Sectors

Emissions Trading Systems (ETSs): Expanding the Scope

The ETS approach, originally targeting core sectors like power and industry, is undergoing a transformation. The world recognizes that for holistic climate solutions, other sectors too need to come under the ambit of ETS. With countries and regions redefining their climate targets, ETS sectoral expansion becomes pivotal, which is already evident in regions like Germany, the EU, and New Zealand.

Why ETS Sectoral Expansion Matters

ETS sectoral expansion isn’t just about meeting a protocol; it has its compelling advantages:

• Wider Emission Coverage: A comprehensive ETS scope covers a significant portion of global emissions, ensuring better predictability regarding emission targets.
• Cost-effective Emission Reduction: A broadened scope brings more sectors into the fold, providing diverse avenues for emission reduction, thus ensuring cost-effectiveness.
• Balanced Competition: A uniform ETS application across sectors minimizes the risk of competitive disparities.
• Robust Carbon Market: Involving more sectors and players enhances market liquidity, stabilizing carbon prices.

Current Landscape of ETS Sectoral Coverage

Most existing ETSs primarily cover CO2 emissions from power generation and industrial processes. While power and industrial sectors remain central, primarily due to their significant emission reductions potential and relative ease of monitoring, the world is witnessing an increasing shift. Notably, out of the 24 operational ETSs, 19 have expanded their purview to sectors like transport, aviation, buildings, waste, and forestry.

Treading the Uncharted Territory: Challenges & Solutions

1. Transport and Building Sectors: Involving sectors with numerous emission sources, such as vehicles, ships, or residential heating systems, poses administrative complexities. To address this, regions like California and Québec have smartly shifted the compliance obligation to fuel distributors, streamlining the process.

2. Agriculture: Agricultural emissions are diverse, dispersed, and rooted in biological processes. Thus, integrating them into ETSs is a challenge. New Zealand’s innovative approach requires reporting of biological emissions from agriculture, signalling a paradigm shift starting 2025.

Examples of nuanced approaches to these challenges serve as guiding lights for others. For instance, Germany’s nETS in 2021, targeting fuels used in heating and transport, has strategically set the compliance obligation on fuel distributors and suppliers. Their phased approach includes fuels like gasoline and diesel from 2021, with plans to include others like coal by 2023.

Evolving Trends in ETS Sectoral Expansion

As countries push for deeper decarbonisation and strive for net-zero emission targets by 2050, it’s evident that the confines of energy and industry sectors won’t suffice. We must pave the way for holistic, sector-wide carbon pricing. Success stories, like New Zealand’s inclusion of forestry or California’s streamlined approach to transport emissions, prove that while challenges exist, innovative solutions are within reach.

Conclusion:

The journey towards holistic, global climate solutions requires out-of-the-box thinking and collaboration. ETS sectoral expansion, encompassing diverse sectors beyond traditional confines, is a step in the right direction. As the world navigates these uncharted territories, sharing experiences, successes, and lessons learned will be the guiding star.