Emissions Trading in Practice : A Handbook on Design and Implementation

As the world moves on from the climate agreement negotiated in Paris, attention is turning from the identification of emissions reduction trajectories—in the form of Nationally Determined Contributions — to crucial questions about how these emissions reductions are to be delivered and reported within the future international accounting framework. 

The experience to date shows that, if well designed, emissions trading systems (ETS) can be an effective, credible, and transparent tool for helping to achieve low-cost emissions reductions in ways that mobilize private sector actors, attract investment, and encourage international cooperation. However, to maximize effectiveness, any ETS needs to be designed in a way that is appropriate to its context. 

Emissions Trading in Practice: A Handbook on Design and Implementation is intended to help decision makers, policy practitioners, and stakeholders achieve this goal. It explains the rationale for an ETS, and sets out a 10-step process for designing an ETS. In doing so, it draws both on conceptual analysis and on some of the most important practical lessons learned to date from implementing ETSs around the world, including from the European Union, several provinces and cities in China, California and Québec, the Northeastern United States, Alberta, New Zealand, Kazakhstan, the Republic of Korea, Tokyo, and Saitama.

An ETS is a policy tool and it can be designed to achieve a range of outcomes – environmental, economic, and social. Every country or jurisdiction has different requirements, due to its emissions profile, the strength of its emission reduction commitment relative to its local mitigation opportunities, its political priorities and its existing regulatory structure. This handbook provides a generically useful way forward that can be used straight off the bat in places like Egypt, Chile, Colombia, and Mexico. Best of all, it will help any jurisdiction design a system that will work for their local conditions.

The ten-step process for designing an ETS involves a series of decisions or actions that will shape major features of the system. The steps are:

1. Decide the scope
2. Set the cap
3. Distribute allowances
4. Consider the use of offsets
5. Decide on temporal flexibility
6. Address price predictability and cost containment
7. Ensure compliance and oversight
8. Engage stakeholders, communicate and build capacities
9. Link
10. Implement, evaluate and improve

The decisions and actions taken at each step are likely to be interlinked and interdependent, which means the process for working through them will more likely be iterative than linear. For more information on this process, check out the Handbook.