On December 16, GMF in partnership with the Nicholas Institute at Duke University hosted an official UNFCCC side-event on how the United States can design a transparent and credible carbon market with the possibility of linking to a future global carbon market system. The event featured Jos Delbeke, Deputy Director-General for Environment, European Commission; Nigel Purvis, Senior GMF Fellow and President of Climate Advisers; Patrick Woodcock, Legislative Assistant for Senator Olympia Snowe; and Martin Gitlin, Managing Director, Noble Carbon. The event was moderated by Tim Profeta, Director of the Nicholas Institute.
Nigel Purvis discussed how the direction of carbon market development is changing course and heading into a less decentralized "climate federalist" system. In a climate federalist approach, states and political entities, like the European Union, will each have separate carbon markets that are tailored to the different national circumstances of each country, but are compatible and able to link to form a global market. This is also important politically, as most countries, including the United States, have greater trust in their own regulatory systems than an international oversight mechanism. However, regulation should not be taken entirely out of the hands of the United Nations, which should act as an oversight body.
Jos Delbeke discussed the experience of the European Union in crafting the EU Emission Trading System (ETS) and the desire of the EU to link its carbon market with other systems, specifically the United States. Delbeke stressed, and the other panelists agreed, that in order for different carbon markets to link, systems do not have to be identical, but compatible. Europe is closely following the debate on Capitol Hill and understands its political intensity. However, Europe experienced an equally rancorous debate filled with political hurdles in establishing the EU ETS. The EU is now entering a phase of actual emission reductions under the EU ETS and stressed that this is a gradual process. Finally, Delbeke discussed the three critical conditions required to link the EU with a U.S. market:
- States linking up must have a domestic cap that is roughly compatible with other markets.
- Incorporate regulation policies related to offsets- the United States and EU differ on this as the EU opts to incorporate offsets via the clean development mechanism, while the United States favors forest and agricultural offsets.
- The EU is concerned with the price floors and caps being proposed in Congress. Europe thinks this will make the U.S. carbon price too low.
Patrick Woodcock from Senator Snowe's office provided insight from Capitol Hill on the carbon market oversight and governance debate. Woodcock stated this will be the most significant property rights change Congress will enact in terms of property rights law. In light of the global economic crisis, Congress is increasingly concerned about the integrity of a carbon market, specifically in derivatives trading. A carbon market is also unique compared to other existing markets for three reasons:
- The U.S. carbon market does not currently exist and Congress has the opportunity to create a robust system.
- Price stability is more important than other commodity markets and the environmental integrity of the market is essential to ensuring price stability.
- The U.S. carbon market will be highly regulated and entities must be accredited and meet standards set by congressionally established Climate Registry in order to trade.
Market oversight is a major obstacle for passage of a Senate bill. Senator Snowe and other members think that it can and will be a rigorous trading regime.
Martin Gitlin reiterated the utmost importance of ensuring environmental integrity in designing and linking with other carbon markets. Traded commodities require public confidence in order for a market to succeed. Carbon markets comprise two primary markets: allowances and offsets. The offsets market is beneficial as it allows for an influx of private capital in solving a public problem. To enable capital flows, there needs to be a stable market structure and projection for investors. Thus, the carbon market must be well organized, predictable, and have a strong price. Gitlin agreed with Delbeke, but differed with Purvis in the need for standardizing offsets to be economically efficient.