Session timeout

Sorry, your session timed out after a long time of inactivity. Please click OK and Sign In again.


Interview: Dr Mauricio Bermudez-Neubauer, Associate Director & Partner at NERA Economic Consulting

Coaltrans interviewed Dr Mauricio Bermudez-Neubauer, to discuss international carbon pricing policies in light of the upcoming UN Climate Change summit, the workability of a global carbon pricing system and the relative effectiveness of the EU's ETS scheme so far.

1. How much is likely to be clarified at the UN Climate Change meeting in Paris in December around international carbon pricing policies?

I think there are good chances that we will have some form of international agreement on climate change emerging from the COP21 negotiations in Paris. Relative to 2009 (when the last attempt at such a deal was made), a very different political process is in motion today, and the economic and environmental contexts have also markedly evolved. That said, I don’t think that a successful  outcome in Paris will bring a great deal of clarity on international carbon pricing policies per se. What it is likely to bring is greater clarity on the risk that carbon will be priced in one way or another in a growing number of different jurisdictions. Indeed, a successful  treaty will likely introduce, among other things, general frameworks and principles for jurisdictions to use market mechanisms for carbon emissions and removals.   

2. Could a global carbon pricing system feasibly work?

It depends on what sort of time frame we are talking about. In the nearby future, that is, the next 10-15 years, it would be extremely difficult to have a workable carbon pricing mechanism that was uniform across the globe. The more  likely scenario is really just an extension of what we see already today: a growing patchwork of different carbon controls including cap and trade schemes, carbon taxes,  emissions performance standards and other regulations. There is some scope for some of those schemes to be linked in the future, either via the direct trading of emissions allowances or through the use and trade of crediting mechanisms such as REDD. The successful  Treaty  in Paris is likely to create enabling conditions for more of such linkages to materialise.

3. What has been the biggest challenge facing the EU ETS scheme to date?

The ETS has faced two main challenges, one structural and one political. Without the shadow of a doubt, the EU ETS’ greatest structural challenge has been the absence of a supply side adjustment mechanism. Demand for emissions allowances varies naturally with market fundamentals including weather and seasonality, , economic activity and cycles, international energy and commodity prices, the evolution of the power generation fleet, etc. However, allowance supply has always been  fixed (by regulation) in the ETS, which is one of the key the reasons why prices today are so low. As other ETS schemes in the world have learned, supply flexibility (e.g. via price collars) is an important feature of a well-functioning ETS that provides predictable and long term economic signals to investors.  The recently adopted ammendments that create the “market stability reserve” and the “backloading” of allowance allocation are aimed to solve issues arising from supply rigidity, but I am not convinced that the problem has been adequately solved.

The EU ETS’ main political challenge has been the lack of progress in carbon pricing and controls outside Europe (although, as mentioned in the previous question, this has evolved dramatically over the past few years). The EU’s unilateral action on carbon has prompted its policy makers to introduce changes to the EU ETS to prevent so-called “carbon leakage”. These have augmented the scheme’s complexity but have also diluted it’s impact and would have been unnecessary if other major emitters had progressed alongside Europe in controlling carbon emissions.

4.      Can carbon emissions be accurately measured?

Carbon emissions can be easily and quite accurately measured. In the EU ETS, market participants have the option of adopting an indirect measurement approach (emissions factors; mass balance), a direct measurement  or approaches that combine one or more of the above. The tricky question is “can carbon emissions be accurately reported and accounted for?”. That is al lot tougher as it necessitates strong institutions and rule of law. There is definitely a lot of scope  for corruption and gaming the system in the world of carbon controls. And another related tricky question is, “can the expected impacts or damages of carbon emissions be accurately measured?”, to which the answers is a quite categorical no, especially if we consider that most of those damages will take place several decades from now and that our expectations on those futures are being formed purely via sophisticated mathematical models.  


This content is provided by Coaltrans Conferences for informational purposes only, and it reflects the market and industry conditions and presenter’s opinions and affiliations available at the time of the presentation.

Related Insights