An investigation into the compatibility and effectiveness of linking Brazilian carbon mitigation and trading strategies with the EU ETS (European Union Emissions Trading Scheme) /

Abstract

International climate negotiations have recently underlined the relevance of international cooperation via carbon pricing, as well as the need for support from developed and developing countries to tackle climate change. With Emissions Trading Schemes (ETS) emerging in developed and developing regions around the world, linking these systems may become a future option. This raises the question as to the appropriateness of such an approach. Based on discussions regarding the use of market-based instruments in Brazil, this thesis investigates the impact of a hypothetical ETS covering electricity and energy-intensive sectors in Brazil, using a global economy-wide model - the EPPA6. Land Use, Land-Use Change and Forestry (LULUCF) related emissions, which are significant in Brazil, are excluded from trading in an effort to closely align with existing provisions of the European Union Emissions Trading Scheme (EU ETS). We simulate linkages for Brazil with a developed region (Europe) and two developing regions (Latin America and China) under different ETS design scenarios. There are substantial differences in relation to the volume of emissions, the emissions profile and abatement opportunities between jurisdictions. Results of simulations for the 2020-2050 horizon show that the level of ambition is a key determinant on the effects of the ETS, as is trading partner compatibility. If Brazil is committed to an ambitious mitigation target, the strategy to link with other ETS systems is recommended. If linked to a developed country ETS, an inflow of revenues is envisaged from selling allowances in the long term, and it is possible to curb emissions whilst changing energy use patterns towards less carbon-intensive technologies. On the other hand, due to the contrasting stringency of targets, linking emissions mitigation and trading strategies with developing countries is economically more efficient, as it reduces the adverse impacts on the Brazilian economy. In this case, Brazil presents an import-oriented profile for emissions permits across the period. For trading partners, the benefits of linking with Brazil are mostly political, although there are associated gains from trading. Accordingly, there are advantages and disadvantages associated with each proposed trading situation. Within a linkage agreement, a more cost-effective ETS design to seize mitigation opportunities for Brazil includes a less stringent cap, or the introduction of revenue recycling for the production of alternative energy. Finally, the ETS should consider the incorporation of other GHG’s and additional sectors, where mitigation opportunities may be more readily available.