March 2009 Emissions Trading in South Africa National Climate Change Summit Emily Tyler

- What can we learn from theory and emerging international experience? - Relevant South African political, economic and institutional characteristics - Some initial considerations for the design of a South African ETS - Areas for further exploration…

Considerations from theory & international experience Developing an ETS: Planning, preparation, management Data and lead times Policy stability and certainty is crucial Retrospective adjustment is costly! Voluntary pilots (data generation, preparation, reduced complexity)

Considerations from theory & international experience Markets and Politics Concentration of market power (in product or emissions markets) negatively effects ETS performance Information asymmetry enables abuse in design phase Underlying distortions in energy markets undermine performance Experience with market mechanisms advantageous Fiscal revenue generation possible through auctioning Distributional aspects effected by scheme design

Considerations from theory & international experience Design Elements Capacity to design, manage, enforce. ETS is a sophisticated policy mechanism Baseline setting and allowance allocation is key to performance Who? Increased efficiency of coverage (liquidity) vs distortions, administrative challenge Flexibility vs simplicity Institutional independence of scheme administrator

The South African Emissions / Energy Context 80% of South Africa’s emissions are energy related Predominantly CO2 (limited methane and nitrous oxide) Not a lot of info on emissions, mitigation opportunities, costs Institutionally: Over 50% Eskom, 19% Sasol Electricity crisis Electricity sector’s monopolistic structure, some indications of intent to move away from this Power Conservation Programme, Energy Conservation Scheme, Right To Consume trading proposal LTMS modeling: many negative cost options in electricity generation, conservation, efficiency, reduction of future demand Long term, absolute target of 40%, emissions peak 2020/25

Broader South African Policy Environment Poverty alleviation and employment creation focus Capacity challenge: government, energy sector, strong financial sector Current infrastructure investment opportunity In the absence of a global carbon price: balance between competitiveness, a commitment to an emission reduction trajectory and the creation of future strategic competitive advantages.

South African ETS: Emerging Considerations 1. Importance of certainty - policy-wise this is an issue both locally and internationally - domestically and internationally no cap until 2020 (but key interventions still required in interim) - electricity market price uncertainty - many negative cost options (LTMS) being considered under energy policy already - price certainty (floors, ceilings) within early stages of scheme is important 2. Timing and importance of preparation and long lead times - Data, planning, consultation start, voluntary scheme prior to this? - Alignment with PCP, RTC?

Long Term Mitigation Scenario Planning Targets Emissions peak – ‘capped’ Source: S Raubenheimer in Genesis NBI Briefing Note, 2008

South African ETS: Emerging Considerations 3. Capacity to implement and manage an ETS - extensive planning, ongoing maintenance and development - less certainty, data symmetry = more complex in design - Lack of experience with market mechanisms - Strong, sophisticated financial sector 4. Coverage - Issue of power concentration for regulation of downstream emissions - Combination of Scope 2 and Scope 1 non-electricity? - Size threshold, transaction costs, dominance of energy CO2 - Mobile emissions sources challenging under an ETS - Distributional issues

Areas for further work We need to better understand: -The Australian experience: Whether it is feasible to design a scheme with both Scope 1 and 2 electricity generation emissions (GGAS) -The implications of the use of a white certificate trading scheme as a greenhouse gas mitigation policy instrument in South Africa -How could an ETS work in conjunction with existing / proposed policy initiatives in the energy sector? -What policy mechanisms are required for the short term critical investment decisions? -Current global economic climate and implications for economic policy making, market vs regulation -What and how costly are the emission reduction opportunities outside the energy sector? -Undertake a direct comparison of a future tax vs trading scheme in the South African context