Call for public comments on the Draft Regulations: Carbon Offsets, published by National Treasury 20 June 2016

Transcription

1 Natinal Treasury f the Republic f Suth Africa Prject Develper Frum Ltd. 100 New Bridge Street UK Lndn EC4V 6JA T Memry.Machingambi@treasury.gv.za Frm ffice@pd-frum.net Date 29 July 2016 Page 1/7 Eurpe: Asia: ffice@pd-frum.net CHAIRPERSON: Sven Klmetz sven.klmetz@pd-frum.net CO VICE CHAIRPERSONS: Philipp Hauser philipp.hauser@pd-frum.net Christiaan Vrlijk Christiaan.Vrlijk@pd-frum.net by Natinal Treasury 20 June 2016 Dear Dr Memry Machingambi, Dear Representatives f the Natinal Treasury f the Republic f Suth Africa The Prject Develper Frum (PD Frum) nce again cmmends the gvernment f Suth Africa fr its ambitius climate change plicy and cmmitment t stakehlder engagement. Fllwing ur submissins t previus cnsultatins frm 30 June , 8 May , and 15 December we are happy t ffer ur cmments n the Draft Regulatins: Carbn Offsets published by the Natinal Treasury n 20 June We believe that the ambitin and the brad cnsultatin shwn by yur gvernment prvides Suth Africa with the leverage t play an active rle in the cnstructive implementatin f the Paris Agreement. Particularly the Carbn Offset prvisin has the ptential t fster internatinal cperatin and psitin Suth Africa favurably fr integratin int the internatinal carbn market that we expect t emerge n the basis f the Paris Agreement. Cnsidering the challenges that Suth Africa faces t align the need fr equitable ecnmic develpment with the bjectives f limiting climate change, we believe that attracting investments and financial flws frm internatinal carbn markets is a plicy bjective that shuld guide the design f dmestic flexibility mechanisms. With this bjective in mind, ur general cmments will address the a) Design f the Carbn Offset prvisin and its synergy with ther plicies t prmte clean ecnmic expansin; and b) Opprtunities t psitin fr a future internatinal carbn market. Furthermre, we will ffer specific cmments n the text f the Draft Regulatins: Carbn Offsets. With these cmments, the Prject Develper Frum hpes t supprt Suth Africa in implementing a sund and efficient dmestic carbn pricing scheme that will prmte quantifiable and reprtable early actin, attract private sectr investment, stimulate innvatin and jbs, and prepare the cuntry fr enhanced internatinal cperatin and linking t an emerging internatinal carbn market. 1 Available frm 2 Available frm 3 Available frm

2 Page 2/7 General cmments The PD Frum welcmes the develpment f the Suth African carbn tax with its assciated carbn ffset prvisin. In relatin t the level and cverage f the tax, we understand that it is justified in the cntext f Suth Africa s develpment status and the significant challenges it faces, especially in capital intensive energy and industrial sectrs. Nevertheless, we wish t remind that this tax level will nt materially change the emissin prfile f existing infrastructure and that adequate plicies need t ensure clean ecnmic expansin as a mre cst effective mitigatin. T prmte such clean expansin, the prpsed Carbn Offset prvisin, especially if designed in synergy with ther plicy instruments such as Suth Africa s REIPPP, is an ideal instrument as it allws investrs t anticipate investments and mitigate cst fr industries and Suth African pwer cnsumers, which shuld be a pririty f Suth Africa s energy plicy. Cnsequently, we welcme the Draft Regulatins: Carbn Offsets as we believe that Prject Based Mechanisms are ideal t engage the private sectr in recycling the carbn tax price signal int new clean investments. Such investments assure sustainable ecnmic grwth and if develped with the CDM r future UNFCCC mechanisms they will yield glbally recgnized Measurable, Reprtable and Verifiable (MRV) GHG emissin reductins. The imprtance f such a flexibility mechanism is defined by the material difference between the cst and lgic f GHG mitigatin frm existing and new infrastructure. This cncept is well explained by Altn et al (2014) 4 using the example f the pwer sectr: Pwer generatin is respnsible fr 53,1% f Suth Africa s GHG emissins and GHG mitigatin in this sectr is subject t the vintage prblem, which implies that existing assets have t be substituted at the end f their ecnmic lifetime. As a result, there is little rm t impact the emissins f existing installatins in the shrt term. A cnsequence f this fact is that successful plicies shuld fcus n the develpment f new clean infrastructure t cmpensate fr emissins f these existing assets. An ambitius GHG mitigatin trajectry as defined by Suth Africa s NAMA annuncement requires investments in renewable pwer generatin f 171 billin USD, i.e. 63 billin abve the business as usual trajectry. The incremental 63 billin crrespnds t 19% f Suth Africa s GDP in 2010 and is necessary because f the lwer lad factr that renewable energies have when cmpared t thermal assets. Thugh the study reiterates bth the imprtance and pprtunities f Suth Africa taking a leading rle in climate change mitigatin, it als raises cncerns that a pure carbn tax, withut adequate revenue recycling, wuld harm ecnmic grwth and the cuntry s cmpetitiveness. In additin t the carbn tax being capable f prmting clean ecnmic expansin, we believe there is an imprtant pprtunity t psitin the cuntry favurably in relatin t the prvisins f Article 6 f the Paris Accrd. That prvisin states that Parties may: pursue vluntary cperatin in the implementatin f their natinally determined cntributins t allw fr higher ambitin, but that any internatinally transferred mitigatin utcmes shall prmte sustainable develpment and ensure envirnmental integrity and transparency, including in gvernance, and shall apply rbust accunting t ensure, inter alia, the avidance f duble cunting. In accrdance with this prvisin, the dmestic use f a mechanism t cntribute t the mitigatin f greenhuse gas emissins and supprt sustainable develpment, wuld psitin Suth Africa favurably fr cnnecting t an internatinal carbn market that will gradually re-emerge ver the cming years. Given the large investment requirements and clean grwth pprtunities, we believe it is in Suth Africa s best interest t ensure that its dmestic plicies and regulatins allw the use f flexible carbn market 4 Altn et al; Intrducing carbn taxes in Suth Africa; Applied Energy 03/2014; 116: , available frm

3 Page 3/7 mechanisms that satisfy the basic principles f internatinal cmparability and fungibility in rder t attract internatinal investments and financial flws. Mrever, it is difficult t prject with cnfidence the emissin reductins that will result frm the carbn tax and even mre difficult t measure and verify the utcme. This is all the mre reasn why such measures shuld be cmplemented by mechanisms capable t Measure, Reprt and Verify the emissin reductins achieved by specific prjects r whle sectrs. T facilitate such glbal fungibility the CDM is a preferable mechanism als fr use as a dmestic ffset mechanism, until it is substituted by a new r refrmed mechanism that will be develped n the basis f Article 6.4 f the Paris Accrd. This will allw seamless engagement f the private sectr in brad, but measurable early actin. It will als psitin the ecnmy favurably fr future develpments in internatinal carbn market instruments which may evlve frm indirect linking with ffsets t direct linking f Emissin Trading Schemes. With these elements in mind we wuld like t present ur cmments which will fcus the a) Design f the Carbn Offset prvisin and its synergy with ther plicies t prmte clean ecnmic expansin; and b) Opprtunities t psitin fr a future internatinal carbn market in the cntext f the pst 2020 agreement as means t attract financing and t minimize cmpetitive disadvantages. a) Design f the Carbn Offset prvisin and its synergy with ther plicies t prmte clean ecnmic expansin: As mentined, a well designed and implemented Tax and Offset mechanism ffers a series f tangible benefits and advantages: A hybrid f carbn tax and ffsetting is easy t implement, but still ffers a brad carbn price signal as the ffsetting cmpnent prvides a specific fcus n the necessary clean ecnmic expansin. Due t the cited vintage prblem, a tax alne pses nn manageable risk t existing and new, even lw emitting fssil fuel based pwer plants, but n incentive t clean investments and thus hampers ecnmic grwth. Tax and ffsetting tgether ffer investrs an effective hedging strategy that will stabilize GHG emissins and prmte clean expansin t balance pwer generatin prtflis. This cncept is equivalent t the envisaged sectrial carbn budget apprach and therefre cnstitutes the first step twards that cncept. As sn as the terms fr ffsetting are clear and defined, there will be an effect f anticipatin, leading t enhanced investment even befre the tax bligatin is effective. This element is f special imprtance as an expansin in cverage and increase in the tax level is already freseen, a fact that will induce investrs t clean investments nw, withut anticipating csts fr the ecnmy. The mechanism is designed t ensure efficient MRV f mitigatin results even fr new capacity and is capable t generate tradeable Certified Emissin Reductins. If the carbn ffset mechanism is cmbined with plices such as REIPPP, Suth Africa wuld have a suitable pprtunity t develp a sectral mechanism and ensure sund MRV f the results f its renewable energy prmtin mechanism. As the REIPPP incentives are being allcated under a tendering prcess, the anticipated revenues frm selling carbn ffsets effectively lwer the bids ffered by investrs and thus cntribute t lwering the resulting tariffs. This is a benefit fr sciety and the ecnmy. The ptential t generate ffsets will attract a wide range f existing and new natinal and internatinal investrs. This cmbinatin f plicies will lead t a diversificatin f technlgies and structures, as well as increased cmpetitin, ne f the key drivers t lwer the bidding utcme f the auctins. The scheme will prepare the grund fr a pssible future ETS develpment and allws immediate indirect linking with ther schemes under develpment internatinally.

4 Page 4/7 Such an evlutin is nt nly cmpatible with the plicy design that we are seeing frm cuntries including China, Suth Krea and Mexic, it is als cnsistent with the psitins f sme parties (Switzerland, Nrway, New Zealand and Suth Krea), that wish t acquire internatinal flexibility instruments t meet their dmestic bligatins. In line with this apprach, we believe that rbust use f the CDM and its successr mechanism as sn as available, is an pprtunity t link dmestic plicies t the emerging internatinal market. b) Opprtunities t psitin fr a future internatinal carbn market: In additin t the practical arguments abve we wuld like t highlight sme imprtant pprtunities t develp a regulatin which can facilitate that the Suth African mitigatin effrts are recgnized by the internatinal cmmunity, as well as t facilitate internatinal cperatin and future linking f carbn pricing schemes: a) As mentined, the envirnmental effect f a pure carbn tax at the prpsed level is limited and difficult t quantify, especially because it fcuses n existing infrastructure mre than n new capacities. On the ther hand, a develping cuntry such as Suth Africa will need t fcus n ecnmic grwth and creatin f jbs and welfare and at the same time minimise the build-up f new GHG intensive infrastructure. Such a fcus n a clean expansin and green grwth can be achieved by allwing ffsetting f existing GHG mitigatins by emissin reductins that stem frm sustainable new prductin capacities. While the Paris Accrd has defined a new mechanism t cntribute t the mitigatin f greenhuse gas emissins and supprt sustainable develpment, we believe that the CDM is the mst effective and reliable mechanism currently available fr baseline setting as well as fr MRV. Mrever, its use by develping cuntries will ensure that it can cntinue t evlve gradually twards the glbal flexible mechanism that we need. b) By using the CDM, Suth Africa wuld ensure that the emissin reductins generated are eligible accrding t the principles f the UNFCCC and thus are eligible in many ther cuntries. In additin t prmting such indirect linking with the internatinal cmmunity, which wuld facilitate sharing sme f the dmestic mitigatin cst, we believe that Suth Africa has an imprtant pprtunity t catalyse the refrm f the CDM twards an ffsetting mechanism mre suited t the demands f develping cuntries, which will als influence the creatin f a new mechanism as defined by Article 6.4 f the Paris Agreement. Of special interest wuld be t catalyse the develpment f sectrial baselines and crediting appraches that build n ther dmestic plicies such as REIPPP. c) A further step wuld be t evlve twards sectrial and natinal carbn budgets and as sn as Suth Africa understands that it is feasible and adequate t cnvert its emissin reductin bjectives int firm natinal targets. Under such a scenari Suth Africa culd develp a sund dmestic ffsetting mechanism which is aligned with UNFCCC principles and which generates tradable units with the highest level f envirnmental integrity. Specific Cmments On the backgrund f the general cmments prvided abve we wuld like t prvide specific cmments in relatin t the different sectins f the Draft Regulatins. T facilitate yur evaluatin, we structure ur cntributin int editrial cmments which simply address the clarity f the language used, as well as cnceptual cmments which address the ratinale and purpse f the specific paragraphs in general. Editrial cmments n Part I - Definitins: T increase clarity, we recmmend the fllwing changes: Spell ut CDM and VCS and capitalize gld standard.

5 Page 5/7 Revise definitin f ffset t state that an ffset equals the certified emissin reductin f 1 metric tnne f CO2e rather than a measurable avidance, reductin r sequestratin f CO2e emissins The definitin f VCS prject currently states that VCS prject means a greenhuse gas reductin prgram Change the wrd prgram t prject. Verified Carbn Unit (VCU) is defined but CER is nt defined even thugh it is referred t in Sectin 2 f Part I. A definitin shuld be added. Cnceptual cmments n Part I - Definitins: While we believe that it is adequate t allw different standards, including VCS and the Gld Standard fr dmestic ffsetting we believe that it is recmmendable t prmte the use f the CDM r its successr mechanism as being develped under Article 6.4 f the Paris agreement as this will allw internatinal fungibility and indirect linking t ther internatinal markets. Cnceptual cmments n Part II - Eligibility: As explained in ur general cmments, the natinal and internatinal recgnitin and fungibility f carbn market instruments is a fundamental element t reduce risks and transactin csts and thus t ensure the ecnmic and envirnmental efficiency f the instrument. We therefre draw sme fundamental cnclusins and recmmendatins that shuld guide the definitin f eligibility: 1) With regards t clause 2(1) (a) it might be advisable t relate the date t the effective date f enfrcement f the Carbn Tax Bill in rder t emphasize the link between bth prvisins. In relatin t the limitatins t prjects that are whlly undertaken in the Republic (f Suth Africa) we nte that this apprach is adequate and in line with the strategy adpted by ther cuntries such as China, Suth Krea and Mexic, but we wuld als like t mentin that it culd be f interest t envisage a future cperatin with the cuntries that participate in Suth African Pwer Pl. 2) With regards t clause 2(1) (a) we wuld like t cnfirm ur understanding that the term activity refers t a specific installatin that is cvered by the tax and des nt hinder a cmpany t invest int GHG mitigatin activities at a different place, even if situated next t the cncerned activity. It is essential fr the effectiveness f a flexible mechanism that investrs and peratrs that are subject t a carbn tax at certain industrial r pwer generatin facilities with GHG emissins that cannt be abated at reasnable cst, have the pprtunity t invest int GHG mitigatin and cmpensatin measures utside f the perimeter f this facility. Such flexibility will nt nly reduce the cst f GHG mitigatin, but als prmte investment and ecnmic grwth. 3) It is imprtant that Suth Africa recgnizes the GHG mitigatin results that have been achieved by early actin and investments undertaken by the private sectr. Many investrs have and are anticipating the need and the regulatins t mitigate climate change and limiting the validity and usability f their achievements des nt cntribute t the building f a favrable investment envirnment. We therefre urge yu t define generus and practicable prvisins fr the use f such mitigatin results. With respect t this bjective, the rules as drafted under sectin 2.(2) and (3) (a) and (b) are nt clear as the term existence is nt defined. Nw even if we assume that existence is equivalent t registered by the UNFCCC, the clause seems excessively restrictive. We therefre recmmend: a. That all prjects with a registratin date befre the effective start f the carbn tax are eligible t generate ffsets under the Draft Carbn Tax Bill. b. That Investrs are free t use credits that were issued under the CDM withut any limiting timeframes as any cnstraint will generate risks and decrease the value f mitigatin investments in Suth Africa.

6 Page 6/7 In cmplement t these cmments we wish t reiterate ur believe that an absence f efficient and wrkable regulatins will stymie investments and thus lead t a shrtage f eligible ffsets and t lwer sustainable develpment cntributins. Furthermre, GHG mitigatin will have t be achieved at higher cst and withut adequate and internatinally recgnized MRV. Nw if adequate regulatins are in place, the Offset Prvisin is an pprtunity t build a link between dmestic and internatinal demands is a fundamental strategy t pave the way t internatinal linking and thus t attract internatinal investment and financial flws. We therefre urge t establish a market infrastructure that allws units t flw freely between the internatinal and natinal registries. Cnceptual cmments n Part III Nn-Eligibility: Clauses 4(1) and (2) effectively prevent that emissin reductins that are achieved with prjects that btain ther incentives such as pwer tariffs that were defined under the IPP bid prgram are used t substitute the tax payment. The argument prvided by the explanatry nte is that this wuld represent sme kind f undue duble cunting, which is a cncept that we wuld like t address with the fllwing arguments: The drawback f plicies such as preferred pwer tariffs r tax rebates is that they alne actually d nt allw t measure, reprt and verify the emissin reductins that are achieved. Fr this reasn, we believe that a cmbinatin with a prject based mechanism such as the CDM wuld be f advantage because it will add apprpriate accunting. Once such accunting is in place, any dmestic use r internatinal transfer will have t be accunted fr. If this is warranted, we d nt see a risk f duble cunting as nly ne set f Certified GHG Emissin Reductin is generated as a result f a cmbinatin f plicies. Such plicy cmbinatin is a cmmn feature in the design f GHG mitigatin framewrks and shuld be judged frm the perspective f resurce efficiency. This means that the questin is if a cmbinatin f plicies is likely t increase r decrease the cst f GHG mitigatin fr the dmestic ecnmy. In the case f the REIPPP and as explained abve we believe that a cmbinatin f prject base mechanisms that allw the investrs t take wnership f the emissin reductins bth fr use as dmestic and internatinal ffsets will reduce the cst fr the Suth African Sciety because: As the REIPPP tariffs are defined under a tendering prcess, the anticipated revenues frm selling carbn ffsets increase cmpetitin and result in lwer bids and resulting tariffs. This is a benefit fr sciety and the ecnmy. The reductin in the cst f new renewable energy capacity cmpensates fr the increase in cst f fssil fuel based electricity that results frm the carbn tax. Cnsequently, the ffset prvisin largely neutralizes the negative ecnmic impacts f the carbn tax, but it amplifies its envirnmental benefits. As investrs will anticipate future increases f the carbn tax the cst reductin will be larger than the current tax level, i.e. the ffset regulatin allws the private sectr t anticipate GHG mitigatin and hedge against future cnstraints. Once internatinal demand fr GHG mitigatin ffsets arises, investrs will be able t exprt as lng as higher prices are paid. This will lead t a net capital flw t Suth Africa and further reduce the burden fr the ecnmy. We therefre believe that it is ecnmically ratinal t allw the cmbinatin f these cmplementary mechanisms because it will nt nly reduce the cst fr Suth Africa s sciety, but als ensure apprpriate MRV and the fundaments fr future internatinal linking.

7 Page 7/7 Final Remarks With ur arguments, we hpe t highlight the imprtance f the ffset prvisin as part f Suth Africa s plicy mix. T ensure maximum benefit and sund develpment f adequate regulatins, it is imprtant that the Carbn Tax Bill prvide sme clear signals: Emphasizing the imprtant rle f the ffset prvisin in engaging the private sectr in undertaking the investments in Suth Africa s clean expansin is paramunt t attract investrs, especially in capital intensive sectrs such as pwer generatin and industry. While it is imprtant t develp internatinal demand fr emissin reductin utcmes, it is als imprtant that adequate dmestic demand be created. We believe that an initial ffset allwance f 10% f verified emissins, i.e. 25% f taxable emissins, is a gd start. We suggest, hwever, that this number apply t all cvered sectrs. Once the system is up and running, the Suth African Treasury can adjust its plicies t achieve the mst effective utcme. Fr example, in the event the ffsetting mechanism is very successful and ffers abundant GHG mitigatin at lw cst, the cverage f the carbn tax r the share f ffsetting allwed under the scheme culd be expanded. On the ther hand, if internatinal demand takes up a large share f the ffset units available and thus leads t high demand and a high price, the cverage f the tax might be maintained at 40% fr a lnger time perid. This wuld cntain cst fr the dmestic ecnmy. Such measures wuld prmte a stable price fr dmestic mitigatin investments. This des nt nly mitigate the risk fr investrs, but als leads t the anticipatin f investments. The earlier and mre explicit this plicy and applicable eligibility criteria is annunced, the mre anticipatin and early actin will be attracted, with psitive effects fr ecnmic grwth. Allwing ffsetting t dmestic aviatin is als a psitive signal t the Internatinal Civil Aviatin Organisatin (ICAO) and prvides Suth Africa s dmestic airlines with the advantage f having a dmestic system that is cmpatible with the fundaments f ICAO s Market Based Mechanism. In cnclusin, we wuld like t reiterate that we believe the carbn tax and ffset prpsal, which is being develped by Suth Africa, is a highly differentiated and prmising slutin which we believe des nt nly cntribute t the cuntry s internatinal prestige, but may als be an inspiratin fr ther cuntries. Given the imprtance f a crdinated prgress by the internatinal cmmunity, we encurage Suth Africa t cntinue its cnstructive way under clse cnsultatin with all stakehlders and in cperatin with ther cuntries in rder t ensure that the slutins that are being develped are cmparable and allw as much internatinal cperatin as pssible. Abut the PD Frum Prject Develper Frum (PD Frum) is a cllective vice f cmpanies and practitiners that are develping and financing greenhuse gas emissin reductin prjects in all regins f ur glbe. Our knwledge and experience with glbal carbn market, climate finance instruments, cuntry specific plicies and NAMAs, make PD Frum a unique platfrm and stakehlder fr discussins arund the refrm and creatin f plicies and mechanisms t mitigate climate change. Kind regards, Philipp Hauser C-Chair, Prject Develper Frum