" "CAP-AND-TRADEIS INCENTIVE-BASED AND RELIES UPON INDIVIDUAL FIRMSUNDERTAKING INVESTMENTS ANDSTRATEGIES TOMINIMISE THECOST OF ACHIEVING A DEFINED ENVIRONMENTALTARGEThe world is gripped by uncertainty aboutthe future. Governments are having todeal with economic and politicalupheavals in the wake of financial crises,which reverberate across the globe. In a new atmosphere of fiscal constraint, policy will bedictated by the ability to find solutions to socialproblems that deliver value for public money, andincentivise or leverage private investors and businesses.In an age of austerity, costly and inefficient policies areno longer acceptable to taxpayers.Yet underneath these clearly man-made global crises,an even larger man-made planetary one continues togrow. Climate change demands the attention andaction of policymakers and citizens, whether theyrecognise it today or not. The problems for our environment and our economicand development goals do not move as quickly asthose caused by the short-run economic volatility feltevery day, yet they contain the potential to cause evengreater catastrophes. The scientific consensus showsthat taking action against anthropogenic emissions isnecessary, and it should be a common cause forgovernment and business.These economic and environmental challengesinteract through government policy, which needs todeal with both of them at once. There is an increasingneed to find a policy instrument for public goods thatachieves the targets in a cost-effective manner. When it does not matter where these public goods areachieved, markets provide the greatest opportunity toachieve them cost-effectively. The InternationalEmissions Trading Association (IETA) is the primarymembership organisation for business which isdedicated to promoting the use of carbon pricing andmarkets to deal with the public good of reducinggreenhouse gas emissions. Cap-and-trade has been unfairly vilified by thosewhose real target is the need to do anything at all onclimate change. The alternatives of expensive andinflexible "one-size-fits-all regulation", or subsidiesthat taxpayers cannot afford, to support technologiesthat bureaucrats should not be picking, are well-knownto be worse. Cap-and-trade is incentive-based and relies uponindividual firms undertaking investments andstrategies to minimise the cost of achieving a definedenvironmental target. The combination of certainty ofachieving the desired result, alongside the freedom forcompanies to achieve reductions as they see fit, makecap-and-trade the most efficient option available forclimate policymakers.The failure of the US cap-and-trade legislation last yearhas led to collective political amnesia in that countryabout the scientific and economic realities of climatechange and how best to combat it, and the impact is feltall over the world. But there are many current examplesof carbon markets that demonstrate the economicadvantages of cap-and-trade, continuing to justifyIETA's belief that the future will inevitably becomecarbon-constrained, and the constraint will be tradable. Europe's Emissions Trading Scheme (ETS) is theworld's largest carbon market, covering what is still asignificant and proportion of global emissionsreductions. The third phase of the scheme is beingfinalised and IETA is engaged in policy design andprocedures with policymakers at the European level.PROMOTING MARKET MECHANISMS TO ADDRESSCLIMATE CHANGE092CARBON FINANCEHENRY DERWENT, PRESIDENT AND CEO, INTERNATIONAL EMISSIONS TRADING ASSOCIATION (IETA)T

CARBON FINANCE093Below: Henry DerwentEurope's carbon market has proven itself robust anddemonstrated the ability of cap-and-trade to produceemissions reductions. Tangential issues related toregistry security and the potential for fraud should notdistract from the progress that has been made, and thecommitment to drive forward with further progress.In the United States, California has progressed towardscreating the second largest carbon market in the world.In the absence of federal cap-and-trade legislation, the"golden state" has taken the initiative to constrain itsCO2 emissions. IETA is involved in consultation with the Californianauthorities to improve the market design, leveragingthe expertise of our diverse membership. Regulationsare in the later stages of development, and IETA hasmade significant progress in addressing the issues thatcan impede market functionality. On the other side of the US there is the RegionalGreenhouse Gas Initiative (RGGI), which is the mainlever for emissions reductions for many northeasternstates. IETA is involved in the discourse regarding thefuture of RGGI, and the potential for a more ambitiousscheme to emerge in the years to come. Canadian Provinces are acting as well, with emissionstrading schemes developing in British Columbia andOntario as part of the Western Climate Initiative (WCI),and a long-standing scheme in Alberta.Further afield, cap-and-trade continues to progress inNew Zealand and South Korea with national initiativesthat introduce flexibility and trading to produceeffective emissions reductions. The areas of the worldthat are unwilling to wait for a "grand bargain" onnational or international climate policy are movingtowards market-mechanisms and emissions trading astheir policy of choice. In one emerging market after another, the idea ofmarkets as a lever to achieve reductions in emissionsand energy use is spreading, regardless of theuncertain climate that surrounds COP17 and theUNFCCC process. While Europe may have been distracted by theconsequences of poor registry design, and the UnitedStates may have become disengaged from the premisefor any climate policies, countries such as India, Chinaand Brazil are investigating and experimenting in usingmarkets to provide environmental solutions based onthe merits, not the politics, of the argument - anargument that IETA will persist in promoting. nABOUT THE AUTHORHenry Derwent is President and CEO of theInternational Emissions Trading Association - theoldest and largest non-profit membershiporganisation of companies with an interest in carbonpricing, from many countries and economic sectors. Before joining IETA in 2008, for over ten years MrDerwent had been responsible for international anddomestic climate policy, sustainable energy, airquality and other environmental and energy issues inthe UK Government. Before that he was a corporatefinance executive in a major investment bank,working on public-private partnerships.