9. Emission Reduction Agreements
An emission reduction agreement (ERA) is defined as a commitment with the government for a firm or sector to manage its emissions or meet specified targets over a defined period. Such agreements have been used as a climate change policy tool in some countries, and have covered a broad range of types of commitments, levels of stringency and sanctions relating to participation and compliance. New Zealand implemented a programme of voluntary agreements for major emitters from 1994 to 2000. Negotiated Greenhouse Agreements (NGAs) were also a commitment programme forming the basis of rebates or exemptions for competitiveness-at-risk (CAR) firms.
Terminology varies around the world. For the purposes of this paper, ERAs are defined as agreements in which a commitment is the primary policy tool. The processes and practical issues encountered in an ERA context are also relevant for the possible use of an NGA-like commitment to offer relief to firms that are CAR in the context of a policy that imposes costs. Agreements might form the basis of exemptions or rebates as relief from a price measure for CAR firms. They might be used in a similar way as relief from regulations that impose a cost on emitters. Finally, regulation could be used to mandate participation in a commitment scheme.
There are three possible types of ERAs: mandatory agreements, voluntary agreements, or agreements with voluntary entry but binding consequences. Binding consequences could range from a requirement to publicly report and explain non-performance under the agreement through to financial penalties such as a requirement to pay for emissions in excess of target. There could also be a tradable benefit for performance that betters an agreed target.
Given the various types of goals or objectives that might be agreed for the industry and energy sectors, commitments could be expected to take one or more forms. They might be specified in terms of absolute greenhouse gas emissions in each year, emission intensity, or energy efficiency. Less direct measures are also possible, such as assurance that best available technologies are being used or that a marginal “shadow price” for GREENHOUSE GAS emissions is being incorporated into decision-making. Finally, building the skills and processes needed for firms to participate in emissions trading might be seen as a goal in itself, and commitments might relate to this goal.
The level of ambition for the commitments made is an important issue for credibility and for equity between participants. It is inherently difficult to set and to assess, but could be affected by the design of any programme. This would also be driven by the goals for the programme and for the sector.
A wide range of processes and tools could be used to establish a target. For example, target setting could be by negotiation between the Crown and the participating firm or sector through an energy audit and an agreement to implement cost-effective measures, or through a requirement to meet some standard of best practice for the participant’s plant.
Processes and tools would also be needed for monitoring, verifying, and reporting compliance with commitments over time. Firms or sectors with commitments might be required to report their greenhouse gas emissions against ISO 14064 or some other agreed standard.
There would be challenges in ensuring that commitments and their delivery are equitable enough to avoid a situation where some firms are inadvertently penalised by additional cost when they make and deliver challenging commitments, while competitors are seen as “free-riding”.
If entering a programme and accepting a commitment were both voluntary, firms would need some motivation to participate. Possible incentives could include a connection to any longer-term price measure and its approach to competitiveness issues. Participants would benefit from increased internal attention being given to energy and emissions efficiency and early consideration of the influence of greenhouse gas emission pricing on production and investment decisions.
For example, firms that participate in a voluntary agreement could have either their target or their achievements recognised in a subsequent free allocation to CAR firms. Firms that participate and meet their commitments could be assured their allocations would be based on a different formula or on their monitored achievements. This could be regarded as credit for early action – a framework for firms to record achievements to ensure that subsequent allocations do not penalise actions taken before the allocation decisions are made. Recognising credit for early action does not necessarily mean that a broad price-based measure could not be introduced before the agreements ended.
A more generalised incentive would also be possible, such as the government deciding up front that if firms in a particular sector did not participate in a voluntary programme, some mandatory alternative would be implemented in the sector instead.
Questions for discussion
20) What conditions would be required for emission reduction agreements to be used as an element of post-2012 climate change policy?
21) What methods could be used to ensure that emission reduction agreements were sufficiently ambitious to meet government goals, and the commitments made would be met over time?
22) What process could be used to develop emission reduction agreements for major direct emitters?
Examples of Commitment Programmes Internationally
The New Zealand government negotiated voluntary agreements with major energy and industry firms between 1994 and 1998, with targets for emissions up to 2000. The incentive for firms to accept ambitious commitments was the government’s stated intention to implement a carbon tax in 1997 if emissions were not on track. France, Germany and other European countries implemented similar agreements in the 1990s, while those in the Netherlands and Denmark had more significant incentives with carbon and energy taxes already in place.
Governments in the United States, Canada, Britain, Australia and other countries have run corporate commitment and registry programmes in which firms make commitments to manage their emissions (and/or energy efficiency) and report over time. Reporting may be based on firms’ emissions inventories, or may be on projects or improvements they have made. While these programmes are sometimes very elaborate, they do not include specific emission targets with consequences for the firms.
NGAs were an example of a voluntary agreement with mandatory consequences. Under NGAs, New Zealand firms whose international competitiveness would have been affected by the carbon tax could apply to negotiate an agreement with the Crown whereby they received a full or partial exemption from the tax in exchange for agreeing to move towards the world’s best practice in emissions management. The objective of the NGA policy was to mitigate the risk of economic production moving (or “leaking”) from New Zealand without any corresponding global reduction in greenhouse gas emissions. NGAs also sought to reduce emissions or the intensity performance of applicant firms to assist New Zealand in meeting its Kyoto obligations from 2008 to 2012. The Crown has NGAs with Oceana Gold Ltd and the New Zealand Refining Company.
For more information on emission reduction agreements, refer to:
LBNL, 2005. Voluntary Agreements for Energy Efficiency or GHG Emissions Reduction in Industry: An Assessment of Programs around the World
http://ies.lbl.gov/iespubs/58138.pdf
UNEP, 1998. Voluntary Initiatives – various articles
http://www.uneptie.org/media/review/vol21no1-2/vol21no1-2.htm
