The Role of Sectoral Approaches and Agreements: Focus on the Steel Sector in China and India - Full Report and Executive Summary

Sectoral approaches and agreements may offer good options for greenhouse gas (GHG) emission reductions in certain sectors of the economy. In the developing world, they offer the possibility of scaling up from relatively small-scale, project-based emission reductions. Some countries prefer sectoral schemes in the medium term as pathways toward an ultimate aim of economy-wide emission reduction targets in developing countries.

To date, work on sectoral approaches and agreements has been dominated by work of a strategic nature, generally focusing on relatively high-level economic and political analysis. The details needed for the successful implementation—both practical and political—have been largely missing. This study is based on the premise that it is essential to understand how decisions—financial and production as well as response to environmental policies—are made within the candidate sectors to better understand what impacts these decisions could have, and at what cost. The study is therefore narrowly focused on the iron and steel sector in China and India.

This study analyzes the potential impact of sectoral approaches and agreements, presents what they could look like in practiceand provides advice to allow national negotiators to advance the debate on sectoral approaches and agreements within the United Nations Framework Convention on Climate Change (UNFCCC). It aims to:

• assess the realistic abatement potential within the steel sector, what it might cost and how it could be incentivized;

• gain further insight into the feasibility of different variants on sectoral approaches and agreements in the steel sector, considering the wide range of variants that have been proposed;

• understand the concerns of stakeholders and how these can be answered.

The elements necessary to design and implement sectoral approaches and agreements are analyzed and discussed. The study concludes by recommending what types, for the steel sector in India and China, would offer the best chances for an international agreement and how effective these might be in reducing GHG emissions:

• China and India are already making reductions in their emissions below what would be expected from stock turnover alone. Sectoral approaches and agreements could incentivize further reductions. How effective they would be is not yet clear; building up experience regarding the steel sector's abatement potential and how abatement can best be incentivized is necessary.

• An effective sectoral approach or agreement would need to overcome both price and non-price barriers. Apportioning a sector target to individual plants and relying on the resultant carbon price alone to drive abatement is unlikely to yield significant reductions in the steel sector. Politically, transnational trading does not appear to be a viable option in at least the medium term. A national approach, ideally with price and non-price incentives, is thus indicated.

• A key part of scheme design is whether it should target a number of individual abatement categories or the sector as a whole. An approach specific to the abatement categories (four currently available categories have been identified in this study) would lower the risks resulting from the considerable uncertainties in abatement costs and potentials and what business-as-usual emissions from the sector would be. But it would be less flexible than a single target for the sector, not allowing abatement to be optimized across all the sector's options. This study concludes that there is potential for sectoral approaches and agreements, carefully designed to account for the realities of the steel sector, its abatement options and the state of available information, to incentivize abatement in China and India beyond what these countries currently achieve.