Scaled-up Market Mechanisms: What is Needed to Move Forward?

Scaled-Up Market Mechanisms for Carbon Trading

Overview

Since 2005, the Organisation for Economic Co-operation and Development (OECD) and the International Energy Agency (IEA) have been exploring ways to expand international carbon markets to include more developing countries. This summary draws on earlier analyses by the Annex I Expert Group on the United Nations Framework Convention on Climate Change (UNFCCC).

Key Points

1. Need for Expanded Carbon Markets

   • Global greenhouse gas (GHG) emissions projections show the necessity of engaging both developed and developing countries in emission reductions.
   • The Kyoto Protocol's Clean Development Mechanism (CDM) has already supported thousands of projects, averting over 1.2 billion tons of CO2 emissions.
   • However, current mitigation efforts are insufficient to meet ambitious climate goals, particularly in the energy sector.

2. Options for Post-2012 Market Mechanisms

   • Different options exist for implementing scaled-up market mechanisms, typically categorized as crediting and trading.
   • Options include:
     • Intensity-Based Targeting: Emission reductions relative to output levels.
     • Absolute Targeting: Fixed quantities of GHG emissions.
   • Table 1 outlines the main characteristics of these mechanisms, distinguishing between policy-based and sector-wide approaches.

3. Environmental Ambition and Benefits

   • Scaled-up market mechanisms can be more ambitious than pure offset mechanisms like the CDM.
   • Under the CDM, emission reductions only shift emissions without reducing global emissions.
   • Scaled-up mechanisms set a lower baseline, allowing host countries to contribute more significantly to global mitigation efforts.
   • Benefits include:
     • Increased carbon market revenues.
     • Greater flexibility in adopting policies.
     • Enhanced case for technology transfer and access.
     • Direct support for building domestic policy frameworks.

4. Sectoral Baselines

   • Some sectors share commonalities across regions, making a single performance baseline feasible.
   • However, practical differences in industrial structures, access to raw materials, and regulatory obligations mean a homogeneous approach might be impractical.
   • A process for agreeing on baselines is crucial for moving forward.

5. Agreement on Principles and Requirements

   • Agreement on underlying principles and technical elements is necessary.
   • Key areas include:
     • Restrictions on participation.
     • Environmental ambition and coverage.
     • Technology and finance discussions.
     • Limits on the use of credits.
     • Evolution/sunset clauses.
     • Baseline setting processes.
     • Operational features such as crediting periods, trading units, and liability rules.

6. Implementation Challenges

   • Unlike the CDM, achieving immediate mitigation incentives depends on domestic implementation.
   • Entities investing to meet agreed baselines may not receive credits due to country-wide performance.
   • Domestic and international challenges must be addressed for successful implementation.

Conclusion

Scaled-up market mechanisms hold promise for enhancing global carbon trading efforts, particularly in developing countries. However, careful planning and international cooperation are essential to ensure these mechanisms effectively contribute to climate goals.