On the Usefulness and Prospects of New Market Mechanisms (Wonkish)

Below are the abstracts and links to two new publications by me on new market mechanisms (NMMs) under the UNFCCC that got published recently. In a nutshell, there is quite a long way to go.

In addition, I attended a workshop on NMMs last week where somebody asked the impertinent question what exactly we need NMMs for. Two answers were given by the other participants: increasing the supply of offsets and moving developing countries towards common emissions accounting.

Then another impertinent person asked whether we really need NMMs for achieving these objectives. As for increasing supply – besides the obvious problem that the market is already oversupplied -, PoAs and standardised baselines (SBL) under the CDM may be a much easier way forward. In addition, it may be hoped that SBL could minimise some of the CDM’s non-additionality problems. The impertinent person therefore suggested that the EU, being by far the largest buyer, should move the CDM into SBL by tying acceptance of CERs to the use of SBL. As of next year, CERs from new projects will only be accepted in the EU ETS if the projects take place in Least Developed Countries. So the EU could open a new window for projects in non-LDC countries that use SBL. Preferably in the context of increasing its target to 30%. Interesting thought.

As for moving towards common accounting, here as well there may be a much for straightforward road ahead: NAMAs. As NAMAs are supposed to be measurable, reportable and verifiable, they are an obvious way forward to strengthening emissions accounting in developing countries.

And here’s the two new papers.

New Market Mechanisms: Prerequisites for Implementation 

The Durban conference decided to establish a new market-based mechanism that is to cover a broad segment of a country’s economy. The implementation details are to be agreed at this year’s conference in Qatar. The question is, however, which developing countries would actually be able to implement such a new mechanism. The introduction of the EU emission trading system highlighted the many challenges that even advanced developed countries face when establishing a carbon market. This paper therefore aims to explore the essential prerequisites for the implementation of new market mechanisms (NMM). In addition to a theoretical discussion it considers the cases of China and Mexico.

Current Proposals and Positions on New Market Mechanisms

Countries have been discussing “various approaches, including opportunities for using markets, to enhance the cost-effectiveness of, and to promote, mitigation actions” in the Ad-hoc Working Group on Long-Term Cooperative Action (AWG-LCA) for several years. In Durban, Parties decided both the establishment of a new top-down mechanism as well as to consider establishing of a framework for bottom-up initiatives. Parties and accredited observer organisations were invited to submit their view on both issues and the AWG-LCA held workshops on these issues on 19 May 2012. This paper provides an overview of the positions and proposals as contained in the submissions and expressed at the workshops.

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  1. Theodolit

     /  June 29, 2012

    Hi Wolfgang,
    thanks for this post. Very helpful. Being a bit removed from the debate on NMMs, I had already started to wonder if this debate had developed its own life, quite detached from the realities on the ground.
    If one looks at sources like UNEP’s Emissions Gap report, you will immediately notice that the world faces a severe lack of sufficient commitments that would drive demand for credits. If one starts crediting some of the good actions that are happening in the developing world towards the commitments of developed countries, one is INCREASING the emissions gap, instead of closing it. So devising large scale mechanisms to generate credits is counterproductive – it could be compared to printing money at times of severe inflationary pressures.
    Maybe it is rather time to stop the NMM debate before it is becoming really damaging.

    • Thanks for the positive feedback. One could indeed say that if there is one thing the market does not need right now, it’s additional supply. And you are right about increasing the emissions gap. Both of the IPCC ranges, 25-40% below 1990 for industrialised and 15-30% below BAU for developing countries, would need to be achieved (at least) before credits should be generated. And I’m also yet to be convinced that NMM would have a higher environmental integrity than the CDM.

      • Theodolit

         /  July 2, 2012

        Agree. Maybe it is time to spell out that crediting of developing countries’ action towards developed countries targets is only possible without harming the prospects of closing the emissions gap, if the collective ambition without crediting has already achieved the 44Gt emissions by 2020 that are compatible with the 2C pathway (according to UNEP), and if crediting would only refer to additional action. All of which is quite unlikely.
        One could question this analysis by adding a bit of intertemporal tweaking (creating credits this decade that would only be used in one of the following decades) but it does not fundamentally change the picture.

      • Unfortunately, not even all NGOs can agree to a position that there is no room or indeed need for offsetting as long as targets are not strengthened substantially. What’s also funny is that the existing mechanisms will likely be able to satisfy any demand there may be, see may latest post.

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