Flexible Mechanisms

Transformative Potential of the New Market Mechanism

Lukas Hermwille, Wolfgang Obergassel and Christof Arens

There is general agreement that preventing dangerous climate change requires a fundamental transformation of the global economy. Regarding carbon markets, the EU, for example, has called for the new market-based mechanism (NMM) to be established under the UNFCCC to “facilitate transition towards low carbon economy and attract further international investment” (EU 2012). Our paper discusses the transformative potential of the NMM and how it should be structured to maximize transformative impact.

Human rights and the Clean Development Mechanism. In: Cambridge Review of International Affairs

Jeanette Schade and Wolfgang Sterk (2014)

The 2010 UN climate conference in Cancún emphasized that ‘Parties should, in all climate change related actions, fully respect human rights’. However, so far there is no further guidance. This article discusses the relevant legal human rights norms and two case studies from the Kyoto Protocol’s Clean Development Mechanism (CDM). The first case (Bajo Aguán, Honduras) shows that the current absence of any international safeguards can lead to registration of highly problematic projects. The second case (Olkaria, Kenya) suggests that safeguards, introduced here as a side effect of World Bank involvement, can have a positive impact, but that it is necessary to have them based on human rights. It therefore seems recommendable that the UN climate regime develop mandatory human rights safeguards. In addition or alternatively, individual buyer countries or groups of countries, such as the European Union, could introduce their own additional requirements for CDM projects.

Developing a sectoral new market mechanism: insights from theoretical analysis and country showcases

Wolfgang Sterk, Hans Bolscher, Jeroen van der Laan, Jelmer Hoogzaad & Jos Sijm (2014)

Parties to the United Nations Framework Convention on Climate Change (UNFCCC) have decided to establish a ‘new market- based mechanism’ (NMM) to promote mitigation across ‘broad segments’ of developing countries’ economies but have so far defined only some broad outlines of how it is to function. This article identifies key design options of the NMM based on a survey of the literature and reviews them against a range of assessment criteria. Furthermore, potential application of the NMM is analysed for five country-sector combinations. The analysis finds that lack of data and of institutions that could manage the NMM are key bottlenecks. In addition, the analysis reveals the existence of substantial no-regret reduction potential, suggesting that sectors may not be sensitive to the market incentives from an NMM. Governmental capacity building and Nationally Appropriate Mitigation Actions (NAMAs) might be more appropriate in the short term, preparing the ground for the adoption of market-based approaches at a later stage. NMM pilots could be based on supported NAMAs but should ideally generate tradable and compliance-grade emission credits in order to fully simulate the real-life conditions of an NMM.

The Clean Development Mechanism and Emerging Offset Schemes: Options for Reconciliation?

Aki Kachi, Dennis Tänzler, Wolfgang Sterk (2014)

While the Clean Development Mechanism (CDM) used to be the global currency for emissions trading, the global carbon market is nowadays increasingly fragmented as several jurisdictions have in recent years developed new market instruments outside the Kyoto system. Prominent examples include Japan’s development of a Joint Crediting Mechanism / Bilateral Offset Credit Mechanism (JCM/BOCM) and the development of new project mechanisms in the framework of the emission trading systems (ETS) that are being established by California and Québec. Australia is also developing its own domestic project mechanism.

The design of new systems can, among other aspects, be considered as a reaction to the perceived failings of the CDM and an evaluation of their characteristics may therefore contribute to discussions on how to reform the CDM to help continue its “glue” role in the international carbon market. This project therefore analysed perceived issues with the CDM as reflected in statements on CDM reform from these jurisdictions and the decisions they have made in establishing their own systems.

Key findings from the research are:

In developing their offset systems, Australia, California and Japan all explicitly rejected the project-by-project approach to additionality that the CDM has taken so far. Instead, they all promote an ex-ante additionality assessment approach for entire classes of projects and consider this to be not only more efficient and cost-effective but also to be more “objective”, implying a higher degree of environmental integrity. Moving towards greater standardisation of additionality testing and baselines in the CDM might therefore enhance its chances of being allowed to be used for compliance in new systems and continue being allowed to be used in existing systems.

However, while standardisation may lower overall transaction costs in the system, it also frontloads transaction costs and shifts them from project participants to those who develop the standardised metrics. The experience of Australia, California, and Japan underlines this argument. Without substantial support from industrialised countries, standardisation may be beyond the capacity of most developing countries.

Looking at the emerging systems in detail it becomes apparent that their approaches and methodologies often borrow from the CDM. The CDM’s bottom-up approach has therefore to a great extent facilitated the primarily top-down development of new systems. However, the centre of innovation is increasingly shifting away from the CDM as other schemes are able to move faster than the multilateral system.

As the CDM fades away and its capacity is lost, given the lack of current market demand, its role as methodology developer and de facto standard setter is also disappearing and the various systems will probably increasingly diverge. The remaining Kyoto parties could slow this trend by investing efforts to maintain the CDM as an instrument, including in particular its methodology development function, until increased mitigation ambition provides new demand for credits. For the interim, this would require public sector funding of new projects and the development of new methodological approaches. One option may be to use the scale-up of climate finance that has been pledged by industrialised countries. The CDM presents a readily available method to achieve measurable, reportable and verifiable results. To count investments in new CDM projects towards climate finance, the generated credits should not simultaneously be counted towards that countries’ emission commitments, but would have to be cancelled, otherwise this approach would constitute double counting.

Top-down, bottom-up or in-between: how can a UNFCCC framework for market-based approaches ensure environmental integrity and market coherence?

Joelle de Sépibus, Wolfgang Sterk and Andreas Tuerk (2013)

The Durban Climate Conference agreed on the creation of a new market-based mechanism under the United Nations Framework Convention on Climate Change (UNFCCC) and to consider the establishment of an overall framework for various mitigation approaches, including opportunities for using markets (‘Framework’). The creation of such a Framework is therefore of high political significance, as it should ensure on the one hand that new market-based mechanisms contribute to global climate change mitigation and to achievement of targets, and on the other hand, that different market-based approaches can be integrated in a global carbon market. As yet, there is little clarity as to the roles and design of such a framework. This paper contributes to the debate by discussing and evaluating inter alia several design options, and explores how the various options could be implemented and how they interrelate. It concludes that a strong central oversight at the level of the UNFCCC is probably the only option that could reassure the vast majority of UNFCCC Parties that the environmental integrity of new market-based mechanisms is in fact ensured. This does, however, not exclude that some reasonable balance may be struck between centralization and flexibility.

The article is available for free for a limited time here.

The CDM as Glue for the International Carbon Market?

Wolfgang Sterk, Aki Kachi and Dennis Tänzler (2013)

During the first Kyoto commitment period, the Clean Development Mechanisms (CDM) emerged to be the global currency for emissions trading. However, the CDM has not been without its critics, who have raised questions with regard to the additionality of projects, the mechanism’s bureaucracy and transaction costs, and the unequal regional distribution of projects. Efforts to reform the CDM are underway, but at the same, time the global carbon market faces a prospect of fragmentation as other domestic and international offset systems are developed by various jurisdictions. Prominent examples include Japan’s development of a Joint Crediting Mechanism / Bilateral Offset Credit Mechanism (JCM/BOCM) and the development of offset protocols in the framework of the emission trading systems (ETS) that are being established by California and Québec. Australia is also developing its own domestic offset mechanism in addition to allowing the use of Kyoto units in its domestic ETS starting in 2014.

The design of new systems can, among other aspects, be considered as a reaction to the perceived failings of the CDM and an evaluation of their characteristics may therefore contribute to discussions on how to reform the CDM to help continue its “glue” role in international carbon markets. A new paper by Wolfgang Sterk (Wuppertal Institute), Aki Kachi and Dennis Tänzler (adelphi) therefore explores perceived issues with the CDM as reflected in statements on CDM reform from these jurisdictions and the decisions they have made in establishing their own systems.

Ambitious New Market Mechanisms: Exploring Frameworks for Pilots

Timon Wehnert, Natalie Harms and Wolfgang Sterk (2013)

New Market Mechanisms (NMM) are meant to contribute to net mitigation effects beyond offsetting. Currently, several institutions are supporting the development of pilot projects for new market mechanisms. When designing these pilots, it will thus be important to test how NMMs like sectoral crediting can effectively support the goal of net emission reductions. A recent JIKO policy paper assesses different options to implement such environmental ambition in a sectoral crediting scheme. Discounting schemes, for example, offer the benefit of rewarding mitigation actions from the first tonne saved. However, this method is less suitable to move to high ambition as mitigation actions with higher costs may become unprofitable sooner than within other approaches.

Promoting Sustainable Development in New Market Mechanisms – Options and Limitations

Timon Wehnert, Christof Arens and Wolfgang Sterk (2012)

Several Parties (including the EU) as well as NGOs have demanded that new market mechanisms (NMM) should be designed in a way to explicitly support sustainable development (SD). Internationally agreed sets of rules could be established to safeguard environmental integrity, human rights and contributions to sustainable development in terms of environmental contributions (beyond GHG emission reductions) and social contributions (e.g. poverty reduction).

This paper assesses options to implement criteria for sustainable development in new market mechanisms like sectoral crediting and sectoral trading. The analysis shows that the implications for introducing standards for sustainable development are distinctively different from project-based approaches such as the CDM.

Design options for sectoral carbon market mechanisms. Final Report 

Hans Bolscher, Jeroen van der Laan, Stephan Slingerland, Jos Sijm, Stefan Bakker, Tom Mikunda, Timon Wehnert, Wolfgang Sterk, Jelmer Hoogzaad, Matthieu Wemaere, Darragh Conway (2012)

The European Commission has published a study on the design options for the new market mechanism agreed under the UN climate change convention. The study, carried out by a consortium of consultants, will assist the Commission in negotiations at the forthcoming Doha climate conference on setting up the new mechanism, which was agreed at last year’s conference in Durban.

The study outlines three alternative design proposals for the mechanism and assesses the potential for implementation in five case studies, involving sectors in South Africa, Chile and Indonesia. It includes recommendations for sectoral crediting and trading.

City-Wide Programmes of Activities – An Option for Significant Emission Reductions in Cities?

Hanna Wang-Helmreich, Nicolas Kreibich, Verena Streitferdt, Christof Arens and Wolfgang Sterk

This paper analyses whether city-wide approaches to carbon finance under the Clean Development Mechanism (CDM) are a viable option for significant emission reductions in cities. For this purpose, the paper provides an overview of emission sources and possible mitigation activities in cities, discusses the current role of developing country cities in the CDM and identifies the main barriers that hinder the engagement of cities in the carbon market. The authors then anaylse the CDM methodologies suitable for urban projects and review a proposal on a city-wide CDM PoA. The paper concludes with a discussion of alternative approaches to tap mitigation options in cities.

Ready for the Market? Assessing prerequisites for market-based REDD+ activities

Nicolas Kreibich, Christof Arens and Wolfgang Sterk (2012)

This policy paper aims at identifying and assessing the prerequisites developing countries should fulfill in order to access a future market-based REDD+ mechanism. Using four different evaluation criteria the areas of “technical readiness”, institutional and legal readiness” and “policy readiness” are analyzed. The authors conclude that given the large differences between countries in their progress towards REDD+ market readiness, a general integration of REDD+ credits into carbon markets is currently clearly out of reach and should be considered at a later point of time.

Top-Down, Bottom-Up or In-Between: How Can a UNFCC Framework for Market-Based Approaches Ensure Environmental Integrity and Market Coherence?

Joelle de Sépibus, Wolfgang Sterk and Andreas Tuerk (2012)

The Durban Climate Conference agreed on the creation of a new market-based mechanism under the United Nations Framework Convention on Climate Change (UNFCCC) and to consider the establishment of an overall framework for various mitigation approaches, including opportunities for using markets (“Framework”). This development is taking place against the background of increasing numbers of parties developing market mechanisms outside the UNFCCC. The creation of such a Framework is therefore of high political significance, as it should ensure on the one hand that new market-based mechanisms contribute to global climate change mitigation and to achievement of targets and on the other hand that different market-based approaches can be integrated in a global carbon market. As yet there is little clarity as to the roles and design of such a framework. This paper contributes to the debate by discussing and evaluating inter alia several design options, and explores how the various options could be implemented and how they interrelate. The paper concludes that a strong central oversight at the level of the UNFCCC is probably the only option that could reassure the vast majority of UNFCCC Parties that the environmental integrity of new market-based mechanisms is in fact ensured. This does, however, not exclude that some reasonable balance may be struck between centralisation and flexibility.

Current Proposals and Positions on New Market Mechanisms

Wolfgang Sterk (2012)

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.

New Market Mechanisms: Prerequisites for Implementation

Wolfgang Sterk and Florian Mersmann (2012)

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.

Sectoral Approaches as a Way Forward for the Carbon Market?

Wolfgang Sterk (2011)

For almost ten years now, there has been a discussion to scale up the project-based Clean Development Mechanism (CDM) or complement it with new carbon market mechanisms. This article aims to analyse in how far the proposed new mechanisms do actually hold promise for improving and going beyond the current CDM. The paper first looks at how the new mechanisms would be defined and would operate based on the current status of discussions. Second, the paper analyses possible advantages and disadvantages of the new mechanisms. Key questions in this respect are how robustly emission reductions could be quantified under the new mechanisms, what incentives the new mechanisms would provide for reducing emissions, and which sectors and countries would in practice be able and appropriate for employing new mechanisms.

The CDM Project Potential in Sub-Saharan Africa with Focus on Selected Least Developed Countries

Christof Arens, Martin Burian, Wolfgang Sterk, Joachim Schnurr, Christiane Beuermann, Daniel Blank, Zoran Kapor, Nicolas Kreibich, Florian Mersmann, Arnold Burtscher and Susanne Schwan (2011)

The study describes the CDM project potential in Sub-Saharan Africa. Focusing on eleven least developed countries (LDCs) in the region, the study shows the technical potential for CDM projects in the renewable energy, energy efficiency, transport, waste management and other selected sectors. The assessment is supplemented by brief analyses on related subjects such as programmes of activities (PoAs), public private partnerships, and alternative financing models (e.g. the potential role of microfinancing).

Trends, Herausforderungen und Chancen in der Nutzung des CDM durch Deutschland

Thomas Forth, Wolfgang Sterk, Nicolas Kreibich, Hanna Wang-Helmreich (2010)

Deutschland erhebt den Anspruch, im Bereich der klimarelevanten Technologien weltweit eine führende Position einzunehmen. Der Clean Development Mechanism (CDM), der sowohl kostengünstige Zertifikate für die Annex I-Staaten generieren als auch zur nachhaltigen Entwicklung in den Gastgeberländern der CDM-Projekte beitragen soll, ist konzeptionell geradezu prädestiniert für die wirtschaftliche und technologische Zusammenarbeit. Bei über 2000 registrierten CDM-Projekten und einer Projektpipeline von über 5000 Projekten insgesamt stellt sich die Frage, ob Deutschland die Chancen des Kohlenstoffmarktes nutzen konnte. Das vorliegende Policy Paper bereitet die zugänglichen Projektübersichten für eine erste Analyse der deutschen Beteiligung auf dem CDM-Markt auf. Beleuchtet werden der Zeitpunkt des Eintritts der deutschen Akteure in die einzelnen Projekte, die geografische Verteilung der Projekte, die Projekttypen mit deutscher Beteiligung, sowie welche deutschen Akteure konkret den CDM nutzen.

REDD Crediting vs. REDD Funds – How Avoided Deforestation under the UNFCCC Should Be Financed

Christof Arens, Marie-Leonie Bohlen, Nicolas Kreibich, Wolfgang Sterk and Hanna Wang-Helmreich (2010)

Since 2005, the parties to the United Nations Framework Convention on Cimate Change (UNFCCC) negotiate how the protection of rainforests could be integrated into the climate regime. This discussion paper primarily addresses the question of how this integration via the REDD (Reducing Emissions from Deforestation and Forest Degradation) mechanism should be financed. Two main possible approaches can be identified: on the one hand, the introduction of a public fund, which acquires and manages financial means and distributes them to developing countries. On the other hand, financial resources could be raised via the international carbon market. The authors conclude that a combination of both financing approaches would not only raise the highest amount of financial means but also serve best to reduce several risk factors.

New Mechanisms for the Carbon Market? Sectoral Crediting, Sectoral Trading, and Crediting Nationally Appropriate Mitigation Actions

Wolfgang Sterk (2010)

In particular industrialised countries have strongly advocated for introducing new emission trading mechanisms at sectoral level. The expectation is that scaled-up mechanisms will be able to mobilise carbon finance on a much larger scale than so far, will be better able to reach sectors the CDM has so far hardly tapped, will give incentives to developing countries to implement climate-friendly policies, and will be more environmentally robust than the project-by-project approach of the current CDM. This paper analyses the viability of sectoral approaches in developing countries as well as their advantages and disadvantages.

Further Development of the Project-Based Mechanisms in a Post-2012 Regime

Wolfgang Sterk, Frederic Rudolph, Christof Arens, Urda Eichhorst, Dagmar Kiyar, Hanna Wang-Helmreich and Magdalene Swiderski (2010)

As part of its CDM/JI Initiative, the German Environment Ministry (BMU) commissioned a study on potential quality criteria for a reformed CDM. What led to the research study was the ongoing criticism of the lacking additionality of CDM/JI projects. Also, many observers question whether the project activities really do promote sustainable development in the host countries, as called for in the Kyoto Protocol. The debate covers proposals such as using positive/negative lists or discounting CERs from projects deemed to be less sustainable. The European Parliament has presented an extremely far-reaching proposal of only recognising premium certificates generated from Gold Standard projects in the EU Emissions Trading Scheme. A key objective of the research study was to analyse whether Gold Standard requirements stand the test of practice, i.e. whether they actually lead to higher-quality projects.

Integrating Sustainable Transport Measures into the Clean Development Mechanism

Bettina Wittneben, Daniel Bongardt, Holger Dalkmann, Wolfgang Sterk and Christian Baatz (2009) in: Transport Reviews, Vol 29, No. 1, pp. 91-113.

While the number of projects under the Clean Development Mechanism (CDM) is expanding rapidly, there currently are relatively few transport projects in the global CDM portfolio. This article examines existing CDM transport projects and explores whether sectoral approaches to the CDM may provide a better framework for transport than the current project-based CDM. We conclude that it is possible to design sectoral transport activities within clear project boundaries that fit into a framework of a programmatic or policy-based CDM. Although we are able to ascertain that transport policy research yields several modelling tools to address the methodological requirements of the CDM, it becomes apparent that sectoral approaches will accentuate transport projects’ problems regarding high complexity and related uncertainties. The CDM may need new rules to manage these risks. Nonetheless, sectoral approaches allow the scaling up of activities to a level that affects long-term structural change.

Klimaziele zu Hause erreichen oder wo es am billigsten ist? Der “Clean Development Mechanism” als klimaregime-interner Investitionsmittelgenerator

Hans-Jochen Luhmann und Wolfgang Sterk (2008) in: Internationale Politik und Gesellschaft, 2008, Nr. 2, S. 107-125

Das Kyoto-Protokoll sieht vor, dass die Industrieländer, als Komplement zu eigenen Anstrengungen, Emissionsreduktionen in den Entwicklungsländern aufkaufen können. Durch den dadurch verringerten Druck zu Emissionsreduktionen im eigenen Land entfallen jedoch Anreize für dringend notwendige ökologische Technikinnovationen. Zudem sind zur Eindämmung des Klimawandels nicht nur im Norden, sondern auch im Süden bis 2050 erhebliche Emissionsreduktionen erforderlich. Es stellt sich daher die Frage, inwieweit der Süden in der Lage ist, neben eigenen Reduktionen auf längere Sicht auch noch eine erhebliche Nachfrage nach Emissionsrechten aus dem Norden zu bedienen. Wenn also die finanzielle Unterstützung der südlichen Staaten über den Emissionshandel organisiert werden soll, muss dies im Gegensatz zu den bisherigen Maßgaben zusätzlich zu inländischen Reduktionen erfolgen. Selbst wenn man einberechnet, dass der Süden auch eigene Beiträge entsprechend seiner wirtschaftlichen Leistungsfähigkeit leisten soll, führt dies zu Emissionszielen für den Norden, die weit jenseits dessen liegen, was derzeit politisch diskutiert wird.

The CDM in Africa – Potential and Limitations

Christof Arens, Dagmar Kiyar and Wolfgang Sterk (2007)

The unequitable distribution of CDM projects is a much-debated fault of the CDM mechanism. Africa in particular has seen few projects to date. This paper analyses the reasons, looks at proposals aimed at solving the problem and subjects the various approaches to critical evaluation. It would appear that consideration should be given to solutions found outside the climate regime in order to foster efforts towards sustainable development, especially in Africa.

Promoting Renewable Energy Technologies in Developing Countries through the Clean Development Mechanism

Bernd Brouns, Carmen Dienst, Sven Harmeling, Sitanon Jesdapipat, Sami Kamel, M. Abdelmoughit Lahbabi, Dietmar Schüwer, Wolfgang Sterk, Jean-Philippe Thomas and Bettina Wittneben (2007)

The use of renewable energy technologies entails many development and other ancillary benefits and could thus become a crucial element in the design of (sustainable) development strategies for developing countries. The Clean Development Mechanism of the Kyoto Protocol (CDM) could be an important instrument to foster the market introduction of these technologies in developing countries. However, in its current design the CDM seems to provide only little incentives for renewable energy projects. This research project therefore aimed at elaborating solutions for overcoming the present barriers to the use of renewable energies in the CDM. The main findings were summarised in the brochure “Renewable Energy and the Clean Development Mechanism – Potential, Barriers and Ways Forward”.

Enhancing the clean development mechanism through sectoral approaches: definitions, applications and ways forward

Wolfgang Sterk and Bettina Wittneben (2006) in: International Environmental Agreements: Politics, Law and Economics, Vol. 6, No. 3, pp. 271-287

Grave concerns with the Clean Development Mechanism (CDM) have increasingly surfaced in the international climate policy arena. The sectoral approaches described in this paper may be a way to address some of the shortcomings of this Kyoto mechanism. The paper outlines the criticisms that have been raised against the CDM as well as the conflicting interpretations of a sectoral approach and examines in how far it might resolve the mechanism’s perceived shortcomings. Furthermore, it outlines issues that need to be resolved when implementing a sectoral approach: distributing costs and benefits, defining the sector and its baseline, ensuring additionality and tackling procedural issues. However, a sectoral CDM cannot be mistaken for a panacea. Some of the mechanism’s problems remain, which highlights the need to establish additional instruments to support Southern countries in furthering sustainable development and embarking on a low-emission trajectory.

Voluntary Compensation of Greenhouse Gas Emissions

Wolfgang Sterk and Maike Bunse (2004)

Voluntary compensation of greenhouse gas emissions is emerging as a new business field which increasingly attracts the public interest. This policy paper gives an introduction to compensate schemes and aims to guide companies, organizations and individuals who are interested in compensating their emissions in identifying high quality compensation options.

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