New Publication: Transformative Potential of the New Market Mechanism

by Lukas Hermwille, myself 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.

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

by myself, Hans Bolscher, Jeroen van der Laan, Jelmer Hoogzaad & Jos Sijm

Update: The article can be downloaded for free for a limited time here.

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 in Climate Policy 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.

Climate News of the Week Roundup: China’s Drive to Clean Up Air Pollution Has Strong Climate Co-benefits

This week’s roundup features the likely impacts of the Australian election for climate policy, Chinese efforts to reduce air pollution and their climate co-benefits, solar scale-up accelerating in the US and Japan, development banks putting record volumes into clean energy, a proposal to use the UNFCCC to promote renewables and efficiency, a discussion of the economic and political consequences of scaling up renewables, the interplay of efficiency policies and the EU ETS, contentious climate policy claims by Naomi Klein, arguments that the IPCC is being to conservative, the world wasting 1/3 of its food production while a billion people go hungry, and incidentally causing 3.3 billion tonnes of emissions per year, and more.

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

A new article by Joelle de Sépibus, Andreas Tuerk and me has just been published in the journal Greenhouse Gas Measurement and Management.

Abstract

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.

Climate News of the Week Roundup: Chinese Coal Peak and US Solar Take-Off Ahead?

This week’s roundup covers projections on China and the US that sound rather too good to be true, news on renewables advancing in Australia and Brazil, the Australian election, a study saying that China’s PV manufacturing cost advantage mostly comes from the scale of production rather than labour costs, double standards for fracking and wind turbines in local permitting, an Indian passage to Germany to take a look at the energy transition, the G20 agreeing to address hydrofluorocarbons under the Montreal Protocol, the EU caving on aviation emissions, a Wuppertal Institute submission to the UNFCCC on the 2015 climate agreement, an adelphi-Wuppertal discussion paper on new offset systems and the CDM, and more.

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New publication: The Clean Development Mechanism as Glue for the International Carbon Market?

Cross-post from the Wuppertal Institute website.

Discussion paper analyses new systems and evaluates problems of the CDM

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.

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New Publications on the CDM as a Global Standard (Or Not), City-Wide PoAs and the New Market Mechanism

Me and colleagues got out a couple of new publications at the end of last year. Below are the abstracts and links to the papers.

Design options for sectoral carbon market mechanisms

The European Commission has published a study on the design options for the new market mechanism (NMM) that last year’s UN climate conference in Durban agreed to develop. The study was carried out by a consortium of consultants consisting of Ecorys, ClimateFocus, the Energy Reseach Centre of the Netherlands and the Wuppertal Institute.

The NMM is broadly understood as a mechanism that will scale-up greenhouse gas emission reductions in broad segments of economies, such as sectors, in developing countries. In contrast to the existing carbon market mechanisms under the Kyoto Protocol, for instance the clean development mechanism (CDM), the NMM would go beyond pure offsetting and produce a net atmospheric benefit.

The study provides recommendations to the Commission on the design of NMMs and the abatement options they could incentivize. It presents three alternative design proposals for NMMs and tested one of these proposals by applying it in theoretical case studies in five sectors in five developing countries: the steel sector in Brazil, the power sector in Chile and South Africa, refineries in Indonesia and the cement sector in Vietnam.

Prospects for CDM in Post 2012 Carbon Markets

What happens after the Kyoto Protocol: Will the project-related carbon market disintegrate and lead to separate national systems? Throughout the world new emissions trading systems are being established but without consistent international structures trading certificates from project-based mechanisms such as CDM (i.e. climate projects in developing or newly industrialising countries) is hampered.

DEHSt’s new discussion paper analyses how the CDM must be developed in order to keep it fit for the future.

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

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.

New Publication on UNFCCC Framework for Market-Based Approaches (Wonkish)

Theres a new paper out by Joëlle de Sépibus, Andreas Tuerk and myself. It’s a preliminary version, so comments are most welcome. Here’s the abstract:

Top-down, Bottom-up or In-between: How Can a UNFCCC Framework for Market-Based Approaches Ensure Environmental Integrity and Market Coherence?

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 there is yet 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, ranging from decentralised to centralised. The paper concludes that a strong central oversight at the level of the UNFCCC is probably the only option that could comfortably assure the vast majority of UNFCCC Parties that the environmental integrity of new market-based mechanisms is in fact ensured.

Some Figures on Carbon Market Supply Glut (Wonkish)

Sandbag has produced another interesting report on the EU ETS. They compare the demand that was expected when the post-2012 rules were agreed in 2008 to what is projected today. And find that thanks to the recession cumulative demand is now 2.2 gigatonnes less than was expected in 2008. Further, they argue that even the original caps for industry were overallocated by 900 million tonnes. And that 78% of the surplus allowances accrued to date can be attributed to only ten steel and cement companies, who have confirmed revenues of at least €1.8 billion from the sale of allowances. They suggest that 3.1 Gt should be withdrawn from the EU ETS, more than twice as much as the 1.4 Gt that are so far the upper limit in the political discussion.

In addition, I just noted these figures on global supply and demand in the World Bank’s latest State and Trends of the Carbon Market: It estimates that based on current pledges demand for offsets over the period 2013-2020 may lie in the range of 2,156 to 2,706 Gt CO2-eq. while supply from CDM and JI may lie in the range of 2.3 to 4.8 billion credits. “One can conclude that the supply of existing current Kyoto mechanisms, i.e. CDM and JI, may be sufficient alone to serve global demand for international offsets over 2013-2020.”

Unsurprisingly, cdc climat recently predicted that prices for Kyoto credits might drop to zero within the next two years.

Oh, and in addition to rendering the carbon market non-functional, current emission reduction pledges are also rather inadequate in terms of actually achieving the 2°C target. Of the at least 12 gigatonnes of emission reductions we need in 2020 to get on a trajectory to stabilise temperature increase below 2°C, so far less than 3 Gt have been secured

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.

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