Making sense of new market mechanisms under the UNFCCC Andrew Prag (OECD) KfW Round table: Options to promote market-based mechanisms 7 th May 2013 Climate Change Expert Group
Three areas to explore 2 Climate Change Expert Group
The framework for various approaches and the new market-based mechanism NMM FVA SPOT THE DIFFERENCE! 3 Climate Change Expert Group
Spotting the difference NMM: Many see it as operating under UN rules and governance, but with some flexibility in how it is implemented by Parties FVA: Many see it as flexible implementation by Parties but with recognition as eligible under UNFCCC only if certain standards are met Who will decide on what is eligible? Agreeing standards is one step, ensuring adherence to standards is a different matter If there is an element of UN approval/scrutiny in both tracks, then the distinction is blurred By the way, there were 10 differences in the picture 4 Climate Change Expert Group
Applying the agreed principles A wish-list of principles, similar for both tracks FVA: real, permanent, additional and verified mitigation outcomes; achieve a net global decrease and/or avoidance of GHG emissions NMM: voluntary participation of Parties,, safeguarding environmenta l integrity, good governance, stimulation of mitigation across broad segments of the economy Some recognisable from CDM, others not yet tested Tricky to apply these principles to baseline-and-credit. If we fix the free rider problem, it starts to resemble capand-trade Engine of the carbon market is demand from proliferating domestic cap-and-trade. The UNFCCC can facilitate that process 5 Climate Change Expert Group
Design elements of market mechanisms Trading system Foundations Crediting mechanism Principles and objectives Coverage, cap setting, allocation/auction etc Rules on use of credits Nuts and bolts Trading periods, monitoring/reporting, registry, unit issuance, etc Verification Including accreditation of 3 rd party verifiers Enforcement and non-compliance Principles and objectives Foundations Eligibility, additionality, crediting baselines etc Nuts and bolts Crediting periods, monitoring/ reporting, registry, unit issuance, etc Verification Incl. accreditation of 3 rd party verifiers/validators Adherence to rules 6 Climate Change Expert Group
Setting and applying crediting baselines for the new mechanism Setting and using crediting baselines Conventional CDM CDM Standardised Baselines New Market Mechanism 1 Define coverage of baseline Project Broader group Broader group 2 Set baseline emissions level Project Broader group Broader group 3 Compare whose emissions to baseline? Project Project Broader group? 4 Distribute credits to who? Project participants Project participants Government? Group? Site? 7 Climate Change Expert Group
8 Climate Change Expert Group Headline I saw last year: Shanghai pilot to cover aviation
Piloting new approaches Piloting can be a means to reassure policy-makers about the trustworthiness of new approaches We have a wealth of experience about how to do carbon markets so is piloting the correct term? What are we trying to achieve? From regulatory side, confidence that sector-wide incentives can achieve policy goals From market side, keeping the market alive through period of weak demand and uncertainty Proof of concept, particularly on baseline setting, is important 9 Climate Change Expert Group
Thank you andrew.prag@oecd.org www.oecd.org/env/cc/ccxg 10 Climate Change Expert Group
Governance: who does what? High level authority Foundations Nuts and bolts Verification Enforcement Tradin g EU ETS EU co-decision European Commission Verification 3 rd party Accreditation National government California State Gov t Air Resources Board (ARB) 3 rd party Air Resources Board (ARB) Australia Aus Parliament DCCEE Emitters or 3 rd party N/A Clean Energy Regulator Crediting CDM CMP CDM EB 3 rd party CDM EB VCS VCS Board VCSA / ISO 3 rd party VCSA VCSA / 3 rd party WCI offsets WCI Cttee. WCI Cttee. / ISO 3 rd party WCI partner jurisdiction 11 Climate Change Expert Group
Dividing governance roles High level authority Foundations Nuts and bolts Verification Enforcement Tradin g EU ETS EU co-decision European Commission Verification 3 rd party Accreditation National government California State Gov t Air Resources Board (ARB) 3 rd party Air Resources Board (ARB) Australia Aus Parliament DCCEE Emitters or 3 rd party N/A Clean Energy Regulator Crediting CDM CMP CDM EB 3 rd party CDM EB VCS VCS Board VCSA / ISO 3 rd party VCSA VCSA / 3 rd party WCI offsets WCI Cttee. WCI Cttee. / ISO 3 rd party WCI partner jurisdiction 12 Climate Change Expert Group
Towards inter-linked carbon markets What role for standards in UNFCCC process? And for which design elements? 13 Climate Change Expert Group
How to approach standards through UNFCCC decisions UNFCCC process? Could be broader facilitative guidance or more detailed prescriptive standards UNFCCC recognition of other standards Recognising ISO or other standards if verified UNFCCC agrees only on transparency National regulators decide on standards and which units to recognise 14 Climate Change Expert Group
Which elements for standards? 15 Climate Change Expert Group More politically-sensitive areas, particular to national circumstances Examples of design agreements More technical aspects conducive to standards Monitoring standards, registry systems Wide experience with third party verification and accreditation Fairly comprehensive ISO standards Highly specific to jurisdictions Good practice guidelines and transparency, but is it enough?