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xu hướng phát triển thị trường cacbon sau năm 2012
PERSPECTIVES SERIES 2011 Progressing towards post-2012 carbon markets Brand Usage Guidelines PERSPECTIVES SERIES 2011 Progressing towards post-2012 carbon markets Brand Usage Guidelines 3 Contents Foreword . . Editorial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 SECTION 1. POLICY Fragmentation of international climate policy – doom or boon for carbon markets? 13 Axel Michaelowa Perspectives on the EU carbon market 25 Christian Egenhofer China Carbon Market 37 Wei Lin, Hongbo Chen, Jia Liang The National Context of U.S. State Policies for a Global Commons Problem 49 Robert Stavins Mind the Gap: The State-of-Play of Canadian Greenhouse Gas Mitigation 59 David Sawyer Role of the UN and Multilateral Politics in Integrating an Increasingly Fragmented Global Carbon Market Kishan Kumarsingh 4 73 SECTION 2. EXISTING INSTRUMENTS Making CDM work for poor and rich Africa beyond 2012: a series of dos and don’ts 87 Durando Ndongsok Voluntary Market – Future Perspective 101 Nithyanandam Yuvaraj Dinesh Babu SECTION 3. NEW INSTRUMENTS ¨ Sectoral Approaches as a Way Forward for the Carbon Market? 113 Wolfgang Sterk The Durban Outcome 127 A post 2012 Framework Approach for Green House Gas Markets Andrei Marcu 5 UNEP Risø Centre Systems Analysis Division Risø National Laboratory for Sustainable Energy Technical University of Denmark PO. Box 49 DK-4000 Roskilde Denmark Tel: +45 4677 5129 Fax: +45 4632 1999 www.uneprisoe.org ISBN 978-87-550-3944-5 Graphic Design and Layout: KLS Grafisk Hus A/S, Denmark Printed by: KLS Grafisk Hus A/S, Denmark Disclaimer The findings, opinions, interpretations and conclusions expressed in this report are entirely those of the authors and should not be attributed in any manner to the UNEP Risø Center, the United Nations Environment Program, the Technical University of Denmark, nor to the respective organizations of each individual author. 6 FOREWORD The transition towards low carbon development focuses on the role of carbon markets in contribut- and more broad based green growth are vital to ing to low carbon development and new mecha- addressing some of the most pressing challenges nisms for green growth, as one core area of action facing the global community, such as global warm- to address the challenges noted above. Under the ing and unsustainable use of natural resources. title of ‘Progressing towards post-2012 carbon Confronting the end of the first Kyoto Commit- markets’ the publication explores, how carbon ment period in 2012 with no agreed outcome for markets at national, regional and global levels can global cooperation on future emission reductions, be developed and up-scaled to sustain the involve- there is an urgent need to look for new opportu- ment of the private sector in leveraging finance nities for public and private cooperation to drive and innovative solutions to reduce greenhouse gas broad-based progress in living standards and keep emissions. projected future warming below the politically agreed 2 degrees Celsius. GGGI opened the first regional office in May 2011 at the Technical University of Denmark, where the Responding jointly to these global challenges the UNEP Risø Centre is located and this report repre- United Nations Environmental Program (UNEP) sents a first collaborative effort. and its UNEP Risø Centre (URC) have in cooperation with the Global Green Growth Institute (GGGI) prepared the Perspectives 2011. The publication Richard Samans John Christensen Executive Director Head GGGI UNEP Risø Centre 7 Editors: Søren Lütken ([email protected]) and Karen Holm Olsen ([email protected]) EDITORIAL The absence of agreement on a second commit- part of an integrated global carbon market? Do the ment period for the Kyoto Protocol or another le- new instruments constitute a threat or an oppor- gally binding agreement is creating uncertainty for tunity for carbon markets? investors looking to invest in emissions reduction activities all over the world. This year’s Perspec- Ten articles in Perspectives 2011 address these tives from UNEP and its UNEP Risoe Centre focuses questions. Durando Ndongsok shares experiences on the mushrooming of initiatives that are filling from the CDM in Africa and takes a critical look the global vacuum while waiting for a post-2012 at the perspectives for CDM and future mecha- climate agreement. These may provide the building nisms in Africa, despite a preferential status in blocks and lead the way for carbon markets in the the EU ETS post-2012. Christian Egenhofer con- future. Local and regional initiatives have emerged tends that the future European carbon market is in countries like India, South Korea, China, Japan, unlikely to induce noticeable demand while it still Australia, Brazil and others. Compared to the situ- remains the backbone of global carbon markets. ation prior to negotiating the Kyoto Protocol, the The carbon credit overhang may seek towards the international community may find that it no long- voluntary markets that are experiencing a new dy- er shapes the global carbon market, but will need namism, as described by Dinesh Babu, or it may to find ways of integrating the market fragments wait for a scaled-up cost-efficiency mechanism that have already established themselves. like the sectoral crediting approach, as suggested by Wolfgang Sterk. Meanwhile the USA and Canada 8 The current situation gives rise to a number of are lagging behind on carbon trading, as both Rob- questions. Is a global carbon market possible that ert Stavins and David Sawyer describe, while at the incorporates these diverse initiatives? If so, what same time experiencing a significant fragmenta- would it look like? How can carbon markets reach tion of the emissions-related markets within their their full potential and contribute to a significant borders. Axel Michaelowa argues that fragmen- scaling-up of climate finance by 2020? Can bot- tation comes at a cost and maintains that a top- tom-up approaches and voluntary markets help down regime remains the preferential outcome us reduce greenhouse gas emissions sufficiently of the negotiations. But fragmentation is already to keep global warming below 2 degrees Celsius? becoming a reality in China, a rapidly rising new- How will existing mechanisms evolve, and how comer in the exclusive group of countries that, as will new instruments operate: independently, or as described by Wei Lin, Hongbo Chen and Jia Liang is seeking to establish its own national carbon- ment momentum that is unlikely to come to a halt trading markets. Therefore, as Kishan Kumarsingh overnight. Thus, what the current market has done describes, the role of the UN is fast becoming that above anything else is to ensure that there is a of the ‘coordinating entity’ of a global programme common understanding of the issue and a global of activities, the diversity of which is threatening drive to find ways to keep rewarding the pursuit of the liquidity of the global carbon market unless a emission reductions. regulator assumes the task of ensuring compatibility. Finally, there is still the chance that Durban Acknowledgements will provide the breakthrough and deliver a suite Perspectives 2011 has been made possible thanks of new GHG market instruments, as Andrei Marcu to support from the Global Green Growth Institute suggests, that will ultimately go beyond off-setting (GGGI) (www.gggi.org), which opened an office on and mean the beginning of up-scaled carbon mar- the DTU Risø Campus in Denmark in 2011. The kets, with additional benefits for the atmosphere. Perspectives series started in 2007 thanks to the multi-country, multi-year UNEP project on Ca- Perspectives 2011 is organized into three inter- pacity Development for the Clean Development related sections covering policy, existing instru- Mechanism (CD4CDM), funded by the Ministry of ments and new instruments. The first section is a Foreign Affairs of the Netherlands. Since 2009, collection of articles presenting the range of policy Perspectives has been supported by the EU project responses from a number of essential players – the on capacity development for the CDM in African, EU, China, the USA and Canada, and not least the Caribbean and Pacific countries (ACPMEA). A wide UN in a potentially coordinating role. The second range of publications have been developed to sup- section discusses perspectives for existing mar- port the educational and informational objectives kets and mechanisms, in which the CDM and its of capacity development for the CDM with the aim recent adjustments and additions may inspire the of strengthening developing countries’ participa- structuring of future instruments, while the volun- tion in the global carbon market. The publications tary market, free from top-down regulation, may and analyses are freely available at www.cd4cdm. also explore other less compliance-related cor- org, www.acp-cd4cdm.org and www.cdmpipeline. ners of emissions-reduction markets and indeed org inspire the development of new approaches. Such new approaches are the focus of the third section, Finally, we would like to sincerely thank our col- in which sectoral crediting and new market mecha- leagues in UNEP and the UNEP Risø Centre, par- nisms are the main concepts being promoted in ticularly Maija Bertule, Jørgen Fenhann, Mauricio the negotiations. Zaballa, Kaveh Zahedi, John Christensen and Mette Annelie Rasmussen, for their support in the edi- Paradoxically, while many seem to be on the look- torial process, including administration, outreach out for something new to follow the Kyoto flexible and communication. mechanisms, the CDM is thriving. Never has the number of new projects entering into validation on a monthly count been higher than now, reaching over 200. Of course, part of this is an End of The UNEP Risø Centre Business syndrome, but a more positive interpre- Energy and Carbon Finance Group tation is that it provides evidence for an invest- 9 Supporting low-carbon development in developing countries, UNEP and its UNEP Risø Centre (www. uneprisoe.org) have a leading role in analytical development and capacity building for the CDM and NAMAs and are well positioned to support the development and implementation of mitigation actions in developing countries. A core thematic focus is to help developing countries pursue development objectives using carbon finance to promote renewable energy and energy efficiency. The group consists of about fifteen staff coordinated by Miriam Hinostroza: [email protected]. 10 Section 1 Policy 11 12 Axel Michaelowa University of Zurich Perspectives Fragmentation of international climate policy – doom or boon for carbon markets? Abstract After Copenhagen and Cancun, fragmentation of The rise and fall of centralized international climate policy carbon markets is in full swing, with the EU and Anthropogenic global climate change is one of the Japan actively dismantling the role of the CDM biggest challenges for mankind entering the 21st as “gold standard” currency of the global carbon century due to its particularly “nasty” policy char- market. While some political scientists argue that acteristics. Mitigation of greenhouse gases has the fragmentation could be advantageous for the character of a global public good whose benefits ac- climate negotiations, economists see it nega- crue to everybody while costs have to be borne by tively, as it drives mitigation costs upwards and the entity financing the mitigation activity. In con- leads to a hodgepodge of rules with high transac- trast to other public goods such as public security, tion costs. The voluntary market as a laboratory benefits from climate change mitigation do not ac- for fragmentation has shown that high-quality crue immediately, but only in the future, and the credits are restricted to a tiny share, prices vary level of benefits is contested. For some actors, e.g. by several orders of magnitude and registries as people living in high latitudes where climate change well as verification standards have proliferated. increases agricultural productivity (see Yang et al. Thus fragmentation should be resisted as far as 2007), mitigation of climate change might actually possible. not be desirable. Moreover, given the uncertainty surrounding climate change impacts, people might prefer to “wait and see”, and eventually call for government help if impacts actually occur. 13 After two decades of increasing visibility and sali- climate policy frontrunner evaporated after Con- ence, international climate policy is at a crossroads. gress failed to pass a comprehensive emissions Hitherto, climate policy had followed a path of in- trading bill. Those advanced developing countries creasing centralization and coordination, climbing that had weathered the storm well were not really up a ladder of increasingly detailed international eager to take up the role of greenhouse gas miti- agreements. Climate negotiators had the general gation pioneers. Instead, they discovered climate impression to follow in the footsteps of ozone di- policy as a field where they could assert their newly plomacy, where a generic framework treaty was won economic power and defy industrialized coun- strengthened over time by specific treaties, ratchet- tries through a new negotiation group called BASIC. ing up emissions commitments as well as resource transfers from industrialized to developing coun- This explosive cocktail derailed the Copenhagen tries to fund emissions mitigation. With the UN negotiations, with things made worse by the host Framework Convention of Climate Change agreed country’s inept handling of the summit. What was in 1992, the Kyoto Protocol negotiated in 1997 and hoped to be the herald of a new era of global co- the Bali Plan of Action agreed in 2007 on the prin- operation on climate change mitigation dissolved ciples of a post-2012 climate regime, the Montreal into a glimpse into the abyss of a fragmented cli- Protocol precedent seemed to be a perfect fit. mate policy with each country just doing what it felt to be appropriate, without any comparabil- Of course, game theorists (Barrett 1998) and po- ity or transparency of mitigation efforts. While litical science realists (Victor 2001) had long stated through last minute attempts the abyss was pa- that the free riding induced by the global public pered over by the “Copenhagen Accord”, it became good characteristics of climate policy would lead quickly visible that Copenhagen heralded a sea to a failure of a centralized international approach. change in climate policy. Ever since then, interna- They had seemed to triumph already in 2001 when tional climate policy faces the inconvenient truth US president Bush repudiated the Kyoto Protocol. of fragmentation, even if hidden behind many But then the rest of the world rallied to defend smokescreens of UNFCCC language and “success- the Kyoto approach, and the Protocol entered into es” in negotiations such as Cancun in 2010. force in 2005. 2007 brought the consecration of tance with the award of the Nobel Peace Prize to the Why fragmentation of climate policy is a bad idea Intergovernmental Panel on Climate Change and Al Biermann et al. (2007, p. 8ff) discuss pros and Gore. Everything seemed on track to culminate in a cons of fragmentation from a political science glorious event that would lead international climate view. In their view, fragmentation could lead to policy in its third decade and set up a really global faster agreements among frontrunners and avoid climate regime – the Copenhagen climate summit watering down of commitments. Moreover, it of late 2009. would allow side payments and allow to involve climate policy as an issue of highest global impor- non-state actors as well as solutions tailored to 14 But fate intervened by unravelling the real estate specific circumstances. Competition between dif- bubble in the US. By mid-2009 policymakers in ferent approaches could lead to innovation. Os- countries previously proud of their role as climate trom (2010) argues that bottom-up “polycentric policy pioneers were struggling to keep their econo- efforts” could lead to a situation that is better than mies afloat. Hopes of the US playing the role of a an ineffective centralized regime. However, many of the arguments do not fully fit to the current jurisdictions (Flachsland et al. 2009), transaction regime, as it allows for differentiation of commit- costs will occur. Further negative effects are car- ments, side payments through climate finance and bon leakage, i.e. the increase of emissions outside voluntary non-state action. According to Biermann a group of countries that mitigates emissions due et al. (2007) the disadvantages of a fragmented ap- to the reduction of fossil fuel prices caused by the proach include less potential for package deals, mitigation action (Sinn 2008). Fragmentation of lack of fairness, incentives to engage in a race to market mechanisms will deter financial institu- the bottom and lack of transparency. tions which need a minimum turnover and stability to enter a market. In a fragmented market, sell- From an economist’s viewpoint, the disadvantag- ers of credits will be at the mercy of each single, es dominate. Due to the characteristics of green- unique buyer for specific types of credit while cur- house gas mitigation as a global public good, it is economically ideal to agree on emissions targets globally and to harness the cheapest mitigation options through market mechanisms. While simple marginal abatement cost curves as reported by Mc Fragmentation of mitigation action will unequivocally lead to mitigation cost increases. Kinsey need to be treated with caution (see Ekins rently, international competition protects sellers et al. (2011), and the dynamic effects of mitigation against overly greedy buyers. While some buyers policies need to be considered when comparing would look for high-quality credits, as done by the measures, experience from the Clean Development EU today, there would probably be a “race to the Mechanism has shown that it was able to mobilize a bottom” in order to minimize costs of complying significant volume of low-cost reductions, but also with the pledge. higher cost ones (Castro 2011). The effect of frageffort will be lower than required by the 2°C target How does a fragmented climate policy world look like? acknowledged both in the Copenhagen and Cancun The key characteristics of the centralized world agreements (Kartha and Erickson 2011 summarize of the Kyoto Protocol regime and their counter- all relevant studies and conclude that the tempera- parts under a fragmented regime are shown in ture rise would be in the interval 2.5°C to 5°C) . This Box 1. mentation will be that overall emissions mitigation is even acknowledged by realists, Carraro and Massetti (2010) propose wryly to use 50 billion $ to buy Often, a fragmented system is seen as equal to a mitigation in developing countries in order to close “pledge and review” system, which was first pro- the effort gap. They do not realize that under a posed by Japan in the early 1990s and has resurfaced fragmented approach, there is no incentive for any from time to time. However, the review element still country to spend huge sums on mitigation abroad. needs to be based on some common ground, which would lack in a fully fragmented system. A comparison of modelling studies show that any fragmentation of mitigation action will unequivo- A full fragmentation would mean that all countries cally lead to mitigation cost increases (Hof et al., define their climate policy unilaterally. While even 2009). This is the case in any configuration of mar- in the bleakest scenario, the UNFCCC would persist, ginal costs. In a fragmented world, carbon prices it would uniquely provide rules for reporting of na- will differ and even if there is “linking” of different tional greenhouse gas inventories. So some degree 15 of ex post evaluation of actual climate policy suc- Even with the UNFCCC negotiations formally still cesses would be possible, at least for the Annex I aiming at a relatively centralized system, de facto countries. However, for developing countries, this fragmentation is in full swing. The EU, which has evaluation would become difficult as the frequen- hitherto formed the backbone of the global carbon cy of reports is not specified in the UNFCCC. market with its domestic emission trading scheme (EU ETS) accepting credits from the project-based The actual post-2012 future may settle on a “mid- Kyoto Mechanisms without serious constraints, is dle ground” between a centralized and a fully no longer willing to play this role. Already in the fragmented system (Prag et al. 2011, p. 8). While legislation agreed in 2009, the import limits for it retains some features of centralization that are Kyoto credits have been reduced massively for the commonly seen as useful – Prag et al. (2011) would third EU ETS phase 2013-2020. Moreover, in the ab- include common accounting rules, tracking of in- sence of an international agreement, Certified Emis- ternational transactions and common principles sion Reductions (CERs) from Clean Development for new market mechanisms - other elements are Mechanism (CDM) projects can only be imported fragmented. This would entail the risk that in a if they come from projects located in Least Devel- fragmented system one mitigation activity could oped Countries or from projects that have already be counted in several systems. A reduction might been registered before 2013. The latest restriction, be acknowledged as an offset and at the same time announced in November 2010, was the prohibition credited towards a national pledge. This would of CER imports from CDM projects reducing the become particularly relevant if some mechanisms industrial gases HFC-23, and N2O from production credit policies whereas in the same jurisdiction of adipic acid, which will enter into force in April project-based mechanisms continue to exist. It is 2013. CERs from such projects currently make up clear that transaction costs of checking for double the lion’s share of all CDM credits. The EU has made counting might be substantial. it very clear that it sees the Kyoto Mechanisms as Box 1: Key differences between a centralized and a fragmented climate policy regime Centralized world Fragmented world - legally binding commitments (absolute) - unilateral pledges (absolute or intensity-based, partially qualitative) - common emissions units (same global warming potentials) - common inventory guidelines (based on IPCC Good Practice) - a UNFCCC-administered registry linking national - unilaterally defined emissions units (different global warming potentials) - unilateral inventory guidelines (national approach) - national registries registries 16 - centrally defined market mechanisms - bilateral mechanisms - central regulatory oversight - unilateral rules - transparency - opaqueness a bargaining tool in the climate negotiations. It has Ministry of Environment are lavishly funding fea- been actively pushing for sectoral mechanisms to sibility studies for pilot projects, of which 59 have replace the CDM. Moreover, the EU’s import regulations for the EU ETS allow multi-country agreements negotiated as per the EU’s interests. The US, which did not ratify the Kyoto Protocol and thus have been the vanguard of fragmentation Even with the UNFCCC negotiations formally still aiming at a relatively centralized system, de facto fragmentation is in full swing. proactively undermined the idea of a global carbon been started to date. Most of the studies are done in market. While the bills that failed to pass Congress South East Asia and relate to technologies either not in 2009 embraced the principle of international eligible under the CDM (e.g. a nuclear power plant in offsets, it remained always clear that these offsets Vietnam) or suffering from additionality problems. would have to obey domestically defined regula- Japanese industry strongly supports the bilateral tions. This was due to a deep mistrust of the CDM approach as it was put off by the high regulatory in- (see e.g. US Government Accountability Office 2008) tensity of the CDM process and now hopes for easily fostered by an awkward coalition of supporters accessible export subsidies for Japanese technolo- of environmental integrity and opponents of any gies. Access to feasibility study subsidies is limited monetary transfers abroad generated by climate to Japanese firms. Agreements with several govern- policy. Offset mechanisms are also seen as a way to ments to award and recognize bilateral credits are subsidize competitors of US industry in advanced under negotiation. The credits are to be counted to- developing countries; thus avoided deforestation wards the Japanese Copenhagen pledge. To date, no initiatives were preferred compared to industrial baseline, monitoring and verification methodologies projects. have been published. The pilot projects shall however assess such methodologies. Even within the US, fragmentation is rampant, with two regional emission trading schemes (the Region- The current status of fragmentation of carbon mar- al Greenhouse Gas Initiative, RGGI, in the Northeast kets for the time after 2012 is shown in Figure 1 and the Western Climate Initiative essentially trig- below, showing the wide range of emissions trading gered by the Californian emissions trading proposal systems and project-based offset mechanisms. under the bill “AB 32”). Each of these schemes has different rules for project-based offsets. California Below, I discuss which parameters of project-based has set an offset limit of 8%; offsets may only come mechanisms and emissions trading systems can be from projects in the US, Canada and Mexico under influenced by fragmentation. rules approved by the Air Resources Board. So far, only a limited number of project types has been accepted. Moreover, sectoral credits might be allowed. Differentiation of project-based mechanisms The different parameters of project-based market In 2010, Japan introduced the idea of a bilateral mechanisms that can be influenced by fragmenta- mechanism and quickly embarked in filling it with tion are as follows: life. A budget of 77.5 million $ was allocated to promote the concept in 2010 and 2011. Both the a) Baseline and additionality determination Ministry of Economy, Trade and Industry and the b) Project types and sector coverage 17 WCI (2013) RGGI EU ETS PRChina (2013? ) Korea (2015? ) Tokyo Taiwan (200x? ) National ETS Sub-national ETS CDM projects NSW CDM projects accepted in the EU NZ ETS Projects under Japanese bilateral mechanism Figure 1: Ongoing carbon market fragmentation – current status for post-2012 c) Duration of crediting period determination based on investment tests or tough d) Validation process, monitoring, reporting and technology benchmarks. Due to the strong domes- verification tic opposition against offset mechanisms men- e) Sustainability criteria tioned above the US is arguing on the one hand for Positions of different countries and regional a robust additionality test to avoid the impression groups influencing their acceptance of offset cred- that US money flows abroad for the purchase of its in a fragmented world will be discussed below. hot air. On the other hand US industry has always been interested in simple access to cheap credits Baseline and additionality and thus is not really interested in a limitation due Both baseline and additionality determination of to a strict additionality rule. In developing coun- mitigation projects are crucial elements of any off- tries, views diverge. On the one hand Least Devel- set mechanism and thus have been severely con- oped Countries and the AOSIS group which do not tested between business and environmental lobby have a large potential of non-additional emission groups. Normally, rules to set baselines are not reductions due to the absence of industry are in identical with additionality determination rules favour of strong additionality to achieve real miti- but for many project types they are based on simi- gation of greenhouse gases. On the other hand lar principles. The definition of the baseline is usu- heavily industrialized CDM players like China and ally done by applying methodologies which have India see additionality as an obstacle to maximize been accepted by the regulatory authorities. emission credit generation and exports and thus support a lenient interpretation of additionality. Additionality is seen as important by key players 18 in international negotiations. For example the EU Regarding baseline determination similar chal- has consistently emphasized strict additionality lenges appear. A stringent baseline enhances envi- ronmental integrity by leading to higher emission CDM allows a maximum of 21 years for credit gen- reductions while lowering the profitability of pro- eration, split up in three periods of 7 years, whereas jects and increasing the costs of the investor coun- forestry projects can receive credits for 60 years. If try to reach its pledges. Thus the investor country one imagines that the whole lifetime of large power might try to keep the baseline as loose and flexible generation units like nuclear power plants or ultra- as possible in a fragmented world. super critical coal power plants would be eligible for crediting, the overall amount of offsets would Countries interested in environmental integrity will be increased tremendously compared to the CDM. ask for accurate and complete datasets for base- Longer crediting periods also increase the unwill- line determination, while host countries and less ingness to change policy regime characteristics and quality-oriented buyers will go for simple default thus tend to “fossilize” policies. The Japanese bilat- parameters. The pressure to reduce costs of base- eral mechanism, which has not defined any credit- line setting will be high; eventually the supporters ing period, might be the first step into this direction. of environmental integrity might settle for highly conservative default factors. Rules for updates and renewals of crediting periods can have important repercussions on credit vol- Project type and sector coverage umes. Stringent approaches require recalculation Investor countries will define eligible technologies of the baseline and re-validation of additionality in such a way that interests of its industries are sat- whereas lenient ones would just require continued isfied. Thus technologies that are applied by com- existence of the project. petitors located in developing countries will not be eligible (see the US position discussed above), whereas technology exports not leading to direct competition will be favoured (see the Japanese approach to the bilateral mechanism). The pressure to reduce costs of baseline setting will be high; eventually the supporters of environmental integrity might settle for highly conservative default factors. Duration of crediting periods In terms of environmental integrity, overall global While the EU has shown a tendency to prevent re- emission reductions and project profitability, the newal of crediting periods of project types that gen- characteristics of the crediting period within an off- erate exceedingly high profits such as HFC-23, in- set system are a decisive factor as they directly af- ternationally lenient approaches to crediting period fect the number of credits which can be generated duration and renewal have not really spread to date. under the scheme. The start of the crediting period can be determined in very different ways. While the Validation process, monitoring, reporting and ver- CDM is very conservative inasmuch the registration ification date determines the start date, other mechanisms A validation process requires an independent audi- may apply the starting date of the project or the tor. A project could be admitted to a market mecha- date of third party validation, both of which would nism by simple production of a validation report of lead to an earlier inflow of credits. a certification company accredited under domestic law. The CDM goes beyond that inasmuch regula- The duration of the crediting period has major im- tors scrutinize validation reports and frequently pacts on the overall delivery volume of offsets. The ask for revisions. Moreover, regulators accredit vali- 19 dators on the basis of a careful process of checking benefits and then agree who defines and evaluates organizational competence. Significant cost savings the criteria. Either it will be the responsibility of the could be achieved by doing away with validation host country as in the current CDM, or the investor and just rubber-stamping project documentation. claims that right for itself. A third approach would be the joint definition of criteria and a joint evalua- Furthermore it has to be defined whether it is com- tion body. pulsory to publish project documentation ex ante. the potentially affected local population, e.g. by Differentiation of emissions trading systems conducting a stakeholder meeting. Publication of For emissions trading systems, the key parameters documents and stakeholder consultation is costly, are The CDM even requires to collect the opinion of but usually seen as critical for credibility of pro- a) Characteristics of targets jects. The same applies to monitoring, reporting b) Coverage and verification. Reporting frequencies, contents of c) In a fragmented climate policy world, the incentive to set legally binding targets will be lower than in the Kyoto world. Allocation processes d) Openness Characteristics of targets Under the Kyoto Protocol, targets are legally binding and thus generate demand for trading units. monitoring reports, verification requirements and Targets can be set on different jurisdictional levels responsibilities need to be clarified. Should the veri- and “cascade” downwards from the international fication body be independent or is verification done to the national and subnational level – the Kyoto by the mechanism administrator? target triggered the introduction of the EU ETS. In a fragmented climate policy world, the incentive to International acceptance of a “light” approach is not set legally binding targets will be lower than in the guaranteed, but experience is mixed. Some parties Kyoto world. Types of targets would also be differ- do not require independent validation for domestic entiated. The currently prevalent absolute targets offset systems (e.g. Canada ). Advanced developing would most likely be substituted by much less “bit- countries have been extremely reluctant to allow ing” intensity targets, especially in advanced devel- independent verification. On the other hand trans- oping countries. parency of reporting monitoring results is generally supported, especially by the US. Coverage The degree of coverage is akin to project type eligi- 20 Sustainability criteria bility for project-based mechanisms. An upstream In the CDM the host country’s DNA has the exclu- system where allowances are surrendered by fossil sive right to define a set of sustainability criteria fuel producers and importers can cover the entire that projects have to fulfil. In case of a negative out- economy. In a downstream system, coverage is usu- come of the sustainability assessment projects can ally limited to large sources in order to keep trans- be rejected. This possibility reflects states’ sover- action cost at a manageable level. In a fragmented eignty, but is applied rarely. Under fragmented mar- world, the latter system is more likely as it allows kets, both countries involved in a transaction would to exempt critical sectors. For example, in Australia have first to see a need for assessing sustainability and New Zealand key sectors prevented coverage in proposed emission trading systems arguing that of rule differences. While some institutions provide their competitors were not covered by any climate an evaluation of the market segments (the best is policy instrument. Likewise, industries in the EU the annual report on the state of voluntary mar- were able to prevent a replacement of free alloca- kets, for the most recent edition see Peters-Stanley tion by auctioning in the phase 2013-2020 by ar- et al. 2011), there is no institution providing real- guing that a critical loss of competitiveness would time information. This is a massive contrast to the ensue. Fragmentation will also lead to attempts to mandatory market systems where high liquidity and reduce transaction costs of the systems. standardized contracts lead to real-time publication of prices free of charge. Allocation processes Allocation can range from pure grandfathering to Wild swings in demand full auctioning of allowances. Fragmentation will Right from its inception, the voluntary market has make a grandfathering approach attractive as auc- been a buyer’s market. Turnover of the voluntary tioning is seen to provide a competitive disadvan- market is dependent on the whims of the demand tage. The EU implementation of the rules to prevent side and credit suppliers have to discover “what competitive distortions would certainly have led to turns the markets on or off” (Peters-Stanley et al. less exemptions if Copenhagen had brought a cen- 2011, p. iii). Whole market segments are turned off tralized regime for post-2012. if the political appetite for greenhouse gas reductions slackens as seen in the US in 2009-10. This Openness shows that a large share of the demand for volun- In a centralized climate policy world, openness is tary credits was actually due to the hope to acquire favourable as it allows access to UNFCCC regulated an offset that could eventually be used for compli- credits and thus cost reduction with only a limited ance purposes at rock-bottom prices. Many players reduction in credibility. The fragmented world will in the voluntary markets have also tried to market reward exclusive relations between symbiotic part- those segments that were ineligible in the compli- ners and discount openness. Openness reduces the ance market, such as forest protection. Generally, degree of control over prices and quantities. Price marketing plays a much larger role than in the com- caps and floors are a huge obstacle to openness as pliance market, leading to waste of resources and they might lead to “contamination” of other trading a tendency to focus on simple messages. Despite a schemes in case the caps are reached. decade of efforts, overall, annual turnover of the entire voluntary market has remained below ¾ billion The voluntary carbon market – laboratory of fragmentation $, i.e. less than 1% of the compliance markets. Even We already have a fragmented world in an impor- from the Kyoto Mechanisms, the voluntary market tant segment of the carbon markets – the voluntary never reached more than a quarter of the volume of market. In the decade of its existence, several key the compliance market. if one only counts primary transactions of offsets lessons have been learned. None of these is particularly encouraging. Proliferation of institutions with similar tasks Registry and verification systems compete with Lack of transparency each other, increasing transaction costs. 15 reg- The voluntary market is highly non-transparent. istries are competing, most of which are located Only specialists have a good overview of the details in the US. Divergence of standards is likely as 21
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