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Bern 16th June 2015 – 2nd dialogue between the Swiss private sector and the Swiss Federal Administra@on on carbon markets
Juerg Fuessler (INFRAS) and Axel Michaelowa (Perspec@ves)
Market Mechanisms: Incen@ves and Integra@on in the Post-‐2020 World
Source: World Bank, Networked Carbon Market (NCM) Ini@a@ve
INFRAS
Agenda
| Market Mechanisms | 16 June 2015 | J. Füssler und A. Michaelowa
1. Incen@vizing mi@ga@on ac@on pre 2020 2. Accoun@ng – Important essen@als for deal in Paris 3. Transi@ons of market mechanisms – poten@al storylines 4. How to use elements from market mechanisms to improve climate finance?
5. Preliminary findings for Switzerland
2
INFRAS
Incen.vizing mi.ga.on ac.on pre 2020: Current categories of market mechanisms
| Market Mechanisms | 16 June 2015 | J. Füssler und A. Michaelowa 4
Kyoto mechanisms, mostly project-‐based (CDM and JI) § Successful but paralyzed by price crash § Efficiency of CDM hampered by addi@onality issues Other (domes@c and interna@onal) offsebng programs (VCS, CAR, JCM, CH-‐Kompensa@onsprojekte, …) Boeom-‐up upscaling of mechanisms (REDD+, NAMA credi@ng) § Niche ac@vi@es at the moment, but basis for poten@al upscaling
INFRAS
Incen.vizing mi.ga.on ac.on pre 2020: New mechanisms under the UNFCCC
| Market Mechanisms | 16 June 2015 | J. Füssler und A. Michaelowa 5
§ NMM and FVA: § Principles agreed but “hostage” to the nego@a@on process since 2012
§ Willingness to build up new market mechanism seems weak § REDD+
Key ques@ons: • How do climate finance and market mechanisms interact? • What role should the UNFCCC play? • How can environmental integrity and transparency be
maintained in a world of fragmented mechanisms?
INFRAS
Scenarios for assessment of market mechanisms
| Market Mechanisms | 16 June 2015 | J. Füssler und A. Michaelowa 6
High demand – strong governance § INDCs of industrialized countries and emerging economies are ambi@ous and envisage acquisi@on of interna@onal credits
§ Buyers want to ensure high level of integrity Low demand – weak governance § Limited share of INDCs envisages buying of credits § Scramble to get transac@ons may lead to low and/or fragmented standards
“Clubs” with common accoun@ng rules and/or “filters” for types of emission credits § Som linking to allow for a certain fungibility of units
INFRAS
Accoun.ng – Bookkeeping of mi.ga.on outcomes
| Market Mechanisms | 16 June 2015 | J. Füssler und A. Michaelowa 8
Robust rules for accoun@ng of credi@ng units are key to ensure the integrity of any market based mechanism. § Environmental integrity, consistency and comparability of the units § Avoid double coun@ng/claiming: (i) accoun@ng of units, (ii) design of mechanisms that issue units, and (iii) consistent tracking and repor@ng on units.
§ Time dimension of units: validity of vintages (carry over), permanence issue
Minimum: robust accoun@ng rules for interna@onal transfer of units, even if there is no agreement on an interna@onally recognized compliance unit in the sense of an assigned amount -‐> need for «clubs»
INFRAS
0
2
4
6
8
10
12
Natl. BAU Domestic mitigation Crediting INDC (Net)
INDC not met
0
2
4
6
8
10
12
Natl. BAU Domestic mitigation Crediting INDC (Net)
INDC met
Accoun.ng – Double coun.ng with MM under INDCs
| Market Mechanisms | 16 June 2015 | J. Füssler und A. Michaelowa
9
Intl. credi,ng units shall not count towards domes,c INDC compliance.
0
2
4
6
8
10
12
Natl. BAU Domestic mitigation Crediting INDC (Net)
Additional mitigation
INDC met
© INFRAS 2015
a) INDC without interna@onal credi@ng b) INDC with credi@ng – double coun@ng
c) INDC with credi@ng – correct accoun@ng
Source: INFRAS 2014
INFRAS
Accoun.ng – Facilita.ng fungibility of units
| Market Mechanisms | 16 June 2015 | J. Füssler und A. Michaelowa 10
Comparability of accoun@ng approaches supports markets § Fungibility: describes the ability to exchange carbon credits from different schemes and make them eligible for compliance in another scheme
§ (“Som”-‐) linking of carbon markets through § Comparability of accoun@ng, consistency in ambi@on level § Filters or ra@ng of units and discoun@ng § Interna@onal Carbon Asset Reserve (ICAR) – Shared risk
mi@ga@on systems § “Clubs” – coali@ons of the willing
INFRAS
Accoun.ng – carry over of units
| Market Mechanisms | 16 June 2015 | J. Füssler und A. Michaelowa 11
Unlimited carry over of emissions reduc.ons units § generates trust in the market and reduces price fluctua@ons § limits the possibility to eliminate supply overhangs generated by lenient rules in the past
§ is not aerac@ve in the current situa@on Limi.ng carry over § Allows a “fresh start” (akin to a currency reform) § Could be seen as expropria@on by those stakeholders having invested heavily in the past into credit genera@on
Compromise solu.ons § Freezing certain units un@l the supply/demand balance has shimed (price triggers)
§ Linking carry over to the environmental integrity of the credits § Discoun@ng credits § Possibility of “re-‐registra@on” of exis@ng projects under new rules
INFRAS
Transi.ons – towards project or aggregated level instruments? (1)
| Market Mechanisms | 16 June 2015 | J. Füssler und A. Michaelowa 13
Project/installa.on level instrument (e.g. «old CDM») Characteris,cs: § Exis@ng methodologies, ins@tu@ons, know-‐how and MRV structures § Rather limited requirements for host country governments § Builds on private sector ini@a@ve – it works
§ Addi@onality test on project level is problema@c with some project types (uncertainty, low CER impact)
§ Higher transac@on cost on project level § Limited scope for scaling up
INFRAS
Transi.ons – towards project or aggregated level instruments? (2)
| Market Mechanisms | 16 June 2015 | J. Füssler und A. Michaelowa 14
Aggregated/sector level instruments including - Policy instrument based credi@ng, - Sector target credi@ng and trading schemes, - Upscaling of CDM, POA and standardized baselines Characteris,cs: § Lower Requires significant capaci@es for data, methodologies, MRV, GHG inventory, legal frameworkt, etc. on aggregated level
§ Stronger role of governments – challenging in many countries § Key requirement: passing incen@ves to (private sector) actors § Addi@onality issues moves to level of credi@ng baseline sebng – remains challenging (level playing field for host countries with different (own) ambi@on levels)
INFRAS
Storylines for transi.on of market mechanisms
| Market Mechanisms | 16 June 2015 | J. Füssler und A. Michaelowa 15
How could market mechanisms develop over the next years? § Storyline 1: New market based mechanisms
Governing body defines common accoun@ng standards, modali@es and procedures, overseeing ins@tu@ons and valida@on/verifica@on bodies (similar to Kyoto mechanisms).
§ Storyline 2: Scaling up from CDM or recognizing other exis.ng standards The CDM provides a complete, func@oning and opera@onal interna@onally recognized market mechanism. Plus there are more standards to build on. § Pragma@c development of CDM also into aggregated level mechanisms § Solve accoun@ng issue with pledges/INDCs – level playing field issue
§ Storyline 3: Anything goes – seek transparency Minimum solu@on in absence of agreed standards under the UNFCCC § Par@es agree agree only on transparency and disclosure requirements
e.g. through publishing of all relevant documents related to interna@onally traded units
INFRAS
Storylines – Clubs
| Market Mechanisms | 16 June 2015 | J. Füssler und A. Michaelowa 16
In a weak demand – weak regula,on scenario there is a need for «clubs» of likeminded na@ons/jurisdic@ons to promote interna@onal mi@ga@on § Coali@ons of the willing, building on exis@ng (domes@c) credi@ng/ trading systems
§ Clubs allow to som-‐link mul@tude of fragmented markets § Liquidity of markets § Par@cipants’ markets may be similar, but not necessarily § Process of nego@a@ng agreements in club is key § Risk mi@ga@on instruments
INFRAS
Storylines – Clubs and ICAR
| Market Mechanisms | 16 June 2015 | J. Füssler und A. Michaelowa 17
Example: Landscape of globally networked carbon markets
Carbon Market
A
Carbon Market
B
Linking
Price floor/ceiling
Price fl./ceiling
Carbon Market
C
Carbon Market
D
Carbon Market
E
Carbon Market
F
Price floor/ceiling
Price floor/ceiling
Insurance
Insurance
International Carbon Reserve
Clearing house -‐ fungibility
Price fl./ceiling
©INFRAS 2014
Source: INFRAS 2015 Design op@ons for an interna@onal Carbon Asset Reserve. Networked Carbon Markets. A Knowledge Series. The World Bank Group.
INFRAS
Storylines – CDM as important stepping stone
| Market Mechanisms | 16 June 2015 | J. Füssler und A. Michaelowa 18
In a situa@on of uncertainty, CDM seems to be the only readily working tool in the toolbox (storyline 2) § Star@ng point:
§ CDM market down, acceptance, addi@onality, issue of carry-‐over § Exis@ng infrastructure, ins@tu@ons, skills
§ Op@ons for CDM going forward (M&P review, eligibility in countries): § „open gate“ with exis@ng or simplified addi@onality tes@ng
CDM should work for all project types/levels § „open gate plus“ with very stringent addi@onality tes@ng § „filter approach” to CDM (criteria: addi@onality)
CDM is not for all project types – only where it is game changer. For some project types, other instruments than offsebng may work beeer (supported domes@c ac@on, linking ETS, …)
Market mechanisms
4. How to use elements from market mechanisms to improve climate finance? (for part 2 of workshop)
INFRAS
Market mechanism elements for climate finance I
| Market Mechanisms | 16 June 2015 | J. Füssler und A. Michaelowa 20
Element from MM Role in climate finance
Modifica@ons required
CDM MRV methodologies for project-‐level and programma@c level ac@on
Reliable and comparable quan@fica@on of finance results
-‐ Further standardiza@on -‐ Simplifica@on possible -‐ Measure progress, not
only outcomes (tCO2) -‐ REBRANDING
Independent third party verifica@on
Transparent verifica@on of mi@ga@on progress, outcomes
-‐ Capacity building -‐ Simplifica@on
Regulatory, ins@tu@onal and governance sebng
Public documenta@on of criteria, indicators, and evalua@on results; Transparency, checks and balances in rules
-‐ Adapt for climate finance ins@tu@onal process (GCF,…)
-‐ approach civil society for consulta@ons
INFRAS
Market mechanism elements for climate finance II
| Market Mechanisms | 16 June 2015 | J. Füssler und A. Michaelowa 21
Element from MM Role in climate finance
Modifica@ons required
Country-‐specific sustainable development criteria and indicators
Country ownership of evalua@on of local co-‐benefits
Ensuring countries interest in aerac@ng foreign funding does not lead to minimum standards
Key role of the private sector
Need to create incen@ves for private sector similar to the CDM
Make sure CF can incen@vize governments, but also NGOs and private sector
INFRAS
Findings market mechanisms
| Market Mechanisms | 16 June 2015 | J. Füssler und A. Michaelowa 23
§ Uncertainty regarding demand and governance § Accoun@ng: transparency, environmental integrity and robust accoun@ng as necessary condi@on for market mechanisms
§ In absence of stringent interna@onal rules – seek likeminded par@es to form “club”
§ Storylines for transi@on: (i) New market based mechanisms, (ii) scaling up from CDM, (iii) anything goes
§ Stepping stone CDM: “open gate”, “open gate plus” stringent addi@onality, filter approach – best solu@on in a low demand scenario?
§ Make aggregated level mechanisms work for private sector § Ambi@ous mi@ga@on contribu@ons and domes@c ac@on will drive carbon markets