Unveiling the Potential of
Market Based Mechanism
Implementation in
Indonesia
Thailand and Chile case studies
Dicky Edwin Hindarto
Indonesia JCM Secretariat
What happened in COP 21?
Parties of the UNFCCC pledged to curb its carbonemission, strengthen resilience and joined to takecommon climate action .
Paris Deal includes a temperature limit of “well below 2C” and says there should be “efforts” to limit it to 1.5 C.To do so requires 32 GtCO2e emission to be cut in 2050,and around US$ 40 trillion additional investment totransition to a global low-carbon economy.
To achieve long-term temperature goal or in anotherword reaching net zero-emission after 2050.
Legal obligation on developed countries to continue toprovide climate finance to developing countries.
On mitigation, binds parties to prepare and regularlyupdate climate commitments and developing countriesare encouraged to move towards stricter goals.
The most important paragraphs…
PARIS AGREEMENT (article 2 para 1-2)1.This Agreement, in enhancing the implementation of the
Convention, including its objective, aims to strengthen the globalresponse to threat of climate change, in the context of sustainabledevelopment and efforts to eradicate poverty, including by:
1.Holding the increase in the global average temperature to well below 2O Celciusabove pre industrial levels and to pursue efforts to limit the temperatureincrease to 1.5O Celcius above pre industrial levels, recognizing that this wouldsignificantly reduce the risks and impacts of climate change;
2. Increasing the ability to adapt to the adverse impacts of climate change and fosterclimate resilience and low greenhouse gas emission development, in a mannerthat does not threaten food productions;
3.Making finance flows consistent with a pathway towards low greenhouse gasemissions and climate resilient development.
2.This Agreement will be implemented to reflect equity and theprinciple of common but differentiated responsibilities andrespective capabilities, in the light of different nationalcircumstances.
MBM in Paris Agreement: article 61. Parties recognize that some Parties choose to pursue voluntary cooperation in the
implementation of their nationally determined contributions to allow for higher ambition in their mitigation and adaptation actions and to promote sustainable development and environmental integrity.
2. Parties shall, where engaging on a voluntary basis in cooperative approaches that involve the use of internationally transferred mitigation outcomes towards nationally determined contributions, promote sustainable development and ensure environmental integrity and transparency, including in governance, and shall apply robust accounting to ensure, inter alia, the avoidance of double counting, consistent with guidance adopted by the Conference of the Parties serving as the meeting of the Parties to the Paris Agreement.
3. The use of internationally transferred mitigation outcomes to achieve nationally determined contributions under this Agreement shall be voluntary and authorized by participating Parties.
4. A mechanism to contribute to the mitigation of greenhouse gas emissions and support sustainable development is hereby established under the authority and guidance of the Conference of the Parties serving as the meeting of the Parties to the Paris Agreement for use by Parties on a voluntary basis. It shall be supervised by a body designated by the Conference of the Parties serving as the meeting of the Parties to the Paris Agreement, and shall aim:
1. To promote the mitigation of greenhouse gas emissions while fostering sustainable development;
2. To incentivize and facilitate participation in the mitigation of greenhouse gas emissions by public and private entities authorized by a Party;
3. To contribute to the reduction of emission levels in the host Party, which will benefit from mitigation activities resulting in emission reductions that can also be used by another Party to fulfill its nationally determined contribution; and
4. To deliver an overall mitigation in global emissions.
5. Emission reductions resulting from the mechanism referred to in paragraph 4 of this Article shall not be used to demonstrate achievement of the host Party’s nationally determined contribution if used by another Party to demonstrate achievement of its nationally determined contribution.
6. The Conference of the Parties serving as the meeting of the Parties to the Paris Agreement shall ensure that a share of the proceeds from activities under the mechanism referred to in paragraph 4 of this Article is used to cover administrative expenses as well as to assist developing country Parties that are particularly vulnerable to the adverse effects of climate change to meet the costs of adaptation.
7. The Conference of the Parties serving as the meeting of the Parties to the Paris Agreement shall adopt rules, modalities and procedures for the mechanism referred to in paragraph 4 of this Article at its first session.
8. Parties recognize the importance of integrated, holistic and balanced non-market approaches being available to Parties to assist in the implementation of their nationally determined contributions, in the context of sustainable development and poverty eradication, in a coordinated and effective manner, including through, inter alia, mitigation, adaptation, finance, technology transfer and capacity-building, as appropriate. These approaches shall aim to:
1. Promote mitigation and adaptation ambition;
2. Enhance public and private sector participation in the implementation of nationally determined contributions; and
3. Enable opportunities for coordination across instruments and relevant institutional arrangements.
9. A framework for non-market approaches to sustainable development is hereby defined to promote the nonmarket approaches referred to in paragraph 8 of this Article.
MBM in Paris Agreement: article 6
Some thinking of article 6 of Paris Agreement (PA)
1. Article 6 has a strong linkage with article 5 of the PA (REDD+).
2. Parties can develop voluntary cooperation (bilateral, regional, or multilateral) to pursue their emission reductions.
3. The use of internationally transferred mitigation outcomes (ITMO’s) are allowed to support the NDC’s.
4. New mechanism called “Sustainable Development Mechanism” will be established under the PA.
5. The emission reduction that comes from the mechanism shall promote sustainable development and ensure environmental integrity and transparency, including in governance, and shall apply robust accounting to ensure, inter alia, the avoidance of double counting.
6. Non market approaches (NMA) also allowed to be used in NDC fulfilment.
What else?
A lot of things have to be agreed in order
to develop technical elements for the
NDC implementations!
How to finance climate change mitigation?
• Indonesia has commited to reduce national emission up to 26% bybusiness as usual scenario by 2020.
• Indonesia climate change mitigation activities need market- andnon market-based financial system.
Mitigation
market based mechanism
carbon market another market
government budget
central and local
government
private investment
public private partnership and purely
private
FDI
foreign private and
government investment
Why we need to put price on emission?
• Indonesia has targeted to reduce its emission by 26% in 2020 and 29% in 2030. In addition the reduction is expected to reach 41% with the international cooperation
INDC Target
•Putting the price on emission will generate revenue that can be used to transition to low-carbon economy
Source of Government Revenue
•As the emission will become cost, companies will be triggered to be more efficient in the production process
Product and Process Efficiency
•The private sector will be interested to invest in the low-carbon development as there is incentive for reducing emission
Scaling Up Private Sector Fund
•By putting price on emission it is likely the price of energy will get higher, thus changing behavior of the people to be more efficient (demand side management)
Trigger Behavior Change
Market Based Mechanism (MBM) experiences in Indonesia
• Total of 121 registered projects
• 2% of total global CDM registered projectCDM
• Total of 12 registered projects
• Project registered included forestry project VCS
• Total of 28 projects in forestry, energy efficiency, and renewable energy (in 3 years of its development)JCM
• Total of 19 projects in energy efficiency, renewable energy, forestry, waste handling and disposalGold Standard
• Total of 6 projects in the forestry and ecosystem sectorPlan Vivo
GS and Plan Vivo has lower degree of asurance compare to other schemes
Other Indonesia’s initiatives in market based mechanism
• Indonesia was one of the first countries who join this initiative in 2010.
• Currently still in the implementation preparation stage.PMR
• Indonesia actively involved in Asia Pacific Carbon Market Roundtable initiated by New Zealand.
• The roundtable is intended to seek the possibilities of regional market based cooperation.APCMR
• The newest international initiatives on market based mechanism dialogue initiated by G7 countries.
• This is a high level dialogue and discussion intended to create common understanding in the MBM implementation.
Carbon Market Platform
• The declaration was made to support the Paris Agreement implementation.
• Support a strong role for carbon markets to enhance the ambition and facilitate the delivery of mitigation under the Paris Agreement.
• Committed to environmental integrity, transparency and the avoidance of double counting when market mechanisms are used
MinistrialDeclaration on Carbon Market
Market based mechanism types
• Clean development Mechanism (CDM)
• Joint Implementation
• Emission Trading Scheme (ETS)
• Crediting scheme (VCS, JCM, plan vivo, CCB)
• Carbon tax
To calculate the emission we use MRV
M is measurement
R is reporting
V is verification
National Sub-national / Scheme Project / Activity level
M R V
Scale
Some basic elements of MRV1. Scope of MRV (and governance)2. Methodology and baseline3. Measurement system (qualitative and
quantitative)4. Reporting5. Verification (and third party entities)6. Registry and issuance system.
Why we need to do the MRV?
• Many of emission reduction activities are very difficult to be measured and recorded.
• To make climate change activities transparent and accountable.
• To avoid double claiming, double registering, double financing, and double counting.
• MRV is a term used to describe all measures to collect data on emissions, mitigation actions and support, to compile this information in reports and inventories, and to subject these to some form of international review or analysis.
Example: MRV in national level
What is measurement?• GHG emission and removal by sink.• Emission reduction associated with mitigation actions compared to a baseline scenario.• Progress in achieving climate change mitigation and adaptation, achievement of
sustainable development goals and co-benefit.• Support received (finance, technology, and capacity building.• Progress with implementation.
What is report?• Data on GHG emissions and removals by sinks.• Data on emissions reductions associated with mitigation actions compared to a baseline
scenario.• Progress with implementation of the mitigations actions.• Key assumptions and methodologies.• Sustainability objectives, coverage, institutional arrangements, and activities.• Information on constraints and gaps as well support needed and received.
What is verification?• All qualitative and quantitative information reported, in the BUR, on national GHG
emissions and removals, mitigations actions and its effects, together with support needed and received.
• Data maybe verified through national MRV where appropriate.
How crediting work
• Emission reduction is the difference between emission scenario without project with the actual emission after the project is being implemented.
• In crediting, each 1 ton of CO2 emission reduction is equivalent to 1 carbon credit
Emission before project
Emission after project
Carbon credit
before project after project
CO
2
CO
2
• To quantify emission reduction, methodology is needed.
Example of MRV crediting in JCM scheme
*PDD: Project Design Document
Submission of Proposed
Methodology
Approval of Proposed
Methodology
Developmentof PDD
Validation
Registration
Monitoring
Verification
Issuanceof credits
Project Participant / Each GovernmentJoint Committee
Joint Committee
Project Participant
Third Party Entities
Joint Committee
Project Participant
Third Party Entities
Joint Committee decides the amountEach Government issues the creditC
an b
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Measurement
Reporting
Verification
16
JCM Indonesia infrastructures development
Guideline:1. Project Design
Document2. Proposed
Methodology3. Third Party Entity4. Validation and
Verification5. Sustainable
Development Implementation Plan and Report (Indonesia’s specific JCM guidelines )
Procedure: Project Cycle Procedure
Rules: 1. Rules of Implementation2. Rules of Procedure for JC
Since JCM establishment in 2013, it has developed several guidelines, procedure, rules, registry system and methodologies
Registry system:We have developed the first climate change mitigation
registry system in Indonesia, and it is expected to connect with the National Registry
Methodologies:10 methodologies of energy efficiencies and
renewable energy have been developed
ISO 1
40
65
base
d
How cap and trade/ETS mechanism work
Emissions trading or cap and trade is a government-mandated, market-based approach to controlling emission by providing economic incentives for achieving reductions in the emissions of pollutants
By applying
cap and trade
policy,
quantifiable
emission
reductions
can be
delivered by
setting a cap.
What is carbon tax?• Carbon tax is a form of explicit carbon pricing; it refers to a tax directly linked
to the level of CO2 emissions, often expressed as a value per tCO2 equivalent1
• With carbon tax, a ton of emitted GHG has a price according to the taxation policy. Thus, creating incentives for emitters to shift to less GHG intensive ways of production and resulting in reduced emission.
1 based on “Climate carbon – Aligning prices and policies,’ OECS Environment Policy Paper, October 2013 no01
Carbon market
Carbon market elements:• Policy
• Setting environmental target goal
• Selecting appropriate policy instruments
• Sharing possible carbon revenues
• Policies to encourage pilot
• Technical
• Coverage
• MRV system
• Reference/baseline scenario
• Registry and transaction log
• Institutional and legal
• Issuance system
• Institutional for the verificatory
• Rules and regulation
Carbon market is a market that is created from the trading of carbon emission allowances or credits to encourage or help countries and companies to limit their carbon dioxide (CO2) emissions.
Why carbon market?
• Seller• Profit• Green incentives• Co benefit
• Buyer
• Obligation to reduce emission
• Cheaper and easier
• Guaranteed quality
• Voluntary
Cost Effective
Carbon pricing instrument statistic
Jurisdiction
• 39 National
• 23 Sub-national
Instrument
• 38 carbon pricing instruments (already implemented or scheduled for implementation)
• 90% increased compare to 1st
January 2012
Coverage
• Around 12% of the global emission or 7 GtCO2e
• ETS consists of 8% & carbon tax consists of 4%
Price
• Ranging from US$ 1 – 130 /tCO2e
Instrument Strengths Weaknesses
Cap &
Trade
• Assure the delivery of emission
reduction target through emission
cap
• The administrative costs are
generally low in relation to the
value of carbon pricing
instrument
• Uncertainty of the allowance price
• Implementation of ETS is
complicated as a result of
requirement to create a new
commodity, the allocation of these
commodity and the establishment of
a market for trading
Carbon
Tax
• Assure the price certainty, as it is
determined by the government
• Generally easier to implement, as
it can build on existing taxation
infrastructure
• Generally set by modeling the cost
of reducing emission to a certain
target. Inaccuracies in the model will
result actual emission reduction
which is different than the target
• The utilization of iterative approach
to set the tax rates resulted higher
administration cost and uncertainty
for low-carbon investment.
Currently several countries opted to combine these instruments to
mitigate its downside. The combine instrument is generally called
“Hybrid Instrument”
Cap & Trade, Carbon Tax, and Crediting
Cap & Trade, Carbon Tax, and Crediting
Instrument Strengths Weaknesses
Crediting • Flexible and easy to be
implemented
• The administrative costs are
generally low in relation to the
value of carbon pricing
instrument
• Most popular scheme in
developing countries
• Demand and carbon prices are
always the problems
• Most countries used crediting as their
complementary for green business
strategy implementation
Crediting not necessary done by country , but also can be
implemented trans boundary, by sectors, etc
List of Countries Implementing
Carbon Pricing InstrumentsCarbon Tax National:
Japan, Mexico, Chile, South Africa,
Costa Rica
Sub-National:
British Columbia, Alberta
ETSNational:
Liechtenstein, Austria, Belgium,
Bulgaria, Croatia, Cyprus,
Czech Republic, Germany,
Greece, Hungary, Lithuania,
Italy, Luxembourg, Malta, The
Netherlands, Romania,
Slovakia, Spain, Kazakhstan,
Korea, Taiwan
Sub-national:
RGGI, Tokyo, Saitama, Kyoto,
California, Quebec, Shenzhen,
Guangdong, Shanghai, Beijing,
Tianjin, Hubei, Chongqing
ETS and Carbon TaxIceland, Norway, Denmark, Estonia,
Finland, France, Ireland, Latvia,
Poland, Portugal, Slovenia, Sweden,
United Kingdom
The classification is excluded other policy instruments such as: removal of fossil-
fuel subsidies, infrastructure investment in transport and energy, renewable
energy portfolio standard, and energy efficiency standard
Crediting National:
Costarica, Thailand
Case Study: How Do Countries
Choose Carbon Pricing Instrument?
• EU Legislative remit does not cover fiscal policies such as carbon taxation
EU-ETS
• Concentrated nature of its energy sector-marked by small number of market participants and small trading volumes
• Carbon tax could be built on the existing infrastructure used for other taxes
South Africa
Carbon Tax
The choice of carbon pricing instrument is based on national
circumstances and political realities
Conclusion• Market based mechanism implementation is “a must do”
action if we want to reduce emission in an effective and cost efficient way.
• Country may choose their preferences of the market based mechanism scheme that can be implemented in their region.
• Carbon tax is the most feasible to implement in Indonesia as it does not require complicated infrastructure
• The implementation of the taxes, however have to be done gradually to increase the reception from all sectors
• It is required to provide assistance for the energy intensive industry as it will be hit the hardest by the implementation of carbon tax
• Crediting scheme can be the second choice to be implemented.
• Indonesia can start the crediting scheme by implementing domestic scheme.
• The biggest challenge for crediting is to create the demand.
References
1. Atika, Ratu Keni, MRV in MBM presentation 2016
2. Chile delegation presentation at APCMR Meeting Santiago, 2016
3. Setiawati, Rini, Carbon Tax presentation, 2016
4. Thailand delegation presentation at APCMR Meeting Santiago, 2016
5. World Bank PMR Annual Report 2015