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