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Climate Action 2012-2013

POLICY, GOVERNANCE AND

POLICY, GOVERNANCE AND FINANCE THE BUSINESS PERSPECTIVE ON A NEW MARKET MECHANISM By Dirk Forrister, President and CEO, International Emissions Trading Association (IETA) A new carbon trading market mechanism is being negotiated, but has not yet found a definable shape. COP18 in Doha provides the opportunity to make progress on UNFCCC-led initiatives for meeting emissions reduction goals. Market-based carbon reduction mechanisms are progressing at different speeds in jurisdictions across the world, and deploying markets is an increasingly appealing approach for governments in order to reduce emissions cost-effectively. Emissions trading is on the march in Australia, China, South Korea, California and Quebec, and continues to create emissions reductions in the EU and New Zealand. A whole set of additional countries that are involved in special initiatives by the World Bank, UNFCCC and IETA are also exploring market mechanisms with the goal of putting in place a clear carbon price signal. While regional and domestic initiatives forge ahead to institutionalise emissions trading, international negotiations through the UNFCCC still provide a sizeable opportunity at COP18 in Doha to make progress on UNFCCC-led market-based mechanisms for meeting emissions reduction goals. The existing market mechanisms available for reducing emissions at the UN level include the Clean Development Mechanism (CDM) and Joint Implementation (JI). These mechanisms have been able to incentivise capital investment in developing countries to lower emissions substantially. The CDM, as of June 2012, has deployed a cumulative US$215.4 billion invested in registered or soon-to-be-registered projects. And these existing mechanisms will continue to play their part in achieving cost effective reductions. However, they must also coincide with a new market mechanism still undefined within the UNFCCC, able to achieve the scale of emissions reductions requested in the decisions taken at COP13 in Bali. BALANCING SUPPLY AND DEMAND The private sector welcomes a new market mechanism, one that covers broad segments of the economy beyond power, petrochemicals and other extractive industries; but with no new demand investment will not be forthcoming. The opportunity provided by the Durban Platform 46

POLICY, GOVERNANCE AND FINANCE is to put in place a new agreement on emissions targets and provide a clear and stable signal of demand that public and private capital will respond to. An agreement on the global trajectory of emissions caps drives scarcity in the market, and therefore demand for investments in reductions through a new market mechanism. A global agreement must therefore put market-based approaches at the forefront of renewed efforts to reduce emissions, and a new market mechanism must give the private sector sufficient incentives to develop scaled-up emissions reduction projects in their consumer markets and beyond. Market mechanisms respond to demand, reflecting the emission reductions goals that Governments or companies commit to, and sustain over the long term by accounting for and recognising a price on carbon. Current frameworks and designs for market mechanisms include exploring sectors of the economy that are not currently covered by a market instrument such as transport, buildings or heating fuels. WHAT IS THE PRIVATE SECTOR IS LOOKING FOR? Long-term mitigation goals, however they are formulated, will need to be fulfilled in a costeffective way in order for carbon pricing to be sustained in the long run. The private sector is a necessary part of achieving this, as the success of private investment through the CDM has shown. The industry and capacity developed in the private sector under existing mechanisms can be deployed to create larger-scale reductions under a new market instrument. Any new mechanism must build and leverage the expertise and capacity that has been developed in the private sector during the lifespan of the CDM and JI – as there are many innovative approaches and enterprises committed to deploying capital for emission reduction activities. Market mechanisms provide positive outcomes for all participants, as is clear from studies such as the World Bank’s State and Trends of the Carbon Market 2012, or UNFCCC’s Benefits of the Clean Development Mechanism. Host governments are provided with a source of financing, investment, and technology transfer to achieve goals on both emissions and sustainable economic development. Developed countries can access low-cost mitigation options to fulfil their reduction targets through an internationally recognised mechanism. The private sector can fulfil obligations at a lower cost, and also develop innovative opportunities to reduce emissions through the mechanism. This mutual benefit has driven IETA to partner with the World Business Council for Sustainable Development (WBCSD) to put forward the private sector’s viewpoint on the framework of a new market mechanism. This framework would put trading at the heart of a mechanism, but aimed at achieving higher-scale reductions than the project-based mechanisms currently in operation. BOTTOM-UP OR TOP-DOWN – OR BOTH? Institutionally, discussions often centre on the bottom-up or top-down approaches to a framework that institutionalises a global carbon price. The private sector understands that, within the political context, a mixture of these approaches represents the best way forward. Therefore, some elements of top-down guidance need to be created on issues such as MRV (‘measurable, reportable, verifiable’), standard setting, and oversight to avoid issues such as double counting. IETA sees these functions as being situated either under the UNFCCC ‘umbrella’, or through a different institutional arrangement bilaterally between countries. They will serve a critical purpose in ensuring that a trading framework provides fungibility in carbon credits worldwide. Both producers and users of credits prefer to access the broadest market of reductions possible to enhance liquidity and options available for those transacting in the carbon market, as well as an enhanced flow of global trade in clean technology and energy efficiency solutions. Providing assurance that MRV standards are consistent and that “a tonne is a tonne” gives the private sector confidence that credits are equally valuable in their environmental benefit and maintain integrity in the markets. In addition, a global MRV regime will substantially lower transaction costs for the private sector – allowing for greater participation and the likelihood that ambitious climate targets could be met. Different approaches and rules on accounting for carbon will not provide a clear pathway to meeting global climate action goals. Alongside a level of governance from an international governance system, there needs to be appreciation for national circumstances; and use of a new market mechanism should be determined by countries on an opt-in basis. This approach allows climateactionprogramme.org 47