Future of New Market Mechanisms – Not Yet (COP18 analysis)

Doha was the final session for the negotiation track on long-term cooperative action (LCA), established as part of the Bali Action Plan. Under this track, Parties discussed the details for establishing a new market mechanism (NMM) and a Framework for Various Approaches (FVA), including the use of markets.

Framework for Various Approaches (FVA)

Doha didn’t bring much clarity to what such a framework would actually entail but concluded with the realization that this lack of clarity and common understanding was the very problem. The final decision taken in Doha includes establishing a work programme:

  • to address the purpose of the framework,
  • develop the scope of approaches to be included under the framework (e.g. market based and/or non-market based);
  • develop a set of criteria and procedures to ensure the environmental integrity;
  • develop technical specifications to avoid double counting and
  • agree on the institutional arrangements for the framework.

The work programme will be developed by the Subsidiary Body for Scientific and Technological Advice (SBSTA) for decision at COP19. Parties and observer organizations are invited to submit views by 25 March 2013.

The final decision text can be found here (page 9).

New Market Mechanism

Parties decided on a work programme under SBSTA to elaborate modalities and procedures for the so called New Market Mechanism (NMM) to be agreed upon at COP19. Parties and observer organizations are invited submit views on by 25 March 2013.

The decision text on the New Market Mechanism is more detailed than that on the FVA and already includes a number of important elements, such as:

  • Operation under the guidance and authority of the COP;
  • Standards that deliver real, permanent, additional, and verified mitigation outcomes, avoid double counting of effort and achieve a net decrease and/or avoidance of greenhouse gas emissions;
  • Requirements for the accurate measurement, reporting and verification of emission reductions, emission removals and/or avoided emissions;
  • Criteria for the accurate and consistent recording and tracking of units;
  • Supplementarity;
  • The promotion of sustainable development;

The final decision text can be found here (page 10).

Wild West Carbon Markets

Ahead of Doha, the seemingly common view was that the FVA is supposed to give recognition to national emission reduction systems and, if Parties want it to, make the emission reductions units that are achieved by these systems internationally tradable and eligible for meeting national emission reduction targets (QUELROs). Under the NMM on the other hand, countries could put forward national emission reduction systems to the UNFCCC to be approved for the issuance of credits. Both work streams could host the same types of emission reduction systems, ranging from market-based instruments to renewables feed-in tariffs. However, this raised the question on why two different work streams were actually under discussion.

The answer becomes clear when looking at the politics. Although the same types of emission reduction systems could be hosted, the NMM requires international common standards and UNFCCC approval before credits could be issued and used for compliance. The FVA on the other hand could allow countries to develop whatever systems they want and offer the resulting emission credits for compliance without the UNFCCC taking a close look them, something strongly wished for by Japan, New Zealand and the US. If the FVA would have become part of a new agreement mandated by the Durban Platform, this would have potentially enabled Parties to meet part of their commitments using units from other domestic market mechanisms. This means that the future of carbon markets could have looked like the Wild West, where units from multiple market and non-market mechanisms would have been traded wildly and internationally, and for compliance. In a world without a clear set of international standards, this wild trading would certainly lead to double, potentially triple counting and would leave us with no certainty on how much 1 tonne of CO2 really is.