Developing a sectoral new market mechanism: insights from theoretical analysis and country showcases

Abstract

Abstract:Parties to the United Nations Framework Convention on Climate Change (UNFCCC) have decided to establish a "new market-based mechanism" (NMM) to promote mitigation across "broad segments" of developing countries' economies but have so far defined only some broad outlines of how it is to function. This article identifies key design options of the NMM based on a survey of the literature and reviews them against a range of assessment criteria. Furthermore, potential application of the NMM is analysed for five country-sector combinations. The analysis finds that lack of data and of institutions that could manage the NMM are key bottlenecks. In addition, the analysis reveals the existence of substantial no-regret reduction potential, suggesting that sectors may not be sensitive to the market incentives from an NMM. Governmental capacity building and nationally appropriate mitigation actions (NAMAs) might be more appropriate on the short term, preparing the ground for the adoption of market-based approaches at a later stage. NMM pilots could be based on supported NAMAs but should ideally generate tradable and compliance-grade emission credits in order to fully simulate the real-life conditions of an NMM. Policy Relevance:The Doha conference identified "possible elements" of the NMM to be addressed in the development of the NMM's modalities and procedures. This article identifies available options for these possible elements and reviews these options against a number of criteria, including environmental effectiveness, economic efficiency, political and administrative efficiency, and others. On this basis the article identifies options that are best suited to fulfil the main aims of the NMM as decided at the Durban conference, "to enhance the cost-effectiveness of, and to promote, mitigation actions". In addition, the article analysis potential application of the NMM for five country-sector combinations. The analysis assesses the emission reduction potential that could be mobilised through the NMM as well as the institutional market readiness of the sectors. Finally, the article synthesises the challenges ahead for the NMM that have emerged from the analysis and suggests possible ways forward.

The transformative potential of emissions trading

“…While various design options exist and not all of them provide for a direct price incentive to the private sector (Wehnert, Arens, and Sterk 2012;Bolscher et al 2012;Sterk et al 2015), a new market mechanism under the UNFCCC is nevertheless seen as an intermediate step on the route to a unified global carbon market, facilitating the establishment of domestic emission trading systems in more and more countries.…”

A conjoint analysis of corporate preferences for the sectoral crediting mechanism: a case study of Shanxi Province in China

“…18 that need to be taken into account by the Subsidiary Body for Scientific and Technological Advice (SBSTA) in the development of the NMM (UNFCCC, 2013a). Sterk et al (2014) groups some of these elements together and streamlines them into five design elements, of which several have sub-elements. Some of the design elements and sub-elements require to be considered and defined by the Conference of the Parties (COP) at the international level, and thus have little effect on the companies.…”

New market mechanism and its implication for carbon reduction in China

“…Moreover, some PAMs (such as feed-in tariffs) already exist and have been proven to be effective. In the short term, therefore, strengthening an existing and successful policy can be an effective approach (Sterk et al, 2014). However, emission reductions from some PAMs are difficult to measure, report and verify (MRV), which makes them ineligible for crediting (Cai, 2010).…”