New Market-based Mechanism

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Date produced: 11/06/2014

1. Can the new mechanism described in paragraphs 83 and 84, section E, of decision 2/CP.17 draw from the modalities and procedures for the CDM?

2. Can the new mechanism described in paragraphs 83 and 84 also incorporate the 3 work programmes (the Framework for Various Approaches, non-market based approach, new market-based mechanism)?

Advice:

1. CDM model

The “New Market-based Mechanism” (“NMM”) described in paras 83 and 84 of decision 2/CP.17 aims to enhance the cost-effectiveness of, and to promote, mitigation actions, as well as to assist developed countries to meet part of their mitigation targets or commitments under the Convention:

“83. Defines a new market-based mechanism, operating under the guidance and authority of the Conference of the Parties, to enhance the cost-effectiveness of, and to promote, mitigation actions, bearing in mind different circumstances of developed and developing countries, which is guided by decision 1/CP.16, paragraph 80, and which, subject to conditions to be elaborated, may assist developed countries to meet part of their mitigation targets or commitments under the Convention;

84. Requests the Ad Hoc Working Group on Long-term Cooperative Action under the Convention to conduct a work programme to elaborate modalities and procedures for the mechanism referred to in paragraph 83 above, with a view to recommending a decision to the Conference of the Parties at its eighteenth session.”

This is precisely the scope of the CDM, JI and ETS, which are the flexibility mechanisms under the Kyoto Protocol (arts. 6, 12 and 17). These mechanisms are also “market-based”, i.e. based on the possibility of exchanging and trading carbon units, in order to comply with a mitigation target or commitment. They draw on the market as a tool for assisting developed countries to comply with their mitigation commitments in a cost-effective manner. The underlying idea is that, since it is more expensive for some countries/facilities to cut emissions as compared to others, those that bear low margin costs can trade their surplus ability to reduce emissions in the form of carbon units.

When first launched in the KP, these market-based mechanisms were deemed remarkably innovative in international law, and have allowed for billions of tons of CO2 emissions to be avoided or reduced since then.

Therefore, it is only natural that a new NMM would build upon the experiences of CDM, JI and ETS so far. However, whether CDM modalities and procedures can be used for the new market-based mechanism depends on what form this mechanism will take, ie  whether it will be project-based (like CDM and JI) or whether it will take a sectoral approach  (like the ETS).

In a project-based crediting mechanism, a baseline of emissions for carbon-offset projects is set, and carbon units are issued for the emissions reduction that go beyond the crediting threshold, allowing the host country to comply with a given mitigation target or commitment or to trade the surplus with those who were not able to achieve theirs.

In a sectoral crediting mechanism, the aim is to facilitate emission reductions in economic sectors by issuing quotas within the limit of reduction of emissions which, if exceeded, must be compensated with the purchase of emission reduction units from other countries, or payment of a penalty.

Since CDM is a project-based carbon offset mechanism, its modalities are focused on the types of projects and activities, and its procedures are for crediting carbon units as a result of such projects. Consequently, procedures and modalities of CDM will only be useful for NMM if its carbon units likewise are generated under project activities.

Finally, there is no explicit indication in paras 83 and 84 (or in any other COP decision) that the procedures and modalities of the CDM should be necessarily considered for this new market-based mechanism. However, if a project-based approach is agreed for the NMM, it will be difficult to depart from some key elements of CDM, such as the project activities that were already identified by CDM as capable of reducing emissions with environmental integrity, which were crafted together with the science. Accordingly, the establishment of procedures and modalities under the NMM should be guided by science too.

2. Incorporation of other work programmes

Pursuant to the Bali Action Plan, COP16 decided to consider the establishment of one or more market-based and non-market based mechanisms and agreed on criteria to guide their implementation. At COP 17, decision 2/CP.17 defined a new market-based mechanism, and decided to consider a framework for various approaches on mitigation.

Decision 1/CP.18, section D requested SBSTA to conduct separate work programmes on: the Framework for Various Approaches (FVA) and the New Market-Based Mechanism (NMM). Under the FVA, a specific work programme to elaborate Non-market based Approaches (NMA) to mitigation  was also requested.

It is important to differentiate “approaches” to “mechanism”.

The FVA is a platform to devise and analyze all possible approaches, market and non-market based, driven by the aim of maximizing mitigation of climate change. Therefore, our understanding is that the Non-market based Approaches (NMA), being one kind of the possible “approaches” to mitigation, is already incorporated into the FVA.

On the other hand, the NMM is a governance microsystem (under which there may be institutional arrangements), which coordinates and facilitates compliance with mitigation targets and commitments by means of trade of carbon units. It concerns a market-based approach to mitigation of climate change entrusted into a specific mechanism. In this sense, we can broadly say  that it is incorporated into the realm of approaches considered under the FVA.

At the moment it is referred to generically as a “new market-based mechanism”, but eventually it will be coined with a specific name, such as in “Clean Development Mechanism (CDM)”.

Under the work of SBSTA, questions have arisen as to whether the NMM should comprise only the trade of carbon units or other possible economic incentives. It is not yet clear what sorts of market-related activities are embedded in the NMM.

In any case, the NMM is not intended to be the only way to promote mitigation under the Convention: indeed para 83 provides that the NMM will assist developed countries to meet “part of their mitigation targets and commitments under the Convention”. This implies that the NMM (as it happens with CDM and JI) is complementary to other mitigation approaches, all of which should be addressed under the FVA track.