Design Options for Sectoral Carbon Market Mechanisms and Their Implications for the EU ETS

  • Project no.1282
  • Duration 10/2011 - 06/2012

The UN climate conference in Durban in 2011 decided to establish a new market mechanism (NMM) under the UNFCCC that is supposed to cover broad segments of the economy of developing countries. Detailed modalities and procedures are yet to be elaborated. The project developed design options for the NMM and assessed the impact that the NMM might have in specific sectors in specific developing countries.

Three Design Proposals for the New Market Mechanism

The development of design proposals was based on three priority criteria: Environmental effectiveness and integrity, preparedness for evolution towards an EU ETS compatible cap-and-trade system, and economic efficiency.

The three proposals are:

  • Government Crediting System: Under this proposal, the host country adopts a sectoral emissions crediting threshold and implements policies and measures to reduce emissions. If emissions are reduced below the threshold, emission reduction credits are issued to the host country government, which may use them to (co-)finance policy implementation. Emissions are accounted in aggregate rather than at installation level.
  • Tradable Intensity Standard: Under this proposal, the sectoral crediting threshold is passed on to individual installations. That is, each installation is assigned an individual crediting threshold. Host countries are recommended to make reaching the threshold binding for each individual installation.
  • Installation-Based Emission Trading System: In this system, the host country government would adopt a sectoral emissions target and receive trading units ex ante. The host country would introduce an installation-level emission trading system for the sector in order to achieve this target.

Case Studies

The case studies consisted of theoretically applying the second proposal in five sectors in five developing countries. Key findings were:

  • There is a large variation between forecasts of future emissions. International standards are therefore needed if crediting thresholds in different sectors and countries are to reflect comparable effort to generate credits.
  • Consistent and reliable data on emissions is crucial for the design and operation of the NMM. Unfortunately, such data is not always available.
  • Some sectors already show a large economically viable abatement potential. Research is needed to identify why these possibilities have not been developed. This is important to ensure that applying the NMM - and thereby providing financial incentives - can stimulate investments and have an impact on emissions.

Capacity building and developing institutions that can manage the NMM are therefore important requirements. In the short term, strengthening existing policies could be an effective approach to NMM development. If certain policies have demonstrated to have the intended effect, the NMM can support the policies' up scaling.

Further project information


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