Markets 2.0 under UNFCCC - Control...

Markets 2.0 under UNFCCC

Clima East, October 30th 2013

International Climate Negotiations Workshop Vilnius

Andrei Marcu Senior Advisor CEPS

SBI

• Review of CDM M&P

• Review of JI

• CDM appeals Process

SBSTA

• Framework for Various Approaches

• New Market Mechanisms

• Non market Mechanisms

Market Decisions on Warsaw

• 3/CMP.1 Review of CDM M&P at ninth CMP session

• CMP requested SBI to carry out review at 39th session

• Requested CDM EB and stakeholders to provide input to the process

• A workshop was also organized prior to SB 38

• Consider the output of the High Level Panel on CDM Policy Dialogue

Review of CDM M&P

Topics considered

• Executive Board

• Accreditation of DOE

• Participation requirements

• Validation and registration

• MRV

• Methodologies

• Other matters

Review of CDM M&P

Conclusion:

A wish list to satisfy everyone

Reality

• CDM market currently slowing down and no demand

• No reason to issue or put new projects through unless from LDC

• Some solutions are being sought out to salvage the CDM

Review of CDM M&P

Two SBI agenda items related to JI:

• Review of the JI guidelines (7b)

• Expedited issuance of ERUs (7c)

Joint Implementation (JI)

• Based on the proposal from JISC made in 2012 • Key attributes for JI decided in Doha:

– Single track – Aligned or unified accreditation process with CDM – Clear information on projects to be provided by Parties,

stakeholders, and accredited entities in English – Appeals procedure – Clear additionality requirements – Mandatory requirements for host Parties on approval of

baselines and MRV

• No progress made so far – review at COP 19 challenging

Review of the JI guidelines

• Status quo means no issuance till 2016 for ER occuring in CP2

• Various proposals made so far: – Use of CP1 AAUs – ‘credit now, deduct later’

• New JISC proposal: – advanced issuance of CP2 AAUs capped at an amount

equivalent to [1] per cent of a Party’s assigned amount established for the first commitment period for the purpose of the ERU issuance. To be accounted for when the CP2 AAUs are issued.

Expedited issuance of ERUs

To review CDM & JI we need to think of lessons learned

• KP mechanisms infrastructure was valuable

• Lack of synchronization between regulators

• Process politicization

• Clarity of objectives

• Competition and leakage

• System stability

• What B+C good for?

Lessons learned

• Make the machinery more efficient

• Make the machinery to produce goods for which there is a market and demand

What are issues of the future

• There will be an international CC agreement?

• There will be compliance obligations?

• Obligation for all to contribute?

• That the “regulator” that sets constraints also determines what is used to show compliance through:

– inventories

– the units used and their characteristics

Assumptions – Do we believe that:

• There is an international agreement : KP

• There is an underlying Int’l Compliance Unit (ICU): AAUs

• Linking efforts – Within the the int’l agreement: Australia/EU

(tbc). All transfers of domestic units is backed by AAUs/ICU

– Outside the int’l agreement: Quebec/California. Bilateral recognition

Current situation

Source: Presentation by UNFCCC Secretariat

• International market mechanisms and units – CDM, JI, NMM

• Many (numbers and types) of domestic mechanisms & units

• No UN backed ICU (AAUs)

Two scenarios • Linking for UN compliance • Linking markets outside an international

agreement

Future world

• Heterogeneity

– Many systems

– Many units

• Competition among market players for mitigation opportunities

• Competition between different approaches/protocols to implement those mitigation opportunities

Future world

Durban Decision

• 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;

New Market Mechanisms

Doha Decision • Requests the Subsidiary Body for Scientific and

Technological Advice to conduct a work programme to elaborate modalities and procedures for the mechanism defined in decision 2/CP.17, paragraph 83, drawing on the work of the Ad Hoc Working Group on Long-term Cooperative Action under the Convention on this matter, including the relevant workshop reports and technical paper, and experience of existing mechanisms, with a view to recommending a draft decision to the Conference of the Parties for adoption at its nineteenth session;

• Also requests that the work programme consider possible elements of the mechanism referred to in paragraph 50 above, for example the following:

New Market Mechanisms

Durban Decision • Acknowledging the role of various approaches, including

opportunities for using markets, to enhance the cost-effectiveness of, and to promote, mitigation actions, bearing in mind different circumstances of developed and developing countries,

• Noting that Parties may, individually or jointly, develop and implement such approaches in accordance with their national circumstances,

• Emphasizes that various approaches, including opportunities for using markets, to enhance the cost-effectiveness of, and to promote, mitigation actions, bearing in mind different circumstances of developed and developing countries, must meet standards that deliver real, permanent, additional and verified mitigation outcomes, avoid double countingof effort, and achieve a net decrease and/or avoidance of greenhouse gas emissions;

Framework for Various Approaches

Doha Decision Considers that any such framework will be developed under the authority and guidance of the Conference of the Parties;

Decides that the work programme

(a) The purposes of the framework;

(b) The scope of approaches to be included under the framework;

(c) A set of criteria and procedures to ensure the environmental integrity of

approaches in accordance with decision 2/CP.17, paragraph 79;

(d) Technical specifications to avoid double counting through the accurate and

consistent recording and tracking of mitigation outcomes;

(e) The institutional arrangements for the framework;

Framework for Various Approaches

• Why do we need an FVA?

• What services does it provide?

• What are NMM ?

• Does anyone need them ? What service do they provide

Depends – assumptions are important

Framework for Various Approaches

New Market Mechanisms

Different definitions

• Market mechanisms designed/operated/recognized at the UNFCCC level

• Cover broad sectors of the economy, but does bot exclude project based (why is that needed?)

• There is some flexibility in implementation at the national level

New Market Mechanisms

Different definitions • Seen as sectoral in nature

– Sectoral trading: ex-ante issuance – Sectoral crediting: ex-post issuance – Actually ….. anything goes now – difficult to find

commonality in M&P

• Challenges – Private sector participation – Capacity for implementation – Political will – why use UNFCCC mechanisms when I

can define my own?

• Purposes of the FVA

• Scope of FVA

• Criteria for environmental integrity

• Double counting

• Tracking

• Institutional arrangements for the FVA

FVA – what are the issues discussed?

• Set of rules vs. minimum criteria and review vs. platform for sharing information

• Units vs. outcomes

• Only UNFCCC units vs. nationally defined units

• Only mitigation or also adaptation

FVA: Purpose & Scope

• Double counting for issuance

• Double counting for use

• Double counting for finance

• Tracking of units – each transaction or netting ?

FVA: Double counting & tracking

• CDM EB - like body, supported by UNFCCC infrastructure

• Reformed CDM EB

• Polycentric system at various levels

• Create an interim body – group of expert

FVA: Governance

• How does the international regulator ensure that the mitigation value of domestic units used for international compliance in a country other than were they were issued is what the issuer says it is?

• How do we ensure no double counting at issuance?

• How do we ensure no double counting at compliance?

• What is needed for transfer and tracking and who does it?

Future world – Int’l Compliance Questions

• How does the international regulator ensure that the mitigation value of domestic units used for international compliance in a country other than were they were issued is what the issuer says it is?

• How do we ensure no double counting at issuance?

• How do we ensure no double counting at compliance?

• What is needed for transfer and tracking and who does it?

Future world – Int’l Compliance Questions

FVA

• The FVA is a set of components and rules that will ensure that all approaches used for mitigation will be integrated, and receive recognition for UNFCCC compliance.

• Through the FVA, units created by a Domestic Market Mechanism in a jurisdiction will qualify/accede, under a protocol TBD, to be used for compliance with UNFCCC obligations, by a jurisdiction other than the one under which they were created.

• The FVA is not concerned with activities that are purely of a domestic nature and do not result in international transfers of units in one way or another.

FVA & NMM

Assumption: A global agreement & UNFCCC compliance

REDD

FVA

CDM/JI

SCM STM

REDD NMM

BOCM Australia

ETS NMA-

Yasuni

VCS

FVA & NMM

Assumption: A global agreement & UNFCCC compliance

REDD

FVA

CDM/JI

SCM STM

REDD

NMM

BOCM Australia

ETS NMA-

Yasuni

VCS

If there is an int’l CC agreement

• Unlikely that Party would allow the use of foreign units for domestic compliance if they cannot be passed through for int’l compliance

• There is no information on the international mitigation value of a domestic unit

• Int’l issuance and transfer made the KP market possible

These are barriers for linking markets in the scenario of an international compliance regime

Why do we need an FVA?

• Allow domestically produced units to become good for UNFCCC compliance by – Using a protocol to be determined – That uses core units characteristics – With a fixed mitigation value

• Binary • At an exchange rate set by the regulator

• Allow domestic systems to link – if they are created to help meet international obligations

• Provide information for UNFCCC compliance accounting (i.e., avoid double counting)

What will the FVA do?

10/31/20

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Centre for European Policy Studies (CEPS) • Place du Congrès 1, 1000 Brussels, Belgium

www.ceps.eu

DMM Developed by Party A

MRB

T0

International DMM

DMM UNIT

ITL

National Register PARTY B

Party A

Issues DMM Units Issues request for

issuance of ICUs Issues request for

transfer to Party B

Checks DMM Issues ICU Checks instructions

from Party B regarding filtering

Checks T1 / T2

ICU

Approval Facilitation

T2 T1

NMM?

FVA Governance

– Global level

– Local level (regional, national, sub national)

• Global Level

– Define Core Characteristics of Units

– Mitigation Units Accession Protocol (to FVA) – Transparency or Approval

– Initial check of Domestic Units

– Periodical audit of Domestic Units

• Global level – Market Regulatory Board

– Compliance Body

– Transfer units internationally

– Tracking units internationally

– Avoid double counting at usage

– ? Set environmental value for domestic units used internationally – set Environmental exchange rate

– ? Issuance of International Compliance Units

FVA Governance

FVA Governance

Local Level

– Avoid double counting at issuance.

– Issuance of units from Domestic Mechanisms

– Develop & operate Domestic Mechanisms

State of discussion for Warsaw Warsaw as a platform for Mechanisms 2.0

• Challenge to undergo CDM and JI review due to time constraints

• Need to provide a clear mandate and process to allow for two tracks

– Items that will make the mechanisms more efficient

– Find a long term solution for CDM & JI in the new world

• Consider one B+C mechanism under the Convention – the B+C mechanism of NMM

State of discussion for Warsaw

• B+C mechanisms with characteristics appropriate for the type of commitments taken

– Economy wide caps

– Sectoral caps

– Domestic offsets

What about Warsaw ?

- Define the FVA (in English create it)

- Set up Transparency phase

- Receive information from Parties

- Provide Expert Group made from Parties and Stakeholders to

- What are the ToR of the Expert Group?

Andrei Marcu

andrei.marcu@ceps.eu