The Networked Carbon Markets Initiative MARCH 2016
Agenda Linking heterogeneous climate actions 3 Reviewing the Paris Agreement Evidence of heterogeneity in climate actions Opportunities for linking climate actions, particularly markets Key components of the Networked Carbon Markets Initiative 11 Next steps 18 2
The WBG’s long term efforts to promote climate actions, including carbon pricing mechanisms PROMOTING THE CASE AND EVIDENCE BASE FOR CARBON PRICING, MOBILIZING PROGRESSIVE BUSINESS SUPPORTING AND CONDUCTING CONSTRUCTIVE DIALOGUES e.g., Carbon Pricing Leadership Coalition; State and Trends of Carbon Pricing reports CONNECTIVITY AND GLOBAL TRADE Exploring the services, IMPLEMENTATION AND SCALE-UP institutions and governance structures Enabling scale-up needed to link all types of climate actions PLANNING, DESIGN AND PILOTS of climate actions, such as carbon through internationally pricing Innovating and connected carbon mechanisms building readiness markets for climate action, Carbon Partnership including carbon Facility; Pilot Auction Networked Carbon pricing instruments Facility, Partnership Markets Initiative Partnership for for Market Readiness; Market Readiness; TCAF Pilot Auction Facility 3
T o achieve its objectives the NCM initiative is collaborating with a wide range of partners W O R K P L A N F O R T H E N C M I N I T I A T I V E Concept Development Private sector Institutions (ICAR and outreach International Partners: Settlement Platform) Partners: Climate * ‘NCM and its compatibility with a Markets and Partners: INFRAS , future UNFCCC regime’ (Marcu) Investment Grantham Institute, * ‘Comparison and Linkage of Climate Association (CMIA). Reed Smith Mitigation Efforts in a New Paris Regime’ (Harvard/IETA) MAAP pilots * Achieving compatibility and synergy Partners: DNVGL, Thai between the NCM Initiative and Greenhouse Gas Office, Climate Clubs (Climate Strategies) Ministry of Environment * ‘A model for NCM based on the key of Peru, Wageningen elements and principles of University Comparative Markets’ (Macinante) * ‘Options for Operationalizing a Carbon Trading Ratio Mechanism’ Independent Assessment (Austin) Framework * ‘Enabling Comparability of Partners: heterogeneous Emissions Trading DNV, IISD, New Climate NETWORKED Systems – Caps, MRV frameworks Institute, CARBON MARKETS and non- compliance penalties’ Climate Transparency, – (Munnings) Observer to ISO Climate Change * Initial modelling of Transaction PARTNERS Standards Committee Scenarios (ENERDATA) 4
Why should we strive for a linked international carbon market in the future? Projections of the G20's GHG Emissions to 2030 - and the Effect of their NDCs in achieving a 2 degree reduction target Source: Climate Action Tracker 5
Over 60 jurisdictions designing or implementing different carbon pricing programs Source: Kossoy et al. 2015 6
Variation arises because there are so many policy choices when designing mitigation actions There are over 40 key design elements of an Emissions Trading System EMISSIONS CAP CAP TYPE CAP SCHEDULE CAP FLEXIBILITY VERIFICATION MRV PROTOCOLS MONITORING METHODS REPORTING PROCESS REQUIREMENTS SCOPE AND TIMING OF LENGTH OF COMPLIANCE BREADTH OF SECTORAL THRESHOLDS FOR COVERAGE PERIODS COVERAGE COMPLIANCE USE OF REVENUES FROM TREATMENT OF ENTRANTS ALLOWANCE ALLOCATION METHOD OF ALLOCATION AUCTION / EXITS T HIRD PARTY P UBLIC REPORTING OF AUCTION COORDINATION P URCHASE LIMIT PARTICIPATION AUCTION RESULTS Q UANTITATIVE Q UALITATIVE RESTRICTIONS BANKING / BORROWING RESTRICTIONS ( HOLDING B ANKING PROVISIONS ( IS VALUE PRESERVED LIMITS ) ACROSS PERIODS ) QUALITATIVE L IMITS OFFSETS QUANTITATIVE LIMITS CREDITING PROTOCOLS P RICE FLOOR AND RATE OF P RICE CEILING AND RATE PRICE COLLARS CHANGE OF CHANGE PENALTIES FOR NON - LEGAL CONTINGENCIES MARKET OVERSIGHT COMPLIANCE 7
Heterogeneity is important for ensuring that domestic needs and circumstances are met N ATIONAL SOVEREIGNTY H ETEROGENEITY 8
CHALLENGE: linking is limited by diversity, design and different capacities C HALLENGE FOR L INKING H ETEROGENEITY / S OVEREIGNTY 9
Linking climate mitigation efforts Considering a new approach to linking FORM OF LINKING DEFINITION Compliance unit in one jurisdiction is accepted Full without restriction in the “linked” jurisdiction Compliance unit in one jurisdiction is accepted Limited with qualitative/quantitative restrictions in the “linked” jurisdiction Markets are not linked directly, but have access Indirect to the same third carbon market. Fungibility of carbon assets across schemes Networking facilitated by assessment and discounting. 10
Agenda Linking in a New Paris Regime 3 Key components of the Networked Carbon Markets Initiative 11 Reviewing the Paris Agreement Evidence of heterogeneity in climate actions Opportunities for linking climate actions, particularly markets Progress to date and next steps 18 11
Key components of Networked Carbon Markets Key components of the NCM Initiative K E Y C O M P O N E N E T S O F T H E N C M I N I T I A T I V E Independent assessment framework to inform the climate change mitigation value of 1 different climate actions. International Carbon Asset Reserve to support 2 and facilitate carbon market related functions. International Settlement Platform to track cross-border trades and possible clearing house 3 function. 12
Types of organizations that could comprise the Independent Assessment Framework Core competencies Access to relevant information about Neutral programs, policies and pledges Capacity to monitor on Governed by Guiding an ongoing basis Principles 13
Range of possibilities of how this information could inform help to linking decisions Informs an MV set by the market Ignored Qualitative input Informs an MV set participants by Governments • Some • Might provide • MV could be • MV could be governments some an anchor an anchor will have the qualitative value which value that resources to input into a could be governs trade Government’s do their own further in a linked due- decision to link adjusted market, or diligence on club an ongoing basis 14
Removing barriers to linking Informs an MV Informs an MV set by set by the market Qualitative input Governments participants • Might provide • MV could be an • MV could be anchor value an anchor some qualitative input which could be value that into a further governs trade Government’s adjusted in a linked decision to link market, or club This independent information could alleviate some of the in- house ‘due diligence’ that Governments require to link. 15
Removing barriers to linking Informs an MV Informs an MV set by set by the market Governments participants • MV could be an • MV could be anchor value an anchor which could be value that further governs trade adjusted in a linked market, or club This independent information could remove the need to make regulatory modifications to harmonize schemes. 16
Mitigation Value helps to preserve the Environmental Integrity of the Trade Scene: 10,000 carbon units are purchased. The actual mitigation value of each unit is 0.5 tonnes. Scenario 1: The actual mitigation value of the carbon Scenario 2: The actual mitigation of the carbon units are accounted for in the trade units are not accounted for in the trade 10 10 10 This scenario This scenario does not overstates actual overstates actual emission reductions and the carbon 8 8 emission reductions integrity of the trade is preserved. by 5000 tonnes. 6 6 5 5 5 4 4 2 2 0 0 Units purchased Actual Emission Reductions Units purchased Actual Emission Reductions Mitigation Value helps to preserve the environmental integrity of the trade.
The 3 key components of the NCM initiative are to be introduced in a phased manner W O R K P L A N F O R T H E N C M I N I T I A T I V E LONG TERM MEDIUM TERM Comparability and linkage of climate actions Comparability between and linkage of countries on a climate actions: SHORT TERM regional or multilateral * within a basis. country * between * Design of robust countries on a climate actions bilateral basis * Benchmarking * Climate finance 18
Agenda Linking heterogeneous climate actions 3 Key components of the Networked Carbon Markets Initiative 15 Progress to date and next steps 18 19
Assessing the Mitigation Value of a crediting program with the NCM Initiative’s Mitigation Action Assessment Protocol • The Mitigation Action Assessment Protocol (MAAP) is a program level rating of climate actions . • It could serve as a key tool for achieving transparency in the design of climate actions, how they compare and what their mitigation value is. • In the long run, the MAAP is intended to contribute to achieving the goal of an internationally accepted system for comparing carbon assets and eventually, trade and exchangeability of carbon credits. • THE MAAP HAS BEEN PILOTED IN THAILAND (Feb 2016) AND PERU (Oct 2015). 20
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