THE NETWORKED CARBON MARKETS INITIATIVE Barcelona May 26, 2017 - - PowerPoint PPT Presentation

THE NETWORKED CARBON MARKETS INITIATIVE

Barcelona May 26, 2017

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MARKETS, KEY TOOL TO ADDRESS CLIMATE CHALLENGES

Cost Savings: market efficiencies reduce costs of low carbon growth Resource mobilization: crowd-in public and private capital Political alignment: NDCs of 84 countries call for markets and/or carbon

pricing mechanisms – including 72 in developing countries

Cost of each country acts alone Intl cooperation through carbon market by 2030 Intl cooperation through carbon market by 2050

Source: World Bank Group, 2016

$

$

$

3 % 5 %

3

AN INTERNATIONAL MARKET - 2030

WHERE DO MARKETS FIT UNDER PARIS?

4

Article 6 has the opening for developing markets – agreement on guidance and rules is still under negotiation by Parties

Under the authority/supervision of the COP Under bi- or plurilateral governance

Introduces “mitigation outcomes” (MOs) from any mechanism/procedure/protocol

Using cooperative approaches to enhance mitigation ambition under NDCs

“a mechanism to contribute to the mitigation of GHG and support sustainable development”

Metrics Governance Objectives

• Art. 6.2
• Art. 6.4

Parties can design and use carbon pricing instruments domestically. Today.

Examples: Chile, China, India, Mexico and South Africa, among others. Markets instruments should create demand for a domestic market that will grow over time to include linkages to create an international market. Bottom-up markets appear to be the most promising approach under the Article 6.2 paradigm.

Top Down Bottom-up

WHERE DO MARKETS FIT IN PARIS?

5

• Paris Agreement encourages mitigation action relevant to national

circumstances (as reflected in their NDCs) by all Parties

• Comparability of the mitigation outcome of the mitigation action will be

the starting point for any international transfer of the mitigation outcome

Country mitigation action MOs ITMOs

Domesti c and/or NDC

accounting

Registry system International markets

National assessment process

Assessment of mitigation action: Use of MAAP Assessment of climate ambition: Climate Transparency initiative

Clubs

6

WHAT IS NETWORKING?

Networking

Designed to link heterogeneous climate actions

System A

Direct Linking

A common market is explicitly established between Systems A and B

(e.g. California-Quebec, EU-Switzerland)

Indirect Linking

Systems B,C, and D are indirectly linked via System A

(e.g. Clean Development Mechanism)

System A System A System B System B System B System D System C

7

WBG STRATEGY FOR CLIMATE MARKETS AND LINKAGE

CONNECTIVITY AND GLOBAL TRANSFER

The NCM Initiative

Enabling cooperation of all types of climate actions, including carbon pricing mechanisms, through internationally connected climate and carbon markets

PROMOTING THE CASE AND EVIDENCE BASE FOR CARBON PRICING AND MARKETS

e.g., Carbon Pricing Leadership Coalition; State and Trends of Carbon Pricing reports

IMPLEMENTATION AND SCALE-UP

Enabling scale-up

• f climate actions such as

carbon pricing mechanisms

e.g., TCAF, PAF, Ci-DEV

Innovating and building readiness for climate action, including carbon pricing instruments

PLANNING, DESIGN AND PILOTS

e.g., PMR

8

NCM’S SHORT, MEDIUM AND LONG TERM VISION

Design and implementation of robust, “market- ready” mitigation actions

• Benchmarking
• Guide climate finance

Comparability and transfer

• f mitigation
• utcomes:
• within a country
• between

countries on a bilateral basis

Comparability and linkage of mitigation

• utcomes

between countries on a regional or multilateral basis

SHORT TERM MEDIUM TERM LONG TERM

9

NCM’S CONCEPTUAL FRAMEWORK

Independent Assessment Framework

Within country: use of MAAP to assess mitigation actions Between countries: use of CTi for national climate ambition

International Carbon Asset Reserve International Settlement Platform

Establishment of an overarching, coordinated framework to measure the relative mitigation

• utcomes (“mitigation value”) of different

actions A pooled reserve of carbon assets to manage carbon market related risks (e.g., price volatility, invalidity of issued and allocated carbon units) Track cross-border trades (manage risk of double counting) and provide possible clearing house functions

10

MAAP: INDEPENDENT ASSESSMENTS AT THE PROGRAM LEVEL

Program

Definition & Scope Objectives & Targets Planning Documents, document control and records Emissions reductions from interventions Monitoring and reporting

Manageme nt Entity

Management Framework Financial and Investment Programs management Infrastructure at the program level

Financial Structure

Financial coherence Financial stakeholders Monitoring financial flows

Developme nt Benefits

Development

• bjectives and

targets Planning and participation Monitoring of development benefits

Environmental integrity

MAAP-Design and MAAP-Implementation 1 2 3 4

MAAP launch

May 23 (Tue) from 2:45 pm to 5 pm

https://maap.worldbank.org/#/homepage

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MAAP PARTNERSHIPS AND COLLABORATION

ASSESSMENT OF CLIMATE AMBITION: CLIMATE TRANSPARENCY

12

Technical partners Secretariat Funding partners Technical partners

Climate Transparency is a consortium of experts and

• rganizations that

have a common goal to enhance assessments

• f climate action

http://www.climate-transparency.org/

13

NCM Partners

Assessment and modelling Partners: DNV, IISD, New Climate Institute, Climate Transparency, Observer to ISO Climate Change Standards Committee, Enerdata MAAP Partners: PMR, DNVGL, Thai Greenhouse Gas Office, Ministry

• f Environment of Peru,

Wageningen University, UNEP- DTU Partnership, Gold Standard, IGES, Perspectives, Carbon Trust, Government of Jalisco in Mexico, ITAM, TERI Institutional frameworks Partners: INFRAS, Grantham Institute, Reed Smith, Xpansiv Concept Development * ‘Options for Operationalizing a Carbon Trading Ratio Mechanism’ (Austin) * Achieving compatibility and synergy between the NCM Initiative and Climate Clubs (Climate Strategies) * ‘Comparison and Linkage of Climate Mitigation Efforts in a New Paris Regime’ (Harvard/IETA) ‘Explore the relevance and feasibility of the NCM Initiative in Japan’ (IGES) * ‘A model for NCM based on the key elements and principles of Comparative Markets’ (Macinante) * ‘NCM and its compatibility with a future UNFCCC regime’ (Marcu) * ‘Enabling Comparability of heterogeneous Emissions Trading Systems – Caps, MRV frameworks and non-compliance penalties’ (Munnings) * Enabling Comparability and Linkage of the REC and PAT Schemes (TERI) * The METRIC for successful linking post-Paris (Vivid Economics) Private sector

• utreach

Partners: Climate Markets and Investment Association (CMIA), IETA, CPLC

NETWORKED CARBON MARKET INITIATIVE

14

Country mitigation action MOs ITMOs

Domesti c and/or NDC

accounting

Registry system International markets/ Carbon Clubs

National assessment process

Assessment of mitigation action: Use of MAAP Assessment of climate ambition: Climate Transparency initiative Independent Assessment Framework International Settlement Platform International Carbon Reserve

SCALING UP THE APPLICATION OF THE MAAP ONLINE INTERFACE

Barcelona May 26, 2017

ACTIVITIES YTD

• 2 work streams:
• Internal – identify Bank supported projects and opportunities with Bank local offices - Ecuador, Mexico
• Independent Assessments. IGES, Perspectives, GS, UNEP DTU, Carbon Trust.
• MAAP Design and MAAP Implementation
• Assessor Guidelines
• Training and support to MAAP partners e.g. SECO, DTU-OLADE workshop
• Scouting activities for MAAP Policy alignment module.

16

CONCLUSSIONS MAAP ROUNDTABLE

• Benefit for having a reference point for the design of MA for NDCs
• Evaluate strategy of targeting multiple (too many?) different users.
• Partner with key stakeholders for those users to roll out online tool.
• Need for comprehensive set of capacity building activities to ensure online

tool is used.

• MAAP in the context of the overall NCM long term strategy

17

SCALING UP MAAP

Regional workshops with MA practitioners:

 Capacity building  Populate online database

Evaluate integration of UNDP SD Online Tool Strategy for external partnerships Adaptation Module Develop existing draft of MAAP Policy Alignment Module

18

19

RATIONALE, VISION AND OBJECTIVES

SUPPORTING MARKETS AND NDC IMPLEMENTATION THROUGH THE MAAP TOOL

1

20

SHORT, MEDIUM AND LONG TERM VISION

Design and implementation of robust, “market- ready” mitigation actions

• Self-evaluation
• Prioritization

Generation of mitigation

• utcomes at the

program level

• Comparability of

mitigation actions

Comparability and transfer

• f mitigation
• utcomes

across countries

• Exchangeability
• f carbon assets

SHORT TERM MEDIUM TERM LONG TERM

21

WHAT IS THE MAAP?

Program

Definition & Scope Objectives & Targets Planning Documents, document control and records Emissions reductions from interventions Monitoring and reporting

Manageme nt Entity

Management Framework Financial and Investment Programs management Infrastructure at the program level

Financial Structure

Financial coherence Financial stakeholders Monitoring financial flows

Developme nt Benefits

Development

• bjectives and

targets Planning and participation Monitoring of development benefits

Environmental integrity MAAP-Design and MAAP-Implementation 1 2 3 4

22

National and Subnational Jurisdictions Donor and Investors Project Developers Carbon Market Regulators Multilateral Development Banks

23

Stakeholder Consultations

Stakeholder consultations held at various climate change fora, such as Carbon Expo Latin America Carbon Forum (Rio de Janeiro), FICCI (New Delhi) and Asian Carbon Forum (Bangkok)

Working group formed by experts

Progress presented to a working group during technical sessions and webinars

Peer review

IISD, NewClimate Institute, Asia LEDS Training Center, IdeaCarbon and FC2E Carbon Fund provided technical reviews to the draft report and components of the MAAP.

Pilot and deployment

• Piloted the MAAP on

NAMAs in Peru in December 2015 and Low Carbon City Programs in February 2016.

• In collaboration with

expert groups, such as UNEP-DTU Partnership, Perspectives, IGES and Gold Standard, applied the MAAP to more than 180 mitigation actions globally

May 2014 Sep 2014 April 2015 Dec 2015 - now

24

MAAP in Mexico: NAMAs (Nov 2017) and Jalisco’s State Climate Plan (April 2017) MAAP in Ecuador: National Energy Efficiency Plan (Jan 2017) MAAP in Peru: 83 NAMAs (Dec 2015) MAAP in Thailand: 2 low carbon city programs (Feb 2016) MAAP in Mongolia and Vietnam: JCM projects (Apr 2017) MAAP in the Mediterranean Region: 20 low carbon city programs (Apr 2017) MAAP independent assessments by UDP in Costa Rica, Ecuador, Jamaica, El Salvador, Morocco, Indonesia, Chile, Sri Lanka, Ghana, Kenya, Peru, Tunisia, Colombia, Armenia Cambodia, Mexico: 50 mitigation actions including NAMAs, energy programs waste management programs etc. (Jun 2017) Scoping Study in India: Green certificate (REC) and white certificate (PAT) schemes (Apr 2017)

25

IMPLEMENTATION

THE MAAP ONLINE INTERFACE

2

26

Lack of visualization tools to compare and benchmark MAAP scores between different actions Practical challenges related to the usability of the MAAP Inability to collaborate and share results and related documents Disaggregated information on MAAP assessment

Limitations of the MAAP excel-based tool

27

User-friendly platform to manage results and store related documents Access to datasets generated by partners worldwide Visualization tools for comparison and benchmarking How-to video, interactive guidelines and helpdesk Centralize and secure platform to quickly and reliably run search queries

28

• 3. RECORD RELATIVE SCORES
• Assign weights and/or scores for key

indicators and assessment areas for selected module(s)

• Select confidence level
• Provide evidence in attachments and
• bservation box

29

• 4. RESULTS FOR INDIVIDUAL MITIGATION

ACTIONS

• Review results and evidence for

individual mitigation actions in order to identify strengths and areas for improvement

• Save results and export to excel

30

• 5. SHARE RESULTS
• Share results with partners for

editing/comments

• Share results for comparison and review

31

• 6. SEARCH RESULTS ON DATABASE
• Filter own/shared assessments based on their

development phase, sector, region and date modified

• Search results to compare

32

• 7. COMPARE AND BENCHMARK RESULTS

(TABLE/CHART FORMAT)

• Compare results for each module, assessment

area and key indicator

• Benchmark results against overall

best/average score or the user’s best score

33

CERs from CDM VERs from voluntary schemes

Mitigation actions

SCALED APPROACH

• Allow a range of possible outcomes
• Risk profile
• Enhanced comparability of carbon assets
• Benchmarking
• Assess development benefits in addition to

environmental benefits

• Users can emphasize modules based on their

priorities

YES/NO OUTCOME on whether the project will potentially achieve its envisaged emissions reduction targets

• r the actual reported emissions

reductions

Tradable units from ETSs VALIDATION AND VERIFICATION MAAP ASSESSMENT

METRIC Principles for linking and potential next steps

26th May 2017

35 METRIC Principles for linking and potential next steps

please note that this presentation is based on a finalised, but not yet published, paper commissioned by the Networked Carbon Markets (NCM) initiative and Carbon Pricing Leadership Coalition (CPLC)

36

There are substantial cost savings to be achieved by international linking

METRIC Principles for linking and potential next steps

0.5 1 1.5 2 2.5 3 3.5 2030 2050

Costs as a percent of global GDP

Without international carbon market With an international carbon markets

32% saving 54% saving

37

2 examples of operational links to date ― California – Québec ― Tokyo - Saitama challenges ― trade-offs when making the choice of linking partner; ― negotiation of the link, which may take a long time and may be politically contested ― prospect that the link might be insufficiently flexible to accommodate domestic policy changes

But, with some exceptions, it has proved challenging

METRIC Principles for linking and potential next steps

38

The METRIC principles aim to help stakeholders, understand and assess the range of linking options and design features

METRIC Principles for linking and potential next steps

• ensuring that capital is allocated efficiently and avoiding disturbing the

continued efficient function of carbon and related markets

Market Integrity

• giving all participants, as well as external stakeholders, confidence that the

linking arrangements are supporting real and additional emission reductions that will in turn support the objective of the Paris Agreement

Environmental Integrity

• being transparent and providing all stakeholders with a clear understanding of

its rationale in order to generate support, and allowing the free exchange of information between linked systems

Transparency

• recognizing early action and avoiding incentives to reduce effort

Recognize Ambition

• facilitating and encouraging more jurisdictions to join the system, promoting

greater international cooperation, and considering domestic and international equity concerns

Inclusiveness

• reducing the overall cost of mitigation, including administrative and transaction

costs, and improving economic efficiency

Cost Effectiveness

39 METRIC Principles for linking and potential next steps

The application of the METRIC principles may lead policymakers to consider a range of different linking options

Market integrity Environmental Integrity Recognise ambition what to do when one ETS has a price floor and other does not? ― remove/introduce floor and direct link? ― surrender charges? ― quantitative limits? ― exchange rates? environmental integrity may be preserved either though ― standardised MRV and a direct link ― alternative MRV approaches and a heterogeneous link the ‘linking paradox’ might be addressed by heterogeneous linking ― but further work needed to measure relative ambition

A potential next step would be to model different linking

• ptions building on the application of the METRIC principles

40 METRIC Principles for linking and potential next steps

METRIC principles highlight important considerations that can inform linking design next stage could be to use these principles to develop different linking options for a particular set of market and quantitatively assess their implications building on the qualitative case study in the paper, and announced plans, this could focus on Mexico’s ETS linking to carbon markets in North America

Company Profile Vivid Economics is a leading strategic economics consultancy with global

• reach. We strive to create lasting value for our clients, both in government and

the private sector, and for society at large. We are a premier consultant in the policy-commerce interface and resource and environment-intensive sectors, where we advise on the most critical and complex policy and commercial questions facing clients around the world. The success we bring to our clients reflects a strong partnership culture, solid foundation of skills and analytical assets, and close cooperation with a large network of contacts across key organisations. Contact us: Vivid Economics 26-28 Ely Place London EC1N 6TD Author contact details: John Ward T: +44 7790 613951 E: John.ward@vivideeconomics.com

Practice areas

Energy & Industry Growth & Development Natural Resources Competitiveness & Innovation Public & Private Finance Cities & Infrastructure

METRIC Principles for linking and potential next steps 41

Enerdata/NCM Initiative: Mexico-California quantitative case study

Assessment of mitigation and financial implications of different linking rules between Mexico-California

NCM Initiative Expert Workshop, Barcelona, 26 May 2017 Enerdata

Linking: a great opportunity to increase ambition

• Reduce cost of emission reduction
• Increase ambition of emission reduction

But linking requires:

• Transparency
• Guarantee the environmental integrity
• Satisfy domestic circumstances
• Support the global transition to sustainable development

43 Enerdata, NCM Initiative Expert Workshop, Barcelona, 26 May 2017

Linking implications of Emissions Trading Schemes + Many research works on ETS assessment:

– At jurisdiction level – On direct linking

• Few quantitative modeling exercise on networked ETS

under different trading rules:

– Discounting permits, traded volume limitation…

 Enerdata realized for NCM in 2016, a first modeling exercise assessing implications of different linking rules between China, South Korea and Mexico national ETS.

44 Enerdata, NCM Initiative Expert Workshop, Barcelona, 26 May 2017

First modeling exercise: Context

• Objective: Analyze impacts of various design options for

Emissions Trading Schemes (ETS) and their potential linking:

– Domestic and International – Discounting Values between jurisdictions – Trading limitations between jurisdictions

• Methodology: Assessment of mitigation and financial

implications of different linking rules through Marginal Abatement Cost Curves (MACCs)

– Use POLES global energy model to calculate MACCs for each jurisdiction at each sector level – Generated MACCs express the sector transformation under a marginal carbon price incentive. They are coherent and comparable. – Use EVALUATE tool to simulate linking rule scenarios

45 Enerdata, NCM Initiative Expert Workshop, Barcelona, 26 May 2017

Project result illustration

• Varying discounting value (DV)

Discount 1 China: 0.3 South-Korea: 1 Discount 2 China: 0.5 South-Korea: 1

• 300
• 200
• 100

100 200 300 400

China South Korea China South Korea China South Korea Abatement Imports Marginal cost

$/tCO2 - Scenario 2 $/tCO2 - Scenario 3 - 3 $/tCO2 - Scenario 3 - 4 $Bn - Scenario 2 $Bn - Scenario 3 - 3 $Bn - Scenario 3 - 4 MtCO2 - Scenario 2 MtCO2 - Scenario 3 - 3 MtCO2 - Scenario 3 - 4

1800.00 1850.00 1900.00 1950.00 2000.00 2050.00 2100.00 2150.00 2200.00 2250.00 2300.00

Scenario 2 Scenario 3 - 3 Scenario 3 - 4 reduction MtCO2 - China MtCO2 - South Korea

Lower DV difference between jurisdictions  More imports from South Korea  Less reductions from China Resulting in lower carbon price in SK driven by low price in China Resulting in lower abatement costs in South Korea and in China

Reduction target Enhanced emissions reductions

Direct Linking Discount 1 Discount 2

• Dir. Linking
• Dir. Linking
• Dir. Linking

Discount 1 Discount 1 Discount 1 Discount 2 Discount 2 Discount 2

46 Enerdata, NCM Initiative Expert Workshop, Barcelona, 26 May 2017

Key learnings: Varying discounting rate

• Discounting could enable higher emissions reduction.
• Varying discounting rates may enhance acceptability from jurisdictions by

adjusting domestic political context (carbon price, burden cost, domestic emission reduction plans…) while ensuring the environmental integrity of the trade.

China South Korea

Dom. ETS Direct linking Discount 1 Discount 2 Dom. ETS Direct linking Discount 1 Discount 2 Emission reduction (MtCO2) 1769 1955 2034 2024 275 89 195 147 Additional reduction (MtCO2)

• 185
• 128

Imports (MtCO2)

• 186
• 264
• 255

186 79 127 Carbon price ($/tCO2) 42 46 49 48 310 46 163 97 Total Abatement costs ($Bn) 262 258 255 255 232 78 188 138

A way to find the best compromise between:

• environmental integrity & costs

47 Enerdata, NCM Initiative Expert Workshop, Barcelona, 26 May 2017

2nd modeling exercise: Quantitative case study proposition in collaboration with Vivid Economics

Realisation in 2 phases:

• Phase 1: Mexico-California ETS linking rules case study
• Phase 2: Implications for the regional Mexico-California-Quebec-

Ontario ETS Proposed Phase 1 approach:

a) Using POLES model to calibrate baselines for Mexico and California from which Marginal Abatement Costs (MACCs) will be generated. b) Simulate with EVALUATE tool, 6-10 scenarios of different direct and heterogeneous linking arrangements. c) Quantitative assessment of the mitigation and financial impacts of these scenarios; and identify key benefits and challenges of each scenario. d) Suggest possible solutions and next steps to address key challenges of linking Mexico and California’s ETSs (Vivid Economics & Enerdata)

48 Enerdata, NCM Initiative Expert Workshop, Barcelona, 26 May 2017

Expected findings

• Put quantitative values on various ETS linking rule options for a practical

case-study.

• Quantitative indicators to be provided for each scenario:

– Financial value/s of carbon allowances (i.e. carbon price/s); – Emissions (both domestic and traded) achieved by sector; – Emission intensity by sector; – Total cumulative (2015-2030) abatement costs by sector; and – Net trade balance by sector;

• EVALUATE tool populated with Mexico and California MACCs could be

provided to the WB NCM Initiative.

• Identification of advantages and challenges for each jurisdiction of linking
• Provide technical support to WB to support stakeholder discussions on ETS

linking.

49 Enerdata, NCM Initiative Expert Workshop, Barcelona, 26 May 2017

www.enerdata.net

Thank you for your attention!

Contact: About Enerdata:

Enerdata is an energy intelligence and consulting company established in 1991. Our experts will help you tackle key energy and climate issues and make sound strategic and business decisions. We provide research, solutions, consulting and training to key energy players worldwide.

Cyril CASSISA

Global Energy Forecasting cyril.cassisa@enerdata.net

50 Enerdata, NCM Initiative Expert Workshop, Barcelona, 26 May 2017

Annex: POLES and GHG models

Enerdata, NCM Initiative Expert Workshop, Barcelona, 26 May 2017

POLES: a Multi-Issue Energy Model

Consumption Production GHG emissions Climate and Energy policies Macroeconomic assumptions

National energy balances (66)

SUPPLY

International markets

Resources PRIMARY DEMAND TRANSFORMATION

• Domestic

production

• Import/

Export

• Trade

routes

• Fossil

fuels

• Nuclear
• Hydro
• Biomass

& wastes

• Oth.

RES

• Power sector
• Investments/capacity planning
• Electricity generation
• Refineries

(incl. synfuels)

FINAL DEMAND

• Industry
• Transport
• Buildings
• Agriculture

Technologies Gas (3 markets) Coal (15 markets) Biomass (1 market) Oil (1 market) International prices

52 Enerdata, NCM Initiative Expert Workshop, Barcelona, 26 May 2017

Marginal Abatement Cost Curves (MACCs)

• Top-down MACCs produced by the POLES model as the result
• f sensitivities on carbon value
• Curves are produced by POLES for:

– 66 countries/regions – 20 emitting sectors – 6 GHGs (from energy and industrial activities) – All years from 2020 to 2050

• The MACCs from POLES are based on:

– Power sector: full technological description and load curve simulation – Final demand sectors: econometric demand functions (including short-term price and long-term price elasticities), incorporating explicit description of technologies in road transport and buildings

53 Enerdata, NCM Initiative Expert Workshop, Barcelona, 26 May 2017

Exemplary MAC curves

China Mexico South Korea 54 Enerdata, NCM Initiative Expert Workshop, Barcelona, 26 May 2017

MACCs are an essential inputs

• A set of coherent and interdependent MACCs for all sectors and

countries considered

• Covers all GHG and emitting sectors, with the exception of LULUCF

and non-CO2 agriculture

• MACCs for the year 2030 constitute the main input data to the

EVALUATE model

More information can be found in EVALUATE Carbon Expo presentation & WB internal presentations 2016

55 Enerdata, NCM Initiative Expert Workshop, Barcelona, 26 May 2017

Justin Macinante Link to published paper:

http://ssrn.com/abstract=2948580

Conceptual model for NCM

• n DLT architecture

57

Map of existing, emerging and potential regional, national and sub-national carbon pricing instruments

62 Jurisdictions are currently putting a price on carbon

Type of Linking Definition

Full Compliance unit in one jurisdiction is accepted without restriction in the “linked” jurisdiction Limited Compliance unit in one jurisdiction is accepted with qualitative/quantitative restrictions in the “linked” jurisdiction Indirect Markets are not linked directly, but have access to the same third carbon market. Networking Fungibility of carbon assets across schemes facilitated by an Independent Assessment Framework that recognizes the differences between schemes

Different types of Linking

The NCM initiative

The assumptions underlying NCM accord with the principles evident in the Paris Agreement:

• Governments need information about jurisdictions and schemes with which

they might ‘link’

• Changes may take place in a scheme and its effectiveness over time, or with a

jurisdiction’s economy, so information needs to be collected and monitored on an on-going basis

• Similarly, market participants need information to make informed investment

decisions

• Some governments and market participants have the resources to make these

assessments, others will not

• Implicit that governments retain the sovereignty to act on this information as

they see fit, and the hegemony over their schemes and policies

Key components of Networked Carbon Markets

1 3 2

Independent assessment framework to determine the climate change mitigation value of different climate actions and enable their fungibility in the international market. International Carbon Asset Reserve to support and facilitate carbon market related functions. International Settlement Platform to track cross- border trades and possible clearing house function.

The NCM initiative is comprised of 3 key components

8/10/2017

Mitigation value

Risk relating to the characteristics of a specific program Risk relating to the characteristics of a jurisdiction’s collective low-carbon policies Risk relating to the characteristics of a jurisdiction’s contribution to addressing global climate change

Determining mitigation value is a function of a robust MRV framework that assesses:

The concept of Mitigation Value is fundamental to the Independent Assessment Framework

Overarching Supervisory Body Settlement Platform/ Clearing Central Registry ICAR Conversion Rate Setting

Regulatory Supervision of conversion setting

Suitable Entities Performing MV Assessments Regulatory Supervisory Body for MV Assessment Trading

Jurisdiction A Jurisdiction B Jurisdiction C

A 1 A 3 A 2 B 1 B 3 B 2 C 1 C 3 C 2

Conceptual model for NCM on DLT architecture

What is distributed ledger technology?

• Combination of a distributed database,
• with public/private key encryption, and
• decentralised infrastructure

Doesn’t offer significant functionality that couldn’t be achieved otherwise BUT does provide potential for innovative solutions to data sharing and transaction management application areas

Conceptual model for NCM on DLT architecture

Paper sets out key elements of underlying technology framework as platform for the components of inter-jurisdictional emissions trading

I how such a market might come into being II possible alternative mechanisms for transactions III institutional elements and requirements of digital infrastructure IV ‘smart contracts’ as the key transactional component V types and roles of participants VI

• ther legal and regulatory concerns

‘Smart Contracts’

• term of art for transactional T&Cs embedded in computer code
• allows automatic execution, once precise conformity with T&Cs has been

established

Conceptual model for NCM on DLT architecture

Firstly, there might be rules governing jurisdictional participation and market

• peration, including, for example:
• Preservation of environmental integrity
• Application of the supplementarity principle
• Applying an national rules for acceptance or exclusion

Then, there are the rules for the transaction, that might include:

• Seller holding the units offered for sale
• Buyer having the funds necessary to complete transaction
• Automatic application of a conversion rate between the jurisdictions
• On settlement, automatic updating of all copies of the ledger

Conceptual model for NCM on DLT architecture

As set out in the paper, preconditions for a contract might typically include the following information and specifications:

• name and jurisdiction of seller;
• domestic authorization, satisfactory KYC and AML checks on seller;
• name and jurisdiction of buyer;
• domestic authorization, satisfactory KYC and AML checks on buyer;
• certification or proof that the transaction is accepted as not negatively impacting upon environmental integrity;
• certification that the transaction would not cause the buyer’s jurisdiction to breach the supplementarity principle

(noting that either jurisdiction may have the level set lower than maximum applicable in the distributed system as a whole);

• certification that the transaction would not cause either the seller or the seller’s jurisdiction to breach the

compliance reserve (noting that the level may have been set higher than the minimum required for the distributed system as a whole);

• that the conversion rate is acceptable to the buyer’s jurisdiction;
• that both jurisdictions have provided and maintain an acceptable surety in regard to their financial obligations

towards the operation of the distributed network;

• confirmation that the seller holds and is entitled to sell the units offered for sale;
• confirmation that buyer has funds to complete transaction; and
• the application of the correct conversion rate between jurisdictions

Conceptual model for NCM on DLT architecture

What does it offer? (potentially!)

• Flexibility
• Cost and time efficiencies
• Consensus + cooperation + voluntary engagement
• Simplicity with certainty
• Transparency and confidentiality

Conceptual model for NCM on DLT architecture

DLT element Paris Agreement Blockchain (ledger) accumulative, immutable

• Security of transaction (e.g., fraud prevention)
• Robust accounting, double-counting control
• auditable

Distributed database, ‘permissioning’

• Transparency (based on permissioning)
• Confidentiality protected as necessary
• Security against IT attack (e.g., loss of data)

Private/public key encryption

• Security against IT attack (e.g., fraud, theft)
• Transparency but with appropriate protection
• f confidentiality

Decentralised infrastructure

• Cost efficiency
• Other peer-to-peer efficiency (e.g., transaction

time) Regulation by code (contract terms)

• Environmental integrity
• Supplementarity
• National rules flexibility (sovereignty)

Conceptual model for NCM on DLT architecture

Conceptual Model:

• Key elements of underlying technology framework as platform for the

components of inter-jurisdictional emissions trading

– how such a market might come into being – possible alternative mechanisms for transactions – institutional elements and requirements of digital infrastructure – ‘smart contracts’ as the key transactional component – types and roles of participants –

• ther legal and regulatory concerns
• Elements of the application need to be developed, especially the concept of how a

value is put on the mitigation outcomes that will be transferred

THANK YOU

for your attention

8/10/2017 70