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For an international climate agreement to be truly effective, it would need to strike an appropriate balance among three parameters: environmental effectiveness (or the ambition of its environmental objectives), participation of major-emitting countries, and the degree of expected compliance on the part of countries that do participate.[1] The Kyoto Protocol put forward ambitious targets for emissions reduction, but exempted all developing countries (including those that have become major emitters). The United States chose not to participate—primarily because it saw the developing-country exemption as inequitable. At least one major-emitting industrialized country—Canada—will fail to comply with its Kyoto target and has taken the further step of formally dropping out of the Protocol.

The Fifteenth and Sixteenth Conferences of the Parties (COP-15 and -16) of the United Nations Framework Convention on Climate Change (UNFCCC)—in Copenhagen and Cancun—yielded a new arrangement, effective through 2020, in which developing countries voluntarily commit to actions that will decrease emissions.[2] What the Copenhagen-Cancun (C-C) regime gains in participation, however, it loses in stringency, given that commitments are voluntary and that their form is almost solely determined by the pledging party. All assessments of the aggregate emissions reduction we might expect from C-C fall well short of concentration and temperature goals that natural scientists have identified as desirable.

At COP-17, in Durban in late 2011, the UNFCCC parties agreed to the Durban Platform for Enhanced Action, which, with regard to potential participation, is a dramatic break with UNFCCC history. The Durban Platform commits the parties to developing a new agreement by late 2015, to be implemented in 2020, that does not distinguish between the form of mitigation commitments that industrialized and developing parties assume.[3] The Durban-Platform process has the potential to yield an arrangement that approaches more closely an optimal balance among environmental ambition, participation, and compliance, such that actual emissions reductions are maximized over time.

A great deal of work is needed to define the nature of Durban-Platform commitments, their legal form, and other important aspects of the new 2015 arrangement. Among other things, it is essential to craft an agreement or arrangement that secures in practice the participation of the larger-emitting developing countries[4] (because their emissions are substantial, but also to have a hope that the United States will also participate). To a close approximation, these are China, Brazil, Indonesia, and India.[5]

As is always true, reducing the expected economic cost of compliance will reduce the political difficulty associated with deciding to participate. Employing well-designed market-based mechanisms is the most effective way to reduce the cost of achieving the environmental objectives of an arrangement to reduce emissions.[6] A new international post-Durban arrangement that encourages and supports the use of market mechanisms would make it somewhat easier for the larger-emitting developing countries to decide to participate.

The best-known market-based mechanism to reduce emissions is cap-and-trade (or “allowance trading”).[7] Cap-and-trade systems usually allow offset credits to be used interchangeably with emissions allowances. Offset credits are generated from distinct, clearly bounded projectsoutside the cap-and-trade system—that measurably and verifiably reduce emissions, relative to some baseline. The central purpose of such offset credit schemes is to lower the cost of compliance—in principle even further than would be possible with lower-cost abatement opportunities within the allowance-trading system itself.

Kyoto included market mechanisms, most importantly the Clean Development Mechanism (CDM), an offset-credit system with projects based in developing countries, which have no emissions-reduction targets. Participation in the CDM and related market institutions (registries for CDM credits, exchanges) has been useful experience for the larger developing countries that are experimenting with or thinking about allowance trading to achieve domestically-determined emission-reduction goals, C-C commitments, or potential future domestic obligations under a new international arrangement arising from the Durban-Platform process. China, which has hosted by far the largest number of CDM projects, is also implementing pilot allowance-trading programs in seven cities or regions. India and other major-emitting developing countries have given some consideration to domestic market mechanisms.

The Partnership for Market Readiness (PMR) is helping developing countries plan and implement domestic allowance-trading markets. The PMR was launched at COP-16 in Cancun and is coordinated by the World Bank. As of February 2012, ten industrialized-country PMR partner governments have provided $75 million to assist fifteen developing-country participants with training and institutional capacity-building with regard to emissions-allowance trading and related matters. [8]

There is the potential for tension between the CDM (and other international offset-credit systems that may develop over time) and domestic allowance-trading systems operating in the same developing country. Most importantly, the two would compete for the lowest-cost abatement opportunities, emissions reduction from which cannot be counted for both.[9] I hope to address this matter further in a future post, but for now would note that, as a practical matter, it is unlikely that this tension will manifest into significant problems during the period through 2020—during which developing country C-C commitments overlap with the Kyoto Protocol’s second commitment period, to which the Protocol’s parties also agreed in Durban. Taking a longer view, stakeholders, policy makers, and social scientists will need to consider carefully how best to utilize, reconcile, and harmonize domestic market-based systems for emissions reduction in developing countries and international offset crediting schemes—and to conduct these analyses independently of entrenched interests with a stake in the CDM and offset crediting more generally.[10] The answers may well vary across countries, economic sectors, and over time.

 More immediately, it behooves the UNFCCC parties to consider carefully how the new 2015 arrangement might include and advance market-based mechanisms, drawing upon input from a variety of sources. (See various submissions to the UNFCCC from parties and observers here, here, and here.[11]) While there remains significant opposition in principle among some developing-country constituencies to market mechanisms and, indeed, to developing country mitigation commitments in the first place , there is also growing acceptance of market–based mechanisms as a mean to lower the cost of compliance, given the new world of Durban-Platform-based commitments-for-all. It is likely that over the next three years, refining and advancing the role of market-based mechanisms will make more likely—rather than less—participation of larger-emitting developing countries—and hence the United States—in the new climate regime.[12]

Image Credit: Jezper/Shutterstock


[1] Daniel Bodansky, “The Durban Platform Negotiations: Goals and Options,” Viewpoints, Harvard Project on Climate Agreements, July 2012.

[2] Industrialized countries assume absolute emissions-reduction targets, as in Kyoto—though this “decision” of the COP is less binding than Kyoto, which is a treaty.

[3] See Robert Stavins’ blog posts on the outcomes of the Copenhagen, Cancun, and Durban COPs.

[4] See also my last post.

[5] In order of emissions, including all six Kyoto-Protocol greenhouse gases and including land-use changes (primarily related to forestry and agriculture) and bunker-fuel emissions—in 2005, the last year for which such data is available. Source: World Resources Institute Climate Analysis Indicators Tool. These four countries accounted for 32% of global emissions in 2005 and over 80% of developing-country emissions.

[6] Why? See Robert Stavins’ blog post. The most important cap and trade program for greenhouse gases—by far—is the European Union Emissions Trading System (EU ETS).

[7] For a primer on cap and trade, see p. 6 here. The other primary market mechanism is a tax on emissions.

[8] Robin Lancaster, “Ready, set, go,” Carbon Trading, February 2012, pp. 16-18; www.carbon-tradingmagazine.com.

[9] Double counting must also be avoided when traditional (non-market-oriented) regulatory approaches to limiting domestic emissions are employed, as is almost exclusively the case in developing countries currently. But in that case, there isn’t the same competition for lower-cost abatement opportunities.

[10] The Kyoto Protocol states that the purpose of the CDM is twofold—to lower costs of compliance for industrialized countries and to advance sustainable development in host countries. There is ongoing discussion about the extent to which the latter goal has been achieved, but host countries have in any case earned a significant return from investment in CDM projects.

 [11] And the proceedings of a three-year program conducted by the Centre for European Policy Studies’ Carbon Market Forum, “New Market Mechanisms under the AWG-LCA,” www.ceps.eu/taskforce/ceps-carbon-market-forum-new-market-mechanisms-under-awg-lca

[12] I make no judgment as to what the United States should do, but rather observe constraints on climate action imposed by domestic politics. Securing U.S. participation will be very difficult in any case, but surely impossible without the participation on equal terms of the major-emitting developing countries, especially China. The Durban Platform, at least, enables the “equal terms.” See my last post.