The Framework for Various Approaches, New Market Mechanism and Non-Market Approaches

Transcription

1 The Framework for Various Approaches, New Market Mechanism and Non-Market Approaches Definition, Scope, Function and Interrelationships Andrei Marcu October 2014 This document has been prepared as a background document for the project entitled Markets and non-markets in the 2015 Agreement, for discussion at the October 14 & 15, 2014 meeting. This paper is not intended to provide solutions or propose a way forward for UNFCCC negotiations. Rather, it tries to outline possible interpretations and reflects on the consequences of taking different paths. It will make assumptions when this is necessary, but this is not to be interpreted as closing any options in the course of the upcoming discussions at the workshop. Andrei Marcu is Senior Advisor and Head of the CEPS Carbon Market Forum. The CEPS Carbon Market Forum was established in 2012 with the aim of creating a neutral space where policymakers and regulators are able to meet carbon market participants and other stakeholders to discuss carbon market regulation and general policy issues. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means electronic, mechanical, photocopying, recording or otherwise without the prior permission of CEPS. Available for free downloading from the CEPS website ( Centre for European Policy Studies 2014 Centre for European Policy Studies Place du Congrès 1 B-1000 Brussels Tel: (32.2)

2 CONTENTS 1. FVA, NMM and NMA in context Assumptions International transfers today Framework for Various Approaches Definition Functions Scope New Market Mechanism Lessons learned from the Kyoto Mechanisms One view of NMM Another view of NMM Are NMM windows needed? Non-Market Approaches Relationship between FVA, NMM and NMA... 13

3 The Framework for Various Approaches, New Market Mechanism and Non-Market Approaches Definition, Scope, Function and Interrelationships 1. FVA, NMM and NMA in context Andrei Marcu Why do we think these elements are a significant component of the 2015 agreement? The 2015 climate change agreement will ensure that all Parties make contributions to combating climate change. However, from an economic- and emissions-profile point of view, the world is very different than it was when the UNFCCC was negotiated in Rio in 1992, and when the Kyoto Protocol (KP) was agreed in Kyoto in In the context of the economic and financial crisis that we experienced over the last few years, which for many is not yet over, the issues of growth, competitiveness and equity have strong resonance. These issues are also important in the context of sustainable development. There are many ways to look at whether this agreement will be successful or not, and many criteria to determine whether Parties are willing to sign it. One way to look at these issues is whether Parties will understand two important aspects of the agreement, namely: What does everyone promise to do through INDCs (intended nationally determined contributions)? What do the INDCs represent? In other words: o How do we define what we promise to do? o How do others understand what we promise to do? o How do we compare the effort required to deliver on the promises? How do we achieve what we promise to do? What are the means available to achieve these promises? o Domestic reductions: captured through inventories o Internationally transferred mitigation credits: - Units - Mitigation outcomes When the efforts are counted at the end of the compliance period, will there be clarity on these points? On inventories, there is an established body of knowledge. Accounting was also well understood under the KP how to count, and what to count. In the new post-2020 world, under what sound like reasonable assumptions, that may not be the case, and it is an issue that needs to be addressed. This makes the FVA, and the approaches it covers, important elements of the 2015 agreement. Finally, in the context of what gets counted towards compliance in any regulatory regime, we must remind ourselves of a fundamental rule of regulation: the regulator, that is the entity that accepts or imposes a commitment, is the only one entitled to decide what type of units are good for compliance. 1

4 2 ANDREI MARCU In the case of the EU Emissions Trading System, it is the EU ETS Directive, enacted by codecision through the EU legislative process. In the case of California, it is the California Air Resources Board (CARB), which decides what is good for compliance. In the case of the Kyoto Protocol (KP), it is the Parties to the KP, through the CMP, which decide what is good for compliance with obligations in Annex B to the KP. It would naturally follow that under any 2015 global climate change agreement, what is good for compliance with any INDCs will be decided by the collective will of the Parties, to what we hope will be the Paris Agreement. Having a subset of the Parties decide unilaterally what is good for compliance with an INDC under a UNFCCC agreement, which is responsible to the COP, is more challenging to conceptualize. Unless this is what the 2015 agreement specifies. However, it is also possible to examine this from a different perspective, in cases where the ultimate goal is not compliance with a multilateral agreement. For example, in the case of California and Quebec, which are not members of the KP club, the decision is made at the level of those jurisdictions. Alternatively, one can imagine a club being formed, which would establish its own rules, outside UNFCCC compliance, and decide what is good for compliance among themselves. How what is good for compliance is decided, is another matter. That is likely to be spelled out in the agreement, and could take any form from a pure declaratory format, to an approval format. That decision will depend heavily on what IS in the 2015 agreement. 1.1 Assumptions The role, scope, functions etc. of the FVA/NMM/NMA are going to be dependent on the architecture of the 2015 agreement. A loose, less centralised architecture will require fewer functions; a more centralised one may come close to mimicking the KP provisions. The KP provisions, which triggered the rapid development and expansion of the carbon market, were relatively limited. They included: Articles 3.10 to 3.12, which provide the hook, the recognition to transfer units and have them counted for compliance with KP obligations Article 6, 12 and 17 which allowed o For the creation and transfer of unit in non-capped countries (non-annex 1) o The transfer of units under the cap, for countries that had budgets, that is an absolute cap However, the KP, while not really a top-down agreement as many like to refer to it in derogatory way, is an agreement that has quite a centralized architecture and governance. It is essentially a giant cap and trade scheme, where accounting, tracking and issuance of units are centralized. There was no role for a framework for various approaches in the KP, as CMP bodies controlled and managed all the mechanisms, and units issued units, centrally. Some will argue that this was not the case for JI T1, but one needs to be reminded that they were, nevertheless, all backed by AAUs, a CMP unit. There were no various approaches, and if any emerged, any transfers would have been backed by AAUs (such as an Australia/EU linkage).

5 FRAMEWORK FOR VARIOUS APPROACHES, NEW MARKET MECHANISM & NON-MARKET APPROACHES 3 The 2015 agreement is just beginning to take shape through the papers that the co- chairs have put out, but there is still a long way to go before Paris. A discussion on FVA, NMM and NMA therefore requires some assumptions to underpin that discussion. There will be an international climate change agreement. Through INDCs all Parties will have to contribute to combating the danger of climate change. There will be a desire to transfer mitigation outcomes/units. This would require that it will be recognized and sanctioned a provision similar to Art 3.10-to 3.12 of KP. Parties to the 2015 agreement will want to have any units/mitigation outcomes that are acquired from another jurisdiction good for compliance with their INDC. Different types of mitigation instruments/approaches/market mechanisms will be available and used o Developed, created and operated by the COP (e.g. CDM, JI). So far they have been baseline and credit mechanisms. New ones may emerge in this category. o Created and operated by Parties (or NOT by the COP) e.g. EU ETS, California ETS, China Pilot systems, JCM, VCS, Gold Standard). These could be cap-and-trade or baseline-and-credit. There will be different types of mitigation commitments under INDCs (this list is not meant to be exhaustive, it simply focuses on what is relevant to the topic at hand) o Economy-wide with absolute caps (not dissimilar to KP commitments, but without AAU budget) o Sub-national level with absolute caps (e.g. sectors of the economy, sub-national regions) o Without absolute caps A number of scenarios could be outlined in this context i) A broadly decentralised climate change regime develops, where each country is able to use any international units it chooses for compliance, without any global standards. The market provisions in the 2015 agreement would then need to be relatively minimalistic. ii) iii) iv) A decentralised climate change regime with some minimum environmental standards provided as guidance only. The units used for UNFCCC compliance by Parties would be expected to observe those guidelines, but no approval is needed. A regime where environmental standards must be observed, but no approval would be required for the units used for compliance. This would represent only a very small incremental step when compared to the approach in (II) above, and has been called a transparency approach. A regime where global environmental standards are defined by the COP, and must be observed. Any units, or systems producing units used for UNFCCC compliance, must be approved by the COP. 1.2 International transfers today Most of the international transfers to date have taken place in the context of the carbon markets that have evolved in the KP, or in efforts to address KP compliance. It could, however, be argued that some of the voluntary, non-compliance transactions have been

6 4 ANDREI MARCU driven by many factors, and where markets may not have been the sole driver in concluding a transaction. Some of the early REDD transactions would fall into this category, as would others in the voluntary market. With the development of the California and Quebec ETS, and their link, we will start to see international transfers of units that are outside the KP. The same will be true when it comes to the JCM, which Japan is currently operationalizing. The link between Australia and the EU, which would have been a major event, was cancelled due to the political decision by the new Australian government not to pursue carbon pricing as an approach to mitigation. As such, the world of international transfers of mitigation outcomes is rapidly changing to a much more heterogeneous one, from one where the CDM, JI and Art 17 of the KP had a monopoly. 2. Framework for Various Approaches 2.1 Definition The FVA is a set of rules, components, standards and protocols that together make up a framework for various approaches (FVA) to ensure that all internationally transferred mitigation units/outcomes used for international compliance (with obligations under the UNFCCC) maintain the environmental integrity of the global climate change agreement. The integrity of the international agreement will have different aspects, from the characteristics of the units themselves, to how they are accounted for. It must be emphasized that any two Parties/jurisdictions can decide to transfer units/outcomes without anyone s permission. It is only when there is a desire that the units transferred internationally are to be used for international compliance with INDCs by the receiving Party, that the requirement to meet minimum UNFCCC conditions is triggered. Another way of looking at the FVA is to say that it will ensure that all units resulting from mitigation approaches that meet certain conditions, and that are transferred internationally, can be used, and counted, for international compliance with UNFCCC obligations. What those conditions are, and how the UNFCCC will test for them, are the topic of another discussion, as one of the functions of the FVA. Yet another way to look at the FVA is as the set of rules, procedures, components, etc. which could define a number of things Which international transfers get to be counted for UNFCCC compliance Under what conditions At what compliance value Ensure that they are not double counted As mentioned above, as the orderly and Cartesian world of the KP makes room for a more heterogeneous one, in order to maintain the integrity of the agreement there must be a framework that will provide a common approach on what to count, on how to count it, towards compliance. There is a significant lesson that we must take from UNFCCC negotiations in general, and from the history of the KP mechanisms. The temptation to burden the FVA with every provision that Parties wish to make, risks turning the discussion into a version of the UNFCCC negotiations at large, and must be resisted.

7 FRAMEWORK FOR VARIOUS APPROACHES, NEW MARKET MECHANISM & NON-MARKET APPROACHES 5 This has been the general view of the FVA. There are however broader views, which may see the FVA as a way to coordinate more than mitigation approaches that are exported, some of which are domestic in nature only. In such cases the FVA would provide an imprimatur of environmental integrity through international standards as well as play other roles, which will be discussed below 2.2 Functions In order for the FVA to achieve the objectives outlined in the definition above, it will need to fulfil at least some of the functions outlined below. Consideration should also be given to the fact that some of the functions will be undertaken through the UNFCCC, which is Operational, while others will be Guidance, which will provide direction on how things need to be done by others. 1. Provide information for compliance accounting. The accounting system will be central to the 2015 agreement, and the FVA is the part of the agreement that is expected to provide the information that will ensure its functioning. The FVA is not the accounting system, which is defined as part of the 2015 agreement, but the FVA provides the information that makes the accounting possible. That can be accomplished in a number of ways, either by tracking every unit transfer, or by tracking netting of transfers at the end of the period (annually) between different Parties. In that way the FVA is critical to any agreement that will have provisions for international transfers. One alternative is that the FVA instruct national authorities to report at year-end net transfers and provide the information to a new ITL-like tool. Another alternative is for the FVA/COP to operate an ITL, which is responsible for making every transfer, and that way having control and access to all the information. 2. Define protocols and mechanisms to avoid double-counting at Issuance Compliance This topic will make the object of a paper on itself, and there are a number of different aspects of double counting, including double counting of finance. While they are all important, in consideration of keeping things manageable, we feel that the FVA should focus on the avoidance of double counting resulting from international transfers of units or mitigation outcomes. Unless there is good coordination, there is a possibility that units could be issued more than once for the same project (for baseline-and-credit project, or between a cap-andtrade system and a baseline and credit one (such as was the case in JI T1)). Consideration must be given to who is best placed to judge what is being issued in terms of mitigation outcomes in a jurisdiction. One alternative is to have all domestic units in a national territory to be only through the National Registry. This institution, being local, is likely best place to have the right information. In this case the FVA would provide guidance. The double counting at compliance will be avoided by ensuring good tracking of units being transferred. Whether netting information provides the same level of assurance is a matter that will need to be well examined as we would change a system (through the ITL) that has worked well so far. 3. Define rules to

8 6 ANDREI MARCU a. Identify what gets counted and under what conditions it gets counted. That is, under what conditions do units/outcomes that are transferred internationally and used by a jurisdiction other than the one where they were produced, get counted toward UNFCCC compliance? This can be addressed in a number of ways, by focusing on types of mechanisms and types of commitments that Parties will take. Another issue that will also have to be considered is HOW the decision is made for what gets counted, and what not. In the case that a mitigation system is in a jurisdiction that does not meet certain pre-requirements (see below), then the protocol to make that finding can also be done in very different ways, depending on the provisions of the agreement. It could be a simple declaratory process, or an approval process that would reminiscent of the CDM (in that case for projects and not systems). 1. Outcomes/units from UN-run mechanisms/approaches. These units, the outcome of a UNFCCC-run -and certified process, and issued by the UNFCCC, must, axiomatically, be good for compliance with UNFCCC compliance. As such, there are no conditions attached to these units being counted for compliance. 2. Outcomes/units resulting from non-unfccc run mitigation approaches. In this case, two different approaches can be considered for adoption. a) Mechanism pre-qualification. A first approach would be to consider the FVA as a set of standards/criteria, defined by the COP, which ensure the environmental integrity of what gets counted for compliance. This approach has been discussed in detail in the previous CEPS submissions to the UNFCCC on this topic. b) Party pre-qualification. A second approach is to qualify sending Parties for international transfers, based on a set of criteria determined by the COP. In this case, Parties are assessed ex ante. Depending on the type of commitment that the Party has undertaken, it may have to be subjected to an increased level of UNFCCC oversight to ensure that the environmental risk to the international system is minimised. Parties that pre-qualify. If a Party meets a set of criteria, similar to those outlined for participation in Article 17 of the KP, the units that they export would be deemed good to be counted. In this case no further international oversight would be required (apart from tracking) for the units sent internationally by that Party. One way to explain this would be that the Party, having an absolute quantified commitment, takes the risk for the environmental value of the units/outcomes it exports. Parties that do not pre-qualify. In the case of Parties that do not fulfil all the conditions set by the COP and outlined above, in order for units transferred internationally to be counted for UNFCCC compliance they would have to be subjected to international oversight. This international oversight could be ex-ante (qualifying mechanisms) or expost (qualifying units issued, as was the case for the CDM). The international oversight may be set at different levels, if some conditions, but not all, are met by a Party.

9 FRAMEWORK FOR VARIOUS APPROACHES, NEW MARKET MECHANISM & NON-MARKET APPROACHES 7 The oversight would occur in areas that impact environmental integrity such as baseline setting, accreditation of verifiers, MRV systems, additionality criteria, public participation, etc. One important aspect of the Party pre-qualification approach is that it may provide incentives for Parties to take increasingly stringent commitments, which would provide them with an easier access to international carbon markets. b. Decide on the mitigation value assigned to outcomes/units issued? In the KP, that value was assigned by the UNFCCC, as all units used for international compliance were issued centrally. In the case of the CDM, it was 1 if the project was deemed to be additional. In the new, decentralised and heterogeneous world that is no longer very clear, as units can now be issued by many jurisdictions. Different approaches have been discussed, including the concept of risk-adjusted value, which is somewhere between 1 and 0. The CDM had a value of 1 if the project was deemed additional, but being a counterfactual it would never be with 100% certainty additional. Another aspect that needs to be considered in this context is the fact that the mitigation measures are not always expressed in terms of carbon reduction. One widely quoted example is that of the energy efficiency trading scheme in India. In such cases it is possible that a function of the FVA would also be to translate into GHG other units of measurement. 4. Ensure that net mitigation is achieved. This is not a well-understood concept that has been adopted in the UNFCCC language in the drive to move away from offsetting. A distinction must be made between a baseline and credit mechanism that produces mitigation outcomes (e.g. CDM), and offsetting, which is how the mitigation outcome is used. In the KP, it was used to offset reductions in Annex 1 Parties. Let s stay away for shortcuts. When we speak about net mitigation, we must remember that this is a reaction to the use of CDM units as offsets under the KP. However, there was no obligation on the part of the Annex 1 country to use a CER as an offset, a discount factor could have easily been introduced in the EU ETS As such, what is needed is to ensure that a reduced ton emanating from a baseline-and-credit system, in a non-capped jurisdiction, is not used to offset a ton in a capped jurisdiction. We must also consider the fact that when a ton of reduction is produced, it is most likely a difficult, and probably an unreasonable, demand to require that its use be defined at the time of production. It may be used to meet the INDC in the production jurisdiction, or could be used for export. It is therefore our view that a discount factor that is used at the point of use is the best way to ensure net mitigation. We do not feel that a tom reduced and used to meet an INDC in the same jurisdiction needs to show net mitigation. That should only be the case for baseline-andcredit outcomes that are produced in non-caped jurisdictions. 2.3 Scope It is generally accepted that the FVA is under the authority of the COP. It is important to fix the scope of the FVA, as this will also allow further definition of its elements and relationship with existing and future mitigation approaches. Figure 1, below, outlines the view that has been expressed by CEPS in previous submissions to the UNFCCC, starting in In this way the FVA can be seen as an umbrella for all mitigation approaches that are transferred internationally. When we refer to mitigation approaches and will include both market and non-market approaches.

10 8 ANDREI MARCU Figure 1. Scope of the FVA SCM Sectoral Crediting Mech; BOCM Japan Bilateral Offset Mech; STM Sectoral Trading Mech. In addition, it must be emphasised that the FVA will cover developed and developing countries. The FVA will also cover all mitigations approaches and all mechanisms, including cap and trade and baseline and credit, as well as any other mitigation approaches that may emerge in the future. In this way the FVA must be conceived as flexible and resilient, and able to adapt to new approaches that will undoubtedly emerge over time. The current international transfer of mitigation units has been south-to-north (CDM), and east-to-west (JI and AAUs). It can be expected that there will be a flow of mitigation outcomes/units south-to-south, and north-to-south. There is a need to adjust and move away from conceptualizing flows only as those that aided offsetting under KP, and understand that FVA will need to be able to accommodate flows in many directions. While it is true that some of these flows may not happen right away, it is nevertheless important to ensure that these possibilities are covered in the design and operational specifications of the FVA. Finally, an essential point that needs to be raised and stated, again and gain. The FVA is not concerned with activities that are purely of a domestic nature, and do not lead to international transfers of units or outcomes. As such, for illustration purposes, any ETS that is strictly domestic, that is, does not export units that another jurisdiction will later use to comply with UNFCCC obligations, is not under the remit of the FVA. 3. New Market Mechanism The NMM has been created and there is an expectation that modalities and procedures will be produced through the SBSTA process. 3.1 Lessons learned from the Kyoto Mechanisms We have now had international carbon markets operating under the architecture of a KPtype climate change agreement, and can reflect on what we learned.

11 FRAMEWORK FOR VARIOUS APPROACHES, NEW MARKET MECHANISM & NON-MARKET APPROACHES 9 Market infrastructure was part of KP and provided strong reassurance to market participants in the CDM. Participation in mechanisms by the Parties on a voluntary basis was subject to compliance with conditions under the authority of the CMP. If a Party did not meet certain conditions, then it could not issue units, nor use units from market mechanisms. This was a very real situation that did affect Parties such as Romania and Ukraine. The International Transaction Log (ITL) played a critical role in ensuring that units were tracked, that there was no double counting, and most importantly, units were issued, and arrived, where they contractually were supposed to arrive. Those who created the obligations for compliance had the authority to decide what units could be used for compliance. This also provided value certainty for market participants. Compliance obligations for Parties with the KP were set under the CMP. All units that could be used for compliance with the KP were issued under the CMP s authority. That ensured, in a very simple way, that the CMP knew the environmental value of each unit used for compliance (1 tonne). Because only CMP approved or issued units could be used for KP compliance, there was recognition that the environmental value of a compliance unit can only be set by those who set the constraints. This is a fundamental issue in any regulatory regime. However, an additional principle also needs to be recognised and accepted; namely how that recognition is provided, which is also something that the Regulator (CMP) has the authority to decide upon. ERUs were issued through T1 and T2 either under international supervision or at the purely domestic level, with little international intervention by the CMP regulator, the JI Supervisory Board. A number of the controversies that emerged regarding the functioning and contribution of carbon markets to mitigation efforts were caused by the discontinuity resulting from the largely uncoordinated objectives and rules of the two regulators of the carbon market, the EU and UNFCCC. This is in itself a critical issue that needs to be recognised and addressed in the new climate change architecture that will emerge from the ADP. A few very powerful examples can easily be identified. The so-called recycle CERs controversy was caused by the fact that, for some EU Economies in Transition Parties, they were a way to use their surplus AAUs resulting from the economic downturn in the post-communist era (addressed by some stakeholders with the unappealing name of hot air ). Similarly, the debate over the use in the EU ETS of CERs from industrial gas projects caused substantial damage to the KP, the KP mechanisms and the credibility of carbon markets in general. It was inevitable that having one regulator in Bonn (the CDM EB) decree, after a thorough investigation, that it would continue to issue these credits, while a second regulator and legislative body in Brussels took the strong stance that they were unpalatable, would provide ammunition to those looking for an excuse to attack the whole concept of carbon markets. Process Politicisation. The process of running and administering the KP mechanisms has been heavily politicised. Clear objectives. The CDM was the flagship of the KP market mechanism, but its duality of objectives has led to vigorous debates on the contribution it has made to real reductions, as well as to sustainable development. The lesson that needs to be learned, in what is a pure regulatory market, is that the lack of clarity in objectives will damage the credibility of the market, affect the social license to operate, and finally impact on its good market functioning. Examples are the dispute over the objectives of the EU ETS, namely compliance within the period cap or long-term de-carbonisation. Similarly, when it did not meet the purity tests of some, the Sustainable Development (SD) objective of the CDM has been interpreted as casting a negative light over certain projects and

12 10 ANDREI MARCU technologies. However, adding the SD conditionality as a market constraint, a concept not quantified, muddies the waters in a way that markets cannot understand. Whatever conditionality is introduced, it needs to be clearly spelled out for markets so they can quantify it and operate within it. Competition and leakage. The vision of the KP was one of a global price for carbon, which would drive reductions around the world in the most efficient way. However, that was in a simpler world, divided into Annex 1 and non-annex 1 income countries and emissions. However, as the world changed and the new economic and emissions realities have taken hold, it becomes apparent that, while paying for rapid development was OK, subsidising competition in globally competitive industries, especially in a time of grave economic crisis, was not acceptable. Carbon leakage is becoming an increasing concern. All these matters need to be accounted for in any new climate change agreement. Stability: acceptance of GHG markets and CC science. Closely connected to the issues of competitiveness and leakage is the acceptance of climate change science. The introduction of a carbon price through carbon markets imposes an additional cost on society. Public acceptance of climate change science is important to markets, given their complete regulatory nature and the need for stability. A price of carbon in the economy, with the attached concerns surrounding competitiveness, can lead to an unstable regulatory environment. With the Australian example in mind, investments driven by carbon prices cannot take place in an environment where the price of carbon is here today, gone tomorrow due to the political colour of the government of the day. 3.2 One view of NMM It is unclear what the NMM really is, but one consensus that seems to emerge is that the NMM is a mechanism with many windows, which is operated by the UNFCCC. The existing CDM and JI would fall in that category, maybe as window of the NMM In our view, the NMM may have more than one window, such as a project, a sectoral baseline and credit approach, and possibly a cap-and-trade approach. It may also have a REDD+ mechanisms window. The purpose of the NMM would be to be available to those Parties that wish to use them in their jurisdiction. They may wish to use the NMM windows for a variety of reasons, including not wishing to develop their own, not having the capacity to develop and operate their own or, the desire of off takers of the mitigation outcome to have them result from a UNFCCC instrument, which they may see as having high integrity. It is clear that the best and simplest option is for the use of the NMM to be on a voluntary basis, while being available to all Parties that sign the 2015 agreement. The Modalities and Procedures (M&P) for NMM may have to be at two levels: a fairly highlevel set of M&P that will provide the general governance and process, and a much more detailed level, such as that provided by the Marrakech Accords for the CDM. The CDM, as well as JI, have accumulated much experience and knowledge in recent years. This cannot go to waste and needs to be incorporated into the new 2015 agreement and put to good use. In the end the CDM is a process to produce and issue credits from a project-byproject baseline and credit approach. Such an approach will need to be in the 2015 agreement, for those Parties that wish to use it.

13 FRAMEWORK FOR VARIOUS APPROACHES, NEW MARKET MECHANISM & NON-MARKET APPROACHES 11 As such, the best outcome would be that post-2020, an International Crediting Mechanism be incorporated in the NMM, with a project-by-project window, and a sectoral window, at a minimum. The CDM, and all its M&P, improved and simplified, could migrate to the NMM, and be merged into that new instrument. Whether other windows, or approaches operated by the COP, need to be developed with their M&P, is something that will emerge over time and will depend on the demand for such approaches, and on the agreement that Parties to the Paris agreement can reach. 3.3 Another view of NMM An alternative view is that the NMM is also a set of standards and protocols, which would be used to qualify mechanisms in those jurisdictions that do not pre-qualify (do not meet all standards, say similar to what is currently needed for Article 17 of the KP). This then transforms the NMM into another framework to qualify these mechanisms. Furthermore, it could also lead to the view that the domestic mechanisms that qualify in this way to have the mitigation outcomes used for UNFCCC compliance, could then be called a window of the New Market Mechanism. 3.4 Are NMM windows needed? Countries that have the capacity to develop, and operate systems seem to be inclined to do so. The World Bank s Partnership for Market Readiness is a clear indication of this trend. That leaves the main market for NMM to those jurisdictions that don t have the ability, the capacity and/or resources to develop their own systems, and then operate them. In addition, the windows of the NMM will have to compete with the type of bilateral mechanisms currently develop by other jurisdictions, such as the Japanese Joint Crediting Mechanism. The added advantages of using the NMM windows may become evident in time, with a reformed, and well run CDM+, which would continue to produce a currency (CERs), that will be good for compliance in many jurisdictions, and very liquid - features that will make it attractive to many project developers, and to those that are in the market to provide liquidity. That points us to the type of NMM window that may be most in demand - essentially a baseline-and-credit mechanism, relatively simple, and project oriented. The more advanced CDM+, which may be cover broader sectors of the economy, may be used as test or pilot as it is more demanding and complex to develop and operate. Whether once developed they will be operated or migrate to versions that are run nationally, that is something that remains to be seen. In our view it is unlikely that a UNFCCC developed and run cap-and-trade system will be in high demand. This requires a sophisticated economy, with a significant capacity and many emissions points. Such a jurisdiction will have the inclination to develop its own ETS. Finally, another NMM window could be something that requires a strong international stamp of approval, such as a REDD+ mechanism. It will be interesting to see whether the advantages and temptation of developing a REDD+ mechanism under the COP, with all its ideological delays, would win over the challenges of developing such a mechanism

14 12 ANDREI MARCU bilaterally. There are many Parties that are deeply interested in REDD+ and that have the ability to finance the development of such an approach. If the other view is taken that the NMM itself is another framework to qualify non-unfccc run mechanisms when this is needed due to non-pre-qualification, then there is a clear need for the NMM. It is obvious those domestic approaches will be developed, and that there will be demand in other jurisdictions for the use of their outputs to meet INDCs. 4. Non-Market Approaches The NMA is a subject that has been much less developed than NMM and FVA. It is agreed that NMA have a significant role to play and that the UNFCCC has a solid base for international cooperation that is non-market based. This has been clearly elaborated and advocated in a number of submissions to the UNFCCC, including this year, in response to a SBSTA invitation. Many of the international cooperative approaches that are non-market in nature are currently being discussed in other negotiating areas of the UNFCCC such as finance, technology transfer, capacity building, etc. NMAs, in the context of the FVA/NMM/NMA work, are not well defined, and understood. One way to look at this issue is to state that mitigation approaches can be the result of market and non-market approaches that could be standards, regulations, etc. The end result will be a mitigation outcome that will be the result of efforts implemented at the national or subnational level. Most of the discussion has focused on how the NMM (and NMA) fits in the FVA, that is, what is the role of the FVA in the case where mitigation outcomes are transferred through markets from one jurisdiction to another, for use in compliance with UNFCCC obligations. One way to approach the discussion is to say that mitigation outcomes are the result of domestic market or non-market approaches. Once there is a domestic mitigation outcome, then the UNFCCC, and the FVA, as building block of the 2015 climate change agreement, become relevant if this mitigation approach, from a non-market activity, is transferred internationally for the purpose of meeting the UNFCCC obligation of another jurisdiction. The transfer in itself can take place in different way and through different means. It can take place as an outcome, or as units of the mitigation, in many cases expressed in tons or different units (EUAs, CERs, AAU, Australian Units, CCERs, etc.). The other side of the equation is how the exchange takes place. Is it based on price discovery, and driven by a market process and market dynamics, or is it a cooperative approach, outside what would be considered market approaches? This can be a very subjective discussion. Many of the REDD+ early cooperation has seen resources being made available, but on a basis that is unlikely to have a clear relation to a price of carbon, or for that matter for a price of other environmental services. Another example is the Japanese JCM which is a baseline-and-credit mechanism, and very much modelled on the CDM experience. If nothing else, many see it as an effort to run a bilateral CDM, simplified, while maintaining the environmental integrity. While the CDM was seen as the very example of a market approach for GHG, research has shown that many stakeholders have questions whether the JCM can be considered a marketbased instrument.

15 FRAMEWORK FOR VARIOUS APPROACHES, NEW MARKET MECHANISM & NON-MARKET APPROACHES 13 While there is a little doubt that Japan is driven by the desire to be efficient and minimize the cost of meeting its mitigation pledges, it is difficult to say that the exchange of resources against mitigation outcomes is driven by a market-established price. There seem to be many components that enter the calculation, and it is unclear whether the price of a ton of reduction on the EU or California market enters into the calculation. If this is an example of a non- market approach, then what is the role of the UNFCCC (and the FVA in it)? Most observers, and negotiators, including this author, would probably feel that the role of the UNFCCC is to ensure that the transfers that take place are done according to the discussion in the section on FVA. That would seem to include qualifying the JCM if the reductions take place in countries that do not have economy wide absolute caps, as well as keeping track of the transfers to ensure that there is no double counting. Whether the JCM then qualifies and as NMM or NMA is something that needs to be discussed and well understood. Is the distinction important? The other aspect of the NMA is whether, in symmetry to the NMM, there will be an internationally/unfccc run NMA? REDD+ plus could be such a mechanism, if the vision is that REDD+ mitigation outcomes will be financed through means that are not driven by the same forces as the price on carbon markets. Yet another vision is that presented by some Parties, and which would seem to take view that 2015 agreement is an NMA and that the FVA is the framework of the whole agreement. That is one vision, with a very ambitious role for the FVA, which then becomes the backbone of the whole agreement. In this context, Various Approaches take on the dimension of every component of the 2015 climate change agreement. This is a view, which needs to be well understood and discussed, but which, based observations during negotiations and submissions to the UNFCCC, does not seem to be shared, or maybe not well understood, by a significant majority of stakeholders. If this interpretation holds, then most activities under the agreement (if not all, considering opposition by some Parties to any license to have the UNFCCC play any role in carbon markets) can be considered as NMAs and the role of the FVA becomes overwhelming. This paper is premised on the less ambitious vision that NMA have the interpretation of discrete approaches that are non-market driven, but still relate to the international component of such approaches, where the UNFCCC and the 2015 agreement would have a legitimate role to play. In any case, the NMA requires further discussions, and above all, practical examples, within the more focused definition that this paper take. 5. Relationship between FVA, NMN and NMA This section can be seen as a conclusion or a summation. Understanding, and agreeing, to the relationship between FVA, NMM and NMA, is fundamental to making progress toward in the 2015 agreement. It is unlikely that there will be a successful conclusion to the negotiation of the 2015 agreement unless there is a way to account for the desire of many Parties to have ability to participate in international transfers, which would help to minimize the cost of compliance with any INDCs they put forward. Therefore, the difficulty of coming to a conclusion on this discussion hampers any future progress.

16 14 ANDREI MARCU The first premise of this last chapter is that in the interpretation of the role of these three components we need to keep simplicity as guiding principle, which would also ensure that negotiations stay manageable. The FVA needs to be seen as the backbone of the accounting information system, with the added role of defining what gets counted, and how much. If that is the vision for the FVA, then the FVA must also include protocols for recognizing systems that produce outcomes from Parties that do not pre-qualify, as detailed above. Which then bring us to the relationship between the FVA and NMM. The NMA, still to be better defined, and in need of more understanding and practical examples, in this vision, would have a somewhat similar relationship with the FVA as the NMM. It is the FVA vs. NMM/NMA relationship that will be defining. In one vision the NMM is a real mechanism, which produces reductions. The NMM name would, in some views, refer to mechanisms that are run by the COP NMM with a number of windows. CDM could be one window, with CDM + (a baseline-and-credit mechanism on broader sectors of the economy) another one and maybe others. In this scenario, it could be that systems from jurisdictions that do not pre-qualify may also then become a NMM window. The second vision, as detailed above, is that of the NMM as a framework for qualifying systems that are from non-pre-qualifying jurisdictions. Also, in this case, the door is open to say that when such a system qualifies based on NMM standards or protocols, it could also be labelled as a NMM. This makes the whole labelling system confusing, and the relationship, between the NMM and FVA increasingly difficult to organize. The fundamental question is whether the NMM is: A Framework, An UNFCCC-operated mechanism with many windows or A name for domestic mechanisms/systems once they qualify under (some) standards (from the FVA, under NMM) for their outcomes to be transferred internationally, and used for compliance with UNFCCC commitments/indcs? There may be a more simplistic way to channel this discussion, but one that may help clarify what is a matter of different approach. There could be the view that an FVA that will try and qualify systems (from non-pre-qualifying jurisdictions) may lead to difficult and politicized discussions. It may be politically difficult, if not impossible in some cases, to make harsh assessments. In this vision, the FVA is an intellectually interesting approach, but one that in practice may be difficult to implement. In this vision, the NMM maybe a better way forward, as it still allows for flexibility, adaptability to local conditions and the inclusion of local content, but with fewer moving parts or degrees of freedom. It may be that the NMM in the centre could ensure a better guarantee of environmental delivery and fewer political headaches. This difference between the visions of the NMM needs to be clarified. The one principle that needs to be kept in mind is simplicity.