Post-2012 Institutional Reform
Institutional Issues
- Depoliticisation, tranparency and performance of institutions - building on Article 9 paper
- Institutional requirements for international linking, including design compatibility and international mechanisms for linking between UN systems and domestic trading schemes
- MRV at international level
- Compliance and enforcement at international level
- Role of the World Bank and other multilateral institutions
1st draft CMIA non-paper on Sectoral proposals under the AWG-KP
Key messages
- Sectoral approaches to carbon finance, as defined in the draft conclusions by the Chair from
Accra
- However, these proposals need to be further developed with some urgency. One key issue that remain unresolved is how the private sector will be incentivised via these approaches.
- The complexity of these instruments spells the beginning of a technical process which may extend beyond the framework agreement arising from the
Copenhagen
1. Principles
CMIA believes that the following three criteria will determine the success of any new sectoral mechanisms:
- Environmental integrity;
- Policy certainty; and
- Creation of a clear role for the private sector.
In order to deliver environmental integrity, any post-2012 agreement must deliver the following:
- For developed countries, the IPCC notes that: "Under most equity interpretations, developed countries as a group would need to reduce their emissions significantly by 2020 (10-40% below 1990 levels) and to still lower levels by 2050 (40-95% below 1990 levels) for low to medium stabilization levels (450-550ppm CO2e)."
- For developing countries, the IPCC notes that: "Under most of the considered regime designs for low and medium stabilization levels, the emissions from developing countries need to deviate - as soon as possible - from what we believe today would be their baseline emissions, even if developed countries make substantial reductions. For the advanced developing countries, this occurs by 2020 (mostly Latin America, Middle East andEast Asia )."
This implies that the post-2012 agreement needs to enable differentiation between "advanced" developing countries and other developing countries, and to provide policy instruments that enable these countries to move business-as-usual baselines. The diversity of countries should be reflected by creating a set of policy instruments that accommodate different national circumstances, instead of looking for only one instrument that can be applied to all (as this is the case with CDM). However, it also implies that significant demand will be required from developed countries in order for the carbon market to be effective.
In order to provide clarity regarding the role of the private sector these proposals will need to set out how credits will be allocated to the private sector i.e. the process for issuing any carbon credits and how they will be delivered to investors in carbon abatement.
In order to deliver policy certainty, it is essential that governments provide a robust enabling environment that limits policy risk in the following ways:
- Credibility. Governments must set out a clear vision and framework for their policies. Policy incoherence must be avoided, e.g. energy policies must be consistent with climate policies. Delivery on commitments is essential or else credibility is discounted.
- Predictability. Governments will need to maintain a level of flexibility in decision making, e.g. for the purposes of international negotiations or to deal with shocks. However, if interventions can be made on the basis of pre-agreed technical criteria, rather than purely political intervention, then business will understand the rules of the game. Investors will expect policies to evolve over time but setting out in advance the timing and scope of reviews will help improve predictability.
- Long-term Visibility. Infrastructure investments typically have long capital cycles, i.e. long planning lead times, followed by long life spans. However, policy should still provide signals in time for the reorientation of major investment cycles (e.g. 5 years before construction begins on a new fleet of power stations) and over relevant time periods so that investors can achieve a commercial return from investing cleanly (e.g. typically 15 years for a power station). Near term policies must provide certainty, while longer term efforts can be more flexible. Investors typically respond best if policy certainty can be provided for 7 to 15 years.
- Simplicity. High transaction costs should be avoided. Moreover, regulation will be inefficient if business does not understand what is expected and this will result in underachievement or more costly achievement and can have unintended consequences.
- Transparency. The public availability of information is essential to market functioning and facilitates enforcement and public trust crucial for a sustainable market.
Clarity regarding the eligibility of new credits (i.e. what types of credits will be admitted to emissions trading schemes) and post-2012 demand will also be key, with the latter in particular being linked to environmental integrity.
2. Mapping proposals against our principles
Our view [A1] regarding the
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Option number
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E
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F
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G
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H
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Description |
Sectoral CDM |
Sectoral no-lose targets
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Credits for NAMAs
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Standardised baselines
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Environmental integrity
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?
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Yes
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Yes
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?
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|
Policy certainty
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?
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?
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?
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Yes
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Private sector role
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Yes
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?
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?
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Yes
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Explanatory comments
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Baselines need to be ambitious but the private sector role is clear. New EB modalities would be needed, creating some uncertainty.
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Supportive of new policies but still not clear whether private sector would be directly incentivised through carbon. Host government would need to minimise policy risk if this looks like JI.
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Supportive of new policies but private sector would only be incentivised through domestic policies, not carbon. Host government would need to minimise policy risk.
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Baselines need to be ambitious but the private sector role is clear and standardised sectoral baselines will reduce transaction costs.
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3. Recommendations
The role of the private sector in the first Commitment Period has been predominantly through investment in and implementation of project based activities.
Project-based activities will continue to provide a valuable mechanism through which the private sector can innovate to achieve previously unconsidered sources of emissions reductions.
The Post 2012 international regulatory architecture must also expand and strengthen the mobilization of the private sector through providing additional ways of harnessing private capital and enterprise.
A. Emissions Savings Activities
Maintaining integrity while simplifying rules and procedures
Taking a sectoral approach to common emissions reduction project types and activities offers an opportunity to ensure environmental integrity by establishing an objective baseline below which all emissions reductions are deemed to be real and additional. Such sectoral baselines also offer the opportunity to differentiate between the status and responsibilities of different countries with respect to their greenhouse gas emissions.
Moreover, more emissions savings activities would be encouraged were the system to provide and allow for the use of (conservative) default values in place of more costly systems for monitoring the performance of emissions saving activities. The default values would ensure the integrity of credits generated by each activity, while private operators could also choose to implement more costly monitoring systems on a cost-benefit basis.
Policy Certainty
The subjective (case-by-case) approach adopted to date by the project-based mechanisms provides limited certainty to investors as to the extent to which emissions-saving investments will benefit from carbon credit sales (if any). This uncertainty is exacerbated in a system where methodologies undergo revisions and where the market has been instructed that precedents cannot be relied on. Hence sectoral approaches could provide added certainty which will enable longer-term and larger-scale investment planning for emissions savings activities.
B. Other roles of Private Sector
The private sector could also play a fuller role in technology transfer, deploying central financial resources for climate change objectives (for example by preparing and submitting investment opportunities to a central financial resource on a competitive basis) and through the provision of a full range of services related to emissions assessment and the planning and implementation of emissions reduction activities.
C. Points on Specific Policy Positions
C. Points on Specific Policy Positions
Introducing multiplication factors to increase or decrease CERs issued for specific project activity types is not considered to be a good idea. This would undermine the incentive provided by the market for delivering real, least-cost emissions savings and may jeopardise the ability of international emissions trading systems to become linked-up, thereby limiting liquidity and capital deployment in the markets overall.
Technology Transfer is a helpful instrument for addressing long term technology "lock-in" and could be prioritised for those countries willing to take on increased levels of responsibility.
3. Next steps
The process for establishing sectoral baselines will need to be identified. The process could be one of the following, or indeed a hybrid:
- Country driven. Parties would agree to specific criteria for setting the baseline. Individual governments would then establish the baseline for their covered sectors and submit them to a supervisory body, such as the CDM Executive Board, to confirm the correct application of the criteria agreed by the COP.
- Private sector driven. Another approach would be for the private sector to submit baselines, as is currently the case for methodologies under the CDM. Again, this would have to be in accordance with criteria agreed by the COP and rolled down to the EB for implementation through guidelines.
- Technical standards. A different way to establish baselines would be for independent technical institutions develop baselines, subject to some international and/or national guidance or approval.
Other issues that will need to be resolved include:
- How to account for existing CDM projects and avoid double counting
- Sector boundaries and leakage
- Others?
Our expectation is that Parties will only be able to agree to indicative ranges of numbers for sectoral efforts by developing countries in Copenhagen and that much of the technical work will follow as part of a multilateral public-private sector process aimed at setting nationally appropriate but internationally comparable sectoral benchmarks based on robust domestic and international MRV procedures. Robust MRV is not yet in place.
[A1]Suggest to beef up this chapter. The explanatory comments are in fact the most interesting part. Should we add a subchapter on private sector role and assessing it in more detail for all four options, basically saying if you do this, than do it that way?