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Bilateral Agreements as Basis Towards Piloting Sectoral Market Mechanisms


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There is an activity gap between existing and future market-based mechanisms that challenges maintaining the expertise of stakeholders while testing new approaches in practice. This presentation looks at possible bilateral agreements for sector crediting. It draws on interim results of the research project “The fragmentation of the carbon market and options for counteraction” by the German Federal Environment Agency and the German Emissions Trading Authority. Carsten Warnecke, Senior Consultant International Climate Policies at Ecofys, presented it at the Carbon Expo 2014 in Cologne, Germany.

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Bilateral Agreements as Basis Towards Piloting Sectoral Market Mechanisms

  1. 1. Bilateral Agreements as Basis Towards Piloting Sectoral Market Mechanisms DEHSt Side Event at Carbon Expo 2014 Cologne, 29 May 2014 Carsten Warnecke 29.05.2014
  2. 2. © ECOFYS | | Background Interim results of research project: “The fragmentation of the carbon market and options for counteraction” > Bilateral agreements for sector crediting > Duration: Sept 2012 – Aug 2015 > Activity gap between existing and future market-based mechanisms challenges maintaining the expertise of stakeholders and testing of new approaches in practice > Demand for „reduction units“ could be created based on bilateral agreements between Parties as long as markets are not available > EU ETS in article 11a (5),(6) considers bilateral agreements as an option in case no new international agreements on climate change has been agreed 29.05.2014 Carsten Warnecke
  3. 3. © ECOFYS | | Objectives > Theoretic research to develop approaches based on a bilateral crediting system that allows pilot activities > Pilot activities shall have a – sectoral coverage based on benchmarks – high level of environmental integrity – generate net emission reductions > Open to further ETS and regional markets to join the initiative > Research shall – Identify suitable countries and sectors within these countries for piloting – Develop initial sector approaches including proposals for benchmark concepts – Elaborate preliminary recommendations for the design of such bilateral agreements – Recommend actions on the level of policy makers 10.11.2013 Carsten Warnecke3
  4. 4. © ECOFYS | | COUNTRY SELECTION METHODOLOGY First part 29.05.2014 Carsten Warnecke
  5. 5. © ECOFYS | | Country selection approach Carsten Warnecke10.11.2013 2. Below 30 € / tCO2 1. Global importance 2. Regional importance Upper Middle Income Countries 3. Activity level 4. Ambition level Selected countries for individual assessment ratingexclusion Shortlisted countries -> Absolute GHG emission level -> Good integration in the region, role model potential -> Development of detailed and objective ranking methodology -> Focus on carbon market and greenhouse gas mitigation related activities and ambition 5
  6. 6. © ECOFYS | | Criteria for ranking 29.05.2014 Carsten Warnecke Indicators for criterion “level of activity”:  Participation in the Clean Development Mechanisms  Activities under the Partnership for Market Readiness (PMR) of the World Bank  Activities around Nationally Appropriate Mitigation Actions (NAMAs)  Activities around Monitoring, Reporting and Verification (MRV) of greenhouse gases; further described with the following sub-indicators: o Submission of National Communications to the UNFCCC; existence of greenhouse gas inventories o Activities under the Global Environment Facility (GEF) and the MRV partnership Indicators for criterion “level of ambition”:  Emission reduction pledges on an international level  Further targets: National energy efficiency or renewable targets  Engagement in Low Emission Development Strategies (LEDS)  Participation in regional or global networks
  7. 7. © ECOFYS | | Country selection Upper middle income countries and territories (OECD 2012) Albania China Iran Mexico Serbia Algeria Colombia Jamaica Montenegro Seychelles Antigua and Barbuda Cook Islands Jordan Namibia South Africa Argentina Costa Rica Kazakhstan Nauru St. Kitts-Nevis Azerbaijan Cuba Lebanon Niue Suriname Belarus Dominica Libya Palau Thailand Bosnia and Herzegovina Dominican Republic Macedonia Panama Tunisia Botswana Ecuador Malaysia Peru Turkey Brazil Gabon Maldives Saint Lucia Uruguay Chile Grenada Mauritius Saint Vincent and the Grenadines Venezuela 29.05.2014 Carsten Warnecke Short list for ranking Algeria Colombia Peru Argentina Kazakhstan South Africa Brazil Libya Thailand Chile Malaysia Turkey China Mexico Venezuela Ranked countries Region 1 Chile Latin America 2 South Africa Africa 3 Mexico Latin America … … …
  8. 8. © ECOFYS | | Sector selection > two structurally different sectors are selected in the target countries: 29.05.2014 Carsten Warnecke Power generation sector (Chile) Building sector (South Africa) Data availability Good, no confidentiality issue, grid emission factor calculations Difficult Success in the CDM Well represented; several methodologies, high share of projects, first SBL Limited, low penetration rate, mostly single measures in buildings Barriers in the CDM Large differences in regional baseline and respective incentive level MRV, boundary setting, high transaction costs, high “signal to noise ratio” Size of average projects in terms of emission reductions Small to very large Small, up-scaling desired but difficult Benchmarks in the EU ETS None, no free allocation None, not covered by the EU ETS
  10. 10. © ECOFYS | | Why benchmarks? > Benchmarks as (simplified) means to politically agree on crediting thresholds for piloting approaches 29.05.2014 Carsten Warnecke
  11. 11. © ECOFYS | | Benchmark approach (1) Definition of the system boundary (2) Identification of the key performance indicator (3) Selection of peers for comparison (4) Data collection of peers for comparison (5) Measurement of own current performance (6) Definition of the benchmark level (stringency) > Objectives: – Apply existing approaches if possible (e.g. CDM) – Ensure consistency with established schemes (e.g. EU ETS) – High environmental integrity (ensure crediting threshold is always below BAU) – Preserve incentives for mitigation activities – Provide a scientifically justified basis for political decisions 29.05.2014 Carsten Warnecke
  12. 12. © ECOFYS | | Stakeholder interaction Country experts and further stakeholder have been involved to ensure appropriateness of considerations etc. Exposé development – Dissemination and presentation at expert workshop in Bonn (June 2013) – Further interviews and discussion / exchange with target and partner countries Valuable feedback from various public and private institutions received and taken into account 29.05.2014 Carsten Warnecke
  13. 13. © ECOFYS | | Chile‘s power generation sector Main facts: > Almost 1/3 of the GHG emissions stem from electricity and heat generation > Electricity generation is currently dominated by gas and hydro power plants > Future capacity additions will likely be based on coal (reducing import dependence, responding to demand increases) > Vast potential for RE (e.g. solar potential in the north, wind potential along the coast, etc.) > Chile requires electricity companies (>200MW capacity) to have a share of at least 5% of renewable energy; increasing by 0.5ppts annually until 2024 (10%) > Chile is developing plans for a domestic ETS under the PMR including the electricity sector > Chile’s renewable energy NAMA is one of the first NAMAs to receive international finance 29.05.2014 Carsten Warnecke
  14. 14. © ECOFYS | | Electricity in Chile – benchmark concept > CDM is a valuable framework which could be applied to a large extent > CDM has addressed most of the identified sector challenges with its respective methodological tools and describes solutions that constitute a consensus for many stakeholders > Our suggested proposals follow the CDM approach to the extent possible but also require a few important modifications that increase pragmatism, ambition and suitability for sector coverage, e.g. – Geographic scope of the benchmark – Existence of a grid connection – Exclusion of low-cost/must-run power units – Stringency levels beyond pure offsetting 29.05.2014 Carsten Warnecke
  15. 15. © ECOFYS | | Stringency level setting > The use of the current CDM framework: – Application of the SBL approach and the CDM tool to calculate the grid EF – Net emission reduction ensured by discount on standardised grid EF > Application of a default value: – Use of a politically set default value – Benchmark below the CDM grid emission factor – Reference e.g. EF of NG fired power plant, various EU ETS phase II NAPs set such benchmark levels between 0.350 – 0.450 tCO2e/MWh > Hybrid approach: – Combination of the above – RE by default get reduction units according to default BM value while fossil fuel based activities apply for BM based on the (adapted) CDM approach – Incentives also for new NG fired power plants and for efficiency increase in existing fossil fuel fired power plants 29.05.2014 Carsten Warnecke Source: IGES, Ecofys
  16. 16. © ECOFYS | | CDM in the building sector > CDM projects mostly refer to single measures in buildings > CDM application in its current form to entire buildings lags behind its enormous potential > Low “signal to noise” ratio, high complexity > Most available methodologies are either too specific or do not provide practicable solutions to sector challenges > CDM experiences show the need for – Pragmatic MRV approaches – Valuation of indirect and long term effects – Bundling of less homogeneous single activities to facilitate reaching a large coverage 29.05.2014 Carsten Warnecke
  17. 17. © ECOFYS | | South Africa‘s building sector > Large demand for low cost buildings to supply the growing population with adequate housing facilities > Government targets for new buildings > Between 1994 and 2011, the government built around 3 million homes, providing housing to 13 million people. By 2014, the government plans to improve the housing situation for 500,000 further households by upgrading informal settlements > Low income housing segment provides free housing to poorest parts of the population > such houses are usually constructed in a standard way, resulting in a large number of similar homes > Focus on sector sub-segment: „low income housing“ > Lessons learned with the use of the CDM and upscaling approaches exist (Kuyasa CDM -> PoA -> “flagship” project) 29.05.2014 Carsten Warnecke
  18. 18. © ECOFYS | | Benchmark concept > Suggestion: Overcoming existing barriers through using most pragmatic approaches, deviating from exact GHG quantification – GHG emissions per standard housing unit – Ex-ante modeling (default/unit) – Simplified ex-post MRV > The increase in uncertainty is levelled out by ambitious crediting thresholds or conservative BAU definitions > Transaction costs are reduced 29.05.2014 Carsten Warnecke
  19. 19. © ECOFYS | | Stringency level setting Option: > BAU: incomplete building code implementation > Reference level: assumption of full implementation of segment specific building codes > Mitigation aim: beyond building code > However, in this sector … – The required support exceeds offset prices – Potentially low own contribution expected – Disincentives for ambitious activities should be avoided > Credited approach requires significantly higher prices > Uncertainty whether reconnection to future carbon markets is realistic 29.05.2014 Carsten Warnecke
  20. 20. © ECOFYS | | Conclusions > Bilateral agreements can provide a temporal solution to test design and implementation of sectoral market-based approaches in periods where markets cannot provide the required incentives > In this way the transition period of the international carbon market can be used to – enter into methodical discussions (also towards NMMs) – prepare for suitable sector definitions and approaches and – raise awareness about countries’ capabilities, own contributions and potential sectoral crediting thresholds > Staying as close as possible to existing rules and knowledge ensures that concepts are understood while simplifications regain confidence in practical success of the instruments > Maintaining intl. market compatibility should counteract market fragmentation > Reconnection to intl. carbon markets is however an option not a must; Enabling GHG mitigation activities is key 29.05.2014 Carsten Warnecke
  21. 21. © ECOFYS | | Carsten Warnecke Thank you. Ecofys: Carsten Warnecke Contact: Report: /carbon-markets-in-transition/ 29.05.2014