This document summarizes a dialogue between the Swiss private sector and Federal Administration on carbon markets. It discusses incentivizing mitigation action pre-2020 through existing and new market mechanisms under the UNFCCC. Robust accounting rules for tracking and reporting emission credits are essential to ensure environmental integrity and avoid double counting of credits towards countries' mitigation commitments. Comparable accounting approaches across different carbon markets can facilitate fungibility of emission credits.

1. Bern
16th
June
2015
–
2nd
dialogue
between
the
Swiss
private
sector
and
the
Swiss
Federal
Administra@on
on
carbon
markets
Juerg
Fuessler
(INFRAS)
and
Axel
Michaelowa
(Perspec@ves)
Market
Mechanisms:
Incen@ves
and
Integra@on
in
the
Post-­‐2020
World
Source:
World
Bank,
Networked
Carbon
Market
(NCM)
Ini@a@ve

2. INFRAS
Agenda
|
Market
Mechanisms
|
16
June
2015
|
J.
Füssler
und
A.
Michaelowa
1. Incen@vizing
mi@ga@on
ac@on
pre
2020
2. Accoun@ng
–
Important
essen@als
for
deal
in
Paris
3. Transi@ons
of
market
mechanisms
–
poten@al
storylines
4. How
to
use
elements
from
market
mechanisms
to
improve
climate
finance?
5. Preliminary
findings
for
Switzerland
2

3.
Market
mechanisms
1.
Incen@vizing
mi@ga@on
ac@on
pre
2020

4. INFRAS
Incen.vizing
mi.ga.on
ac.on
pre
2020:
Current
categories
of
market
mechanisms
|
Market
Mechanisms
|
16
June
2015
|
J.
Füssler
und
A.
Michaelowa
4
Kyoto
mechanisms,
mostly
project-­‐based
(CDM
and
JI)
§ Successful
but
paralyzed
by
price
crash
§ Efficiency
of
CDM
hampered
by
addi@onality
issues
Other
(domes@c
and
interna@onal)
offsebng
programs
(VCS,
CAR,
JCM,
CH-­‐Kompensa@onsprojekte,
…)
Boeom-­‐up
upscaling
of
mechanisms
(REDD+,
NAMA
credi@ng)
§ Niche
ac@vi@es
at
the
moment,
but
basis
for
poten@al
upscaling

5. INFRAS
Incen.vizing
mi.ga.on
ac.on
pre
2020:
New
mechanisms
under
the
UNFCCC
|
Market
Mechanisms
|
16
June
2015
|
J.
Füssler
und
A.
Michaelowa
5
§ NMM
and
FVA:
§ Principles
agreed
but
“hostage”
to
the
nego@a@on
process
since
2012
§ Willingness
to
build
up
new
market
mechanism
seems
weak
§ REDD+
Key
ques@ons:
• How
do
climate
finance
and
market
mechanisms
interact?
• What
role
should
the
UNFCCC
play?
• How
can
environmental
integrity
and
transparency
be
maintained
in
a
world
of
fragmented
mechanisms?

6. INFRAS
Scenarios
for
assessment
of
market
mechanisms
|
Market
Mechanisms
|
16
June
2015
|
J.
Füssler
und
A.
Michaelowa
6
High
demand
–
strong
governance
§ INDCs
of
industrialized
countries
and
emerging
economies
are
ambi@ous
and
envisage
acquisi@on
of
interna@onal
credits
§ Buyers
want
to
ensure
high
level
of
integrity
Low
demand
–
weak
governance
§ Limited
share
of
INDCs
envisages
buying
of
credits
§ Scramble
to
get
transac@ons
may
lead
to
low
and/or
fragmented
standards
“Clubs”
with
common
accoun@ng
rules
and/or
“filters”
for
types
of
emission
credits
§ Som
linking
to
allow
for
a
certain
fungibility
of
units

7.
Market
mechanisms
2.
Accoun@ng
–
Essen@als
for
deal
in
Paris

8. INFRAS
Accoun.ng
–
Bookkeeping
of
mi.ga.on
outcomes
|
Market
Mechanisms
|
16
June
2015
|
J.
Füssler
und
A.
Michaelowa
8
Robust
rules
for
accoun@ng
of
credi@ng
units
are
key
to
ensure
the
integrity
of
any
market
based
mechanism.
§ Environmental
integrity,
consistency
and
comparability
of
the
units
§ Avoid
double
coun@ng/claiming:
(i)
accoun@ng
of
units,
(ii)
design
of
mechanisms
that
issue
units,
and
(iii)
consistent
tracking
and
repor@ng
on
units.
§ Time
dimension
of
units:
validity
of
vintages
(carry
over),
permanence
issue
Minimum:
robust
accoun@ng
rules
for
interna@onal
transfer
of
units,
even
if
there
is
no
agreement
on
an
interna@onally
recognized
compliance
unit
in
the
sense
of
an
assigned
amount
-­‐>
need
for
«clubs»

9. INFRAS
0
2
4
6
8
10
12
Natl. BAU Domestic mitigation Crediting INDC (Net)
INDC
not met
0
2
4
6
8
10
12
Natl. BAU Domestic mitigation Crediting INDC (Net)
INDC
met
Accoun.ng
–
Double
coun.ng
with
MM
under
INDCs
|
Market
Mechanisms
|
16
June
2015
|
J.
Füssler
und
A.
Michaelowa
Intl.
credi,ng
units
shall
not
count
towards
domes,c
INDC
compliance.
0
2
4
6
8
10
12
Natl. BAU Domestic mitigation Crediting INDC (Net)
Additional
mitigation
INDC
met
© INFRAS 2015
a)
INDC
without
interna@onal
credi@ng
b)
INDC
with
credi@ng
–
double
coun@ng
c)
INDC
with
credi@ng
–
correct
accoun@ng
Source:
INFRAS
2014

10. INFRAS
Accoun.ng
–
Facilita.ng
fungibility
of
units
|
Market
Mechanisms
|
16
June
2015
|
J.
Füssler
und
A.
Michaelowa
10
Comparability
of
accoun@ng
approaches
supports
markets
§ Fungibility:
describes
the
ability
to
exchange
carbon
credits
from
different
schemes
and
make
them
eligible
for
compliance
in
another
scheme
§ (“Som”-­‐)
linking
of
carbon
markets
through
§ Comparability
of
accoun@ng,
consistency
in
ambi@on
level
§ Filters
or
ra@ng
of
units
and
discoun@ng
§ Interna@onal
Carbon
Asset
Reserve
(ICAR)
–
Shared
risk
mi@ga@on
systems
§ “Clubs”
–
coali@ons
of
the
willing

11. INFRAS
Accoun.ng
–
carry
over
of
units
|
Market
Mechanisms
|
16
June
2015
|
J.
Füssler
und
A.
Michaelowa
11
Unlimited
carry
over
of
emissions
reduc.ons
units
§ generates
trust
in
the
market
and
reduces
price
fluctua@ons
§ limits
the
possibility
to
eliminate
supply
overhangs
generated
by
lenient
rules
in
the
past
§ is
not
aerac@ve
in
the
current
situa@on
Limi.ng
carry
over
§ Allows
a
“fresh
start”
(akin
to
a
currency
reform)
§ Could
be
seen
as
expropria@on
by
those
stakeholders
having
invested
heavily
in
the
past
into
credit
genera@on
Compromise
solu.ons
§ Freezing
certain
units
un@l
the
supply/demand
balance
has
shimed
(price
triggers)
§ Linking
carry
over
to
the
environmental
integrity
of
the
credits
§ Discoun@ng
credits
§ Possibility
of
“re-­‐registra@on”
of
exis@ng
projects
under
new
rules

12.
Market
mechanisms
3.
Transi@ons
of
market
mechanisms
–
poten@al
storylines

13. INFRAS
Transi.ons
–
towards
project
or
aggregated
level
instruments?
(1)
|
Market
Mechanisms
|
16
June
2015
|
J.
Füssler
und
A.
Michaelowa
13
Project/installa.on
level
instrument
(e.g.
«old
CDM»)
Characteris,cs:
§ Exis@ng
methodologies,
ins@tu@ons,
know-­‐how
and
MRV
structures
§ Rather
limited
requirements
for
host
country
governments
§ Builds
on
private
sector
ini@a@ve
–
it
works
§ Addi@onality
test
on
project
level
is
problema@c
with
some
project
types
(uncertainty,
low
CER
impact)
§ Higher
transac@on
cost
on
project
level
§ Limited
scope
for
scaling
up

14. INFRAS
Transi.ons
–
towards
project
or
aggregated
level
instruments?
(2)
|
Market
Mechanisms
|
16
June
2015
|
J.
Füssler
und
A.
Michaelowa
14
Aggregated/sector
level
instruments
including
- Policy
instrument
based
credi@ng,
- Sector
target
credi@ng
and
trading
schemes,
- Upscaling
of
CDM,
POA
and
standardized
baselines
Characteris,cs:
§ Lower
Requires
significant
capaci@es
for
data,
methodologies,
MRV,
GHG
inventory,
legal
frameworkt,
etc.
on
aggregated
level
§ Stronger
role
of
governments
–
challenging
in
many
countries
§ Key
requirement:
passing
incen@ves
to
(private
sector)
actors
§ Addi@onality
issues
moves
to
level
of
credi@ng
baseline
sebng
–
remains
challenging
(level
playing
field
for
host
countries
with
different
(own)
ambi@on
levels)

15. INFRAS
Storylines
for
transi.on
of
market
mechanisms
|
Market
Mechanisms
|
16
June
2015
|
J.
Füssler
und
A.
Michaelowa
15
How
could
market
mechanisms
develop
over
the
next
years?
§ Storyline
1:
New
market
based
mechanisms
Governing
body
defines
common
accoun@ng
standards,
modali@es
and
procedures,
overseeing
ins@tu@ons
and
valida@on/verifica@on
bodies
(similar
to
Kyoto
mechanisms).
§ Storyline
2:
Scaling
up
from
CDM
or
recognizing
other
exis.ng
standards
The
CDM
provides
a
complete,
func@oning
and
opera@onal
interna@onally
recognized
market
mechanism.
Plus
there
are
more
standards
to
build
on.
§ Pragma@c
development
of
CDM
also
into
aggregated
level
mechanisms
§ Solve
accoun@ng
issue
with
pledges/INDCs
–
level
playing
field
issue
§ Storyline
3:
Anything
goes
–
seek
transparency
Minimum
solu@on
in
absence
of
agreed
standards
under
the
UNFCCC
§ Par@es
agree
agree
only
on
transparency
and
disclosure
requirements
e.g.
through
publishing
of
all
relevant
documents
related
to
interna@onally
traded
units

16. INFRAS
Storylines
–
Clubs
|
Market
Mechanisms
|
16
June
2015
|
J.
Füssler
und
A.
Michaelowa
16
In
a
weak
demand
–
weak
regula,on
scenario
there
is
a
need
for
«clubs»
of
likeminded
na@ons/jurisdic@ons
to
promote
interna@onal
mi@ga@on
§ Coali@ons
of
the
willing,
building
on
exis@ng
(domes@c)
credi@ng/
trading
systems
§ Clubs
allow
to
som-­‐link
mul@tude
of
fragmented
markets
§ Liquidity
of
markets
§ Par@cipants’
markets
may
be
similar,
but
not
necessarily
§ Process
of
nego@a@ng
agreements
in
club
is
key
§ Risk
mi@ga@on
instruments

17. INFRAS
Storylines
–
Clubs
and
ICAR
|
Market
Mechanisms
|
16
June
2015
|
J.
Füssler
und
A.
Michaelowa
17
Example:
Landscape
of
globally
networked
carbon
markets
Carbon
Market
A
Carbon
Market
B
Linking
Price
floor/ceiling
Price
fl./ceiling
Carbon
Market
C
Carbon
Market
D
Carbon
Market
E
Carbon
Market
F
Price
floor/ceiling
Price
floor/ceiling
Insurance
Insurance
International
Carbon
Reserve
Clearing
house
-­‐ fungibility
Price
fl./ceiling
©INFRAS
2014
Source:
INFRAS
2015
Design
op@ons
for
an
interna@onal
Carbon
Asset
Reserve.
Networked
Carbon
Markets.
A
Knowledge
Series.
The
World
Bank
Group.

18. INFRAS
Storylines
–
CDM
as
important
stepping
stone
|
Market
Mechanisms
|
16
June
2015
|
J.
Füssler
und
A.
Michaelowa
18
In
a
situa@on
of
uncertainty,
CDM
seems
to
be
the
only
readily
working
tool
in
the
toolbox
(storyline
2)
§ Star@ng
point:
§ CDM
market
down,
acceptance,
addi@onality,
issue
of
carry-­‐over
§ Exis@ng
infrastructure,
ins@tu@ons,
skills
§ Op@ons
for
CDM
going
forward
(M&P
review,
eligibility
in
countries):
§ „open
gate“
with
exis@ng
or
simplified
addi@onality
tes@ng
CDM
should
work
for
all
project
types/levels
§ „open
gate
plus“
with
very
stringent
addi@onality
tes@ng
§ „filter
approach”
to
CDM
(criteria:
addi@onality)
CDM
is
not
for
all
project
types
–
only
where
it
is
game
changer.
For
some
project
types,
other
instruments
than
offsebng
may
work
beeer
(supported
domes@c
ac@on,
linking
ETS,
…)

19.
Market
mechanisms
4.
How
to
use
elements
from
market
mechanisms
to
improve
climate
finance?
(for
part
2
of
workshop)

20. INFRAS
Market
mechanism
elements
for
climate
finance
I
|
Market
Mechanisms
|
16
June
2015
|
J.
Füssler
und
A.
Michaelowa
20
Element
from
MM
Role
in
climate
finance
Modifica@ons
required
CDM
MRV
methodologies
for
project-­‐level
and
programma@c
level
ac@on
Reliable
and
comparable
quan@fica@on
of
finance
results
-­‐ Further
standardiza@on
-­‐ Simplifica@on
possible
-­‐ Measure
progress,
not
only
outcomes
(tCO2)
-­‐ REBRANDING
Independent
third
party
verifica@on
Transparent
verifica@on
of
mi@ga@on
progress,
outcomes
-­‐ Capacity
building
-­‐ Simplifica@on
Regulatory,
ins@tu@onal
and
governance
sebng
Public
documenta@on
of
criteria,
indicators,
and
evalua@on
results;
Transparency,
checks
and
balances
in
rules
-­‐ Adapt
for
climate
finance
ins@tu@onal
process
(GCF,
…)
-­‐ approach
civil
society
for
consulta@ons

21. INFRAS
Market
mechanism
elements
for
climate
finance
II
|
Market
Mechanisms
|
16
June
2015
|
J.
Füssler
und
A.
Michaelowa
21
Element
from
MM
Role
in
climate
finance
Modifica@ons
required
Country-­‐specific
sustainable
development
criteria
and
indicators
Country
ownership
of
evalua@on
of
local
co-­‐
benefits
Ensuring
countries
interest
in
aerac@ng
foreign
funding
does
not
lead
to
minimum
standards
Key
role
of
the
private
sector
Need
to
create
incen@ves
for
private
sector
similar
to
the
CDM
Make
sure
CF
can
incen@vize
governments,
but
also
NGOs
and
private
sector

22.
Market
mechanisms
5.
Preliminary
findings

23. INFRAS
Findings
market
mechanisms
|
Market
Mechanisms
|
16
June
2015
|
J.
Füssler
und
A.
Michaelowa
23
§ Uncertainty
regarding
demand
and
governance
§ Accoun@ng:
transparency,
environmental
integrity
and
robust
accoun@ng
as
necessary
condi@on
for
market
mechanisms
§ In
absence
of
stringent
interna@onal
rules
–
seek
likeminded
par@es
to
form
“club”
§ Storylines
for
transi@on:
(i)
New
market
based
mechanisms,
(ii)
scaling
up
from
CDM,
(iii)
anything
goes
§ Stepping
stone
CDM:
“open
gate”,
“open
gate
plus”
stringent
addi@onality,
filter
approach
–
best
solu@on
in
a
low
demand
scenario?
§ Make
aggregated
level
mechanisms
work
for
private
sector
§ Ambi@ous
mi@ga@on
contribu@ons
and
domes@c
ac@on
will
drive
carbon
markets

24. Thank
you.
Authors
team:
Jürg
Füssler,
Mar.n
Herren
(INFRAS)
Axel
Michaelowa,
Tyeler
Matsuo,
Maahias
Honegger
(Perspec.ves)
Study
commissioned
by
FOEN.