This document discusses the future of carbon markets following the Cancun climate talks. It suggests that while there was little appetite for a top-down framework, countries may establish top-down emission reduction targets met through bottom-up mechanisms like emissions trading schemes and offset programs. The Clean Development Mechanism is unlikely to deliver large emission cuts and new market mechanisms aim to scale up reductions beyond pure offsetting. A bottom-up evolution of linked domestic carbon markets could emerge without a binding international agreement if countries commit to transparency and mitigation efforts. Key issues for this approach include accounting, reporting, and criteria for traded units.

1. © OECD/IEA 2010
Cancún and beyond, where we are
now and what to expect in Mexico
Implications for Carbon Markets
Christina Hood, Climate Change Unit, International Energy Agency
FORES, Stockholm 20 October 2010

2. © OECD/IEA - 2010
Building a Climate Agreement

3. © OECD/IEA - 2010
 CREDITING/OFFSET mechanisms
 CDM – baselines, programmatic,
LDCs, nuclear, CCS
 REDD
 Sectoral crediting
 TRADING mechanisms
 Domestic and International ETS
 Little appetite for top-down framework
 Possibility of top-down targets,
criteria, delivered by bottom-up
mechanisms
Cancún – Carbon Markets

4. © OECD/IEA - 2010
Crediting/Offset Mechanisms
Future of CDM
 Continuation without Kyoto Protocol ?
 Form (CCS, nuclear, standardised baselines)
 Buyers ? (EU ETS, Japan, USA) ?
New Market Mechanisms
 Need acknowledged
 Goal: scaling-up flow of credits, moving beyond
pure offsetting
 Progress on REDD, little on sectoral
…but needs trading schemes to create demand

5. © OECD/IEA - 2010
Overview of emission reductionsOverview of emission reductions
achieved by Clean Developmentachieved by Clean Development
Mechanism projectsMechanism projects
Source: UNEP Risø, CDM pipeline, consulted in January 2010
CDM pipeline information: Less
than 1.5 GtCO2 listed in
electricity until 2012 – Likely
delivery of reductions:
400 Mt - 600 MtCO2
Projected electricity emissions
over that decade in non-Annex I:
60 GtCO2
Growth trend in CO2 from
electricity in non-Annex I since
2000: +8% per year
CDM structurally unlikely to
deliver needed mitigation
Total emission reductions expected over 2000-
12, est. January 2010: 1.1 GtCO2

6. © OECD/IEA - 2010
1. From projects to sector
2. Beyond pure offsetting
Contribution to global
emission reductions
Credits/allowances
for sale
Business as usual
Emission baseline
Actual performance
tCO2ortCO2/unitofoutput
Time
CDM: cost-effectiveness, not global emission reduction
beyond Kyoto countries’ goals: pure offsetting
Scaled-up market mechanisms also aim for enhanced global mitigation
Require environmentally-ambitious baselines

7. © OECD/IEA - 2010
Bottom-up evolution of markets ?
Todd Stern, US Climate Envoy:
“we don’t agree that an internationally legally binding
agreement is a precondition for markets"
“In light of the trials and tribulations of negotiating a
strong, effective legal treaty, it is worth recognizing
that if an international accord included countries making
political commitments to each other to implement
serious, mandatory national laws and regulations; to be
internationally transparent in what they do; and to
provide appropriate mitigation, technology, adaptation
and forestry assistance to poor countries, you’d be
much of the way home”
Point Carbon News 8 October 2010

8. © OECD/IEA - 2010
Current and Proposed Emissions Trading Systems
Operating Likely (?) Considering

9. © OECD/IEA - 2010
Issues for a bottom-up approach
 Agreed accounting of pledges (incl. overlap)
 Measurement, Reporting and Verification
 Offset criteria
 Bi/Multilateral agreement on tradability of units
… potentially allows for mechanisms to be
developed ahead of political agreement on targets

10. © OECD/IEA - 2010
Carbon Prices ?
 WEO 2009 : Scenario OECD linked trading 2013
USD 50/t in 2020 and USD 110/t in 2030.
 OECD analysis Copenhagen pledges
“high and linked” scenario USD 25/t in 2020
“low and fragmented” USD 13-60/t in 2020
…but very sensitive to offset limit