The document discusses approaches to developing bilateral agreements for piloting sectoral carbon market mechanisms. It focuses on the power generation and building sectors in Chile and South Africa as potential pilot cases. Benchmark concepts are proposed for setting crediting thresholds in each sector based on existing mechanisms like the CDM but with modifications to increase environmental integrity and incentivize further mitigation actions. Bilateral agreements could help test sectoral market mechanisms during the current transition period for international carbon markets.

1. Approaches to lift sectoral
mitigation potential with markets
in transition
DEHSt Side Event
2nd of December 2014, Lima, Peru
Carsten Warnecke Hanna Fekete
c.warnecke@newclimate.org h.Fekete@newclimate.org

2. About NewClimate Institute
Non-profit research institute founded Nov. 2014 by 7
former Ecofys colleagues
Offices in Berlin and Cologne (Germany)
Areas of expertise
Climate negotiations
Tracking climate action
Climate and development
Climate financing
Carbon market mechanisms
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3. Background
Insights from DEHSt research project
Bilateral Agreements as Basis Towards Piloting Sectoral
Market Mechanisms
Duration: Sept 2012 – Aug 2015
Activity gap in 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
Theoretically, the EU ETS with article 11a (5),(6)
considers bilateral agreements
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4. 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 for piloting
Develop initial sector approaches including proposals for
benchmark concepts
Elaborate recommendations for the design of such bilateral
agreements
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5. Country Selection methodology
First part
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6. Country selection approach
Upper Middle Income Countries
1. Global importance
2. Regional importance
3. Activity level
4. Ambition
level
Selected countries for
individual assessment
rating exclusion
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
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7. Criteria for ranking
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
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8. Country selection
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9. Sector selection
Two structurally different sectors are selected in the
target countries:
Power generation sector Building sector
Data availability Good, no confidentiality issue, CDM
grid emission factor calculation
experiences
Difficult due to heterogeneity of
building and owner structure
Average emission
reduction per CDM project
activity
Small to very large Small, up-scaling desired but difficult
Successes in the CDM Well represented; high share of
projects, several methodologies and
tool to calculate grid emission factor,
first SBL
Limited, low penetration rate, very low
issuance success, mostly single
measures in buildings
Barriers in the CDM Large differences in regional
baselines and respective incentive
level
Monitoring, boundary setting, high
transaction costs, high “signal to noise
ratio”
Benchmarks in the EU ETS
(2013-2020)
None, no free allocation None, not covered by the EU ETS
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10. Concepts for credited reference levels
based on benchmarks
Second part
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11. Why benchmarks?
Benchmarks as (simplified) means to politically agree on
crediting thresholds for piloting approaches
GHG intensity
time
Historical
Reduction units issued
(bilaterally supported reductions)
Currently implemented
national policies & measures
Current external support
and CDM projects
(2) Reference (BAU)
Own contribution
(3) Benchmark stringency
(crediting baseline)
(4) Emission level achieved
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12. 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 thresholds always
below BAU)
Preserve incentives for mitigation activities
Provide a scientifically justified basis for political decisions
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13. Chile‘s power generation sector
Almost 1/3 of the GHG emissions stem
from electricity and heat generation
Electricity generation dominated by
gas and hydro power plants
Future capacity additions likely based on
coal
Vast potential for renewable energy
Chile requires large electricity companies
to have a share of at least 5% of
renewable energy; increasing by 0.5ppts
annually
Chile is developing plans for a domestic
ETS under the PMR
Chile’s renewable energy NAMA is one of
the first NAMAs to receive international
finance
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14. Benchmark concept
CDM is a valuable framework with application potential
CDM has addressed most of the identified sector
challenges and describes solutions being a consensus
for many stakeholders
The benchmark proposal follows the CDM to the extent
possible but require a few modifications to 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
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15. Stringency level setting
The use of the current CDM framework:
Application of SBL approach and CDM grid EF tool
Net emission reduction ensured by discount on
standardised grid EF
Application of a
default value:
Agreed benchmark always
below CDM grid EF
Reference e.g.
EF of NG fired power plant,
e.g. between
0.350 – 0.450 tCO2e/MWh Data source: IGES 2014
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16. Stringency level setting
Hybrid approach:
Combination of approaches
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
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17. 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
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18. 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
Low income housing segment provides free housing to
poorest parts of the population
Low income houses 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
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19. Benchmark concept
Suggestion: Overcome existing barriers by using
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
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20. Stringency level setting
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 to be avoided
Credited approach requires significantly higher prices
Uncertainty whether reconnection to future carbon markets is
realistic
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21. Conclusions
Bilateral agreements provide temporal solution to test design
and implementation of sectoral market-based approaches
Transition period of 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 closely to existing rules and knowledge ensures that
concepts are understood while simplifications regain
confidence in the instruments
Maintaining intl. market compatibility counteracts
fragmentation
Reconnection to intl. carbon markets is however an option not
a must; Enabling GHG mitigation activities is key
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22. Outlook
Deeper investigation of aspects such as
Integration into the national and international
policy landscape
Requirements and next steps towards
implementation
Alternative pathways for immediate
implementation action in a situation with no carbon
market recovery
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23. Thank you for your attention!
Carsten Warnecke
c.warnecke@newclimate.org
Hanna Fekete
h.fekete@newclimate.org
www.newclimate.org
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