This document summarizes key challenges and considerations for developing an effective international architecture for carbon markets under the Paris Agreement. It notes that unlike the Kyoto Protocol's assigned amounts for Annex I countries, the Paris Agreement relies on countries' individual pledges which can have different formats. This complexity requires balancing flexibility, diversity in accounting, and environmental integrity. Technical issues need to be addressed such as how countries with single-year pledges can use purchased emission reductions to meet targets. The OECD has done work on emissions accounting and market mechanism design that could inform discussions on practical options.

1. an effective
Toward
international architecture
for carbon markets
Richard Baron
OECD
First Strategic Dialogue of
the Carbon Market Platform
Tokyo, 17 June 2016
This presentation does not reflect the views of the OECD Secretariat or
of the OECD Member countries
richard.baron@oecd.org

2. 2
OECD activities on carbon markets
 Joint OECD-IEA Annex I Experts Group,
now Climate Change Experts Group
– Kyoto mechanisms, including
 Project-based CDM rules and baselines work
 Emissions trading rules (liability, monitoring)
– Post-Kyoto
 Sectoral approaches and crediting mechanisms
 Architecture: Options for accounting under UNFCCC,
Accounting for diverse mitigation options, incl. issues
of double-counting.

3. 3
Effective carbon market architecture?
Lessons from the Kyoto Protocol mechanisms
 KP ‘flexibility mechanisms’ seen as essential for
international co-ordination & cost-effectiveness
 Environmental integrity
– Eligibility: Greenhouse gas inventories and emissions
budgets for 2008-2012 (Annex I/B countries)
– Limit risk of ‘overselling’ (commitment period reserve)
– Liability on selling Party if in non-compliance
– Green investment schemes (to avoid overuse of ‘hot air’)
– Rigorous oversight of Clean Development Mechanism:
counter incentives to over-estimate reductions
(incentive for both buying and selling Parties)
 “Additionality”, methodological panel review of projects

4. 4
Effective carbon market architecture?
New picture under the Paris Agreement
 From Annex I/B Parties’ assigned amounts (Kyoto)
to Parties’ pledges (Paris)
– Each Party with a pledge supposedly responsible for the
transfer of emission reductions to another Party.
 Both buyer’s and host’s pledges adjusted with the transaction.
 Pledges: multiple formats
– Emission budgets, single year, absolute quantities, intensity
objectives (GHG/GDP), non-GHG, peak year, etc.
– GHG inventories essential (at least for the GHG scope
adopted in pledge).
– No obligation to meet pledges effect on role and
governance of trading of emission reductions?

5. ETS
Inventory = NDC
ETS
Not reflected
in inventory NDC
ETS banking
ETS banking
Inventory Not reflected
in inventory
Climate Change Expert Group Source: Hood, 2016
Reality could be complex – an example:
Blueland
 Pledge: Economy-wide, absolute, multi-year
 Linked ETS covering stationary sources
 Govt use of credits in non-ETS sectors
Orangeland
 Pledge: not all sectors, BAU, single year
 Linked ETS covering stationary sources
 Crediting system for ETS
 Govt use of credits in non-ETS sectors

6. What technicalities would need solving to move
forward with international carbon markets?
An illustration

7. Multiple format of pledges:
Fulfilling single year emission pledge
Purchased emission
reductions to offset earlier
emissions above pledge Target year
Purchased emission
reductions
Average emissions over period
preceding target year

8. Other option:
meeting pledge in that year alone
Preceding years Target year
Average emissions over period
preceding target year
Purchased
emission
reductions
 More emissions than
earlier case - but fewer
than without purchase
 Fewer incentives to
manage emissions.

9. How do countries approach the fulfilment of their pledges and the reliance
on international carbon markets? Is such situation likely at all?

10. 9
Elaborating an effective architecture
 Challenge: how to best balance
– Flexibility: allowing for multiple situations leading
to transfer of emission reductions
– Diversity: accounting for emission reductions based
on different types of pledges
– Environmental integrity: confidence in pledges,
inventories (how frequent?) and int’l accounting.
Trust in environmental integrity is key to legitimacy.
 Need safe space for discussion of practical
options, based on likely, not theoretical options.
– Pilots of international cooperation under Paris
Agreement

11. OECD/IEA papers on UNFCCC emissions
accounting and market mechanisms
W N W
ORGAN' :110N fOliECON101/11CCO-OFECAHON
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INTEWALIMONAL ENE
GEGMSATION fat ECONOMIC CO-OPERATION MD 0
INTEINATIONAL ENEAG
Climate Change Expert Group
Paper No. 2013(1) Climate Change Expert Group
Paper No. 2014(2)
GHG or not GHG: Accounting
for Diverse Mitigation
Contributions in the Post -2020
Climate Framework
Christina Hood (IEA), Gregory Briner (OECD)
and Marcelo Rocha (Febrica Ethica Brash!)
Ma y 201 4
TRACKING AND TRADING:
EXPANDING ON OPTIONS FOR
INTERNATIONAL GREENHOUSE
G ACCOUNTING AFTER 2012
Made to Measure: Options
for Emissions Accounting
under the UNFCCC
MA
KINGMA
RKETS:UNPA
CKING
DESIGNA
NDGOVERNA
NCEOF
CA
RBONMA
RKETMECHA
NISMS
Andrew Prag, GregoryBriner (OBCDI,
and Christina Hood PEA)
November 2012
Andrew Prag {OECD}, Cheered Hood clU.
Andre Marred 11E41mnd Gregory Brine,
(eNovember2011
Andrew Prag (OECD), Christina Hood (I
and Pedro Martins Barata (Get2C)
M
Climate Change Expert Group G,/ OECD Ciea)