05 Oct 2015

Mitigation Value, Networked Carbon Markets and the Paris Climate Change Agreement

Andrei Marcu

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Mitigation Value, Networked Carbon Markets and the Paris Climate Change Agreement

Author: Andrei Marcu

Series: Externally Published Work  No. of pp: 29

Carbon markets are undergoing a significant transformation, moving from what could be called Greenhouse Gas (GHG) Markets 1.0, to a new state that may be called GHG Markets 2.0. GHG Markets 2.0 comprises a diversity of domestic carbon pricing approaches, as countries choose different approaches depending on their national circumstances and what is politically feasible. A global carbon market remains a key objective, but may take some time to become a reality. A global market could be achieved in a number of ways, including through the ‘classic’ linking approach, which aims to harmonise differences between systems. It implies that a linking agreement has been negotiated between jurisdictions, which then enables trade between the two jurisdictions. Networked Carbon Markets (NCM) offers an alternative approach, which recognises differences and aims to put a relative value on the units that emerge from different systems. NCM does not seek to ‘police’ but rather seeks to ensure that jurisdictions have the information they need to make their own decisions about connecting and trading with other carbon markets.

This paper assumes that a carbon unit can have three values, all of which are central to NCM: a Mitigation Value (MV), a Compliance Value (CV) and Financial Value (FV). MV refers to the relative value of a unit versus a defined Standard Unit of reduction. It is important to emphasise that the concept refers to units in the carbon market, not tons. Therefore, MV does not challenge the reality that the atmospheric impact of emitting or reducing a ton of greenhouse gas (GHG) is the same everywhere in the world. The paper identifies four scenarios with increasing centralized governance for the framework of markets under the upcoming 2015 Paris agreement. It argues that unless a centralised framework is put in place, it is unlikely that there will be overlap and conflict between the international agreement framework and an NCM.

The paper was commissioned and supported financially by the World Bank Group through its “Networked Carbon Markets” (NCM) initiative. It complements ongoing work undertaken by the NCM initiative to explore the services and institutions needed for the next generation of carbon markets. It is also available for free downloading from the World Bank website at: http://pubdocs.worldbank.org/pubdocs/publicdoc/2015/9/840951442526241099/Mitigation-Value-Networked-Carbon-Markets-and-the-Paris-Climate-Change-Agreement.pdf

Andrei Marcu is Senior Advisor and Head of the Carbon Market Forum at CEPS. He also serves as Advisor to governments in the UNFCCC negotiating process.