Preparing Readiness for Market Instruments Jill Duggan Visiting Senior Fellow World Resources Institute

First things first Different countries have different industrial structures, different labour skills, different legal structures different development objectives Existing infrastructure is important in deciding on how or whether to develop market mechanisms. European experience – developing structures for differing economies All this should be borne in mind.

Look forward and around Low carbon vs development What will 2050 look like? Small states vs big trading programmes Eg UK ETS Linking in the future Reinventing the wheel – and trust and confidence

Things to consider Appropriateness of market mechanisms Scope – sectors and gases Point of regulation Monitoring and reporting regimes Regulatory authority Target setting – and baseline data Creating scarcity and certainty Market oversight

When are market instruments appropriate? What other policies might be implemented relative pros and cons? What institutional framework do I have and do I need? Will the political environment be supportive of market instruments? What are the long term goals?

Some other policies might be more effective Subsidies – agriculture and forestry, electricity Regulation Taxes But market mechanisms can have particular advantages: Environmental certainty (subject to implementation) Flexibility reducing cost Developing new skills and capacity

What sectors might benefit from a market approach? Objectives of the mechanism – point of obligation Liquidity – number of traders Transparency Accuracy Elasticity Structure of the industry Price taker or maker – who changes behaviour

What institutions do I need? Emissions Monitoring, Reporting and Verification Compliance and Enforcement Trading Transfer of allowances Security of assets Tax treatment of allowances and credits Anti fraud and anti gaming mechanisms

Monitoring and Reporting Confidence and Trust Verifiers or technology (eg CEMS plus software) Accreditation for verifiers Auditing process Reporting protocols

Benefits of MRV go wider than trading Effectiveness of policies depends on good data Monitoring emissions reduces fuel use – more efficient, fewer emissions Creates transparent incentives for companies or facilities to reduce their emissions – can see how others are doing – investment incentives

Emissions Factors or End of Pipe monitoring – two approaches to MRV

Emissions Factors Route Permitting regime for participants based on individual MRV plan and emissions factors for converting fuel use to emissions Appointment of verifiers Regulatory/auditing authority Compliance regime – penalties (requires legal framework)

Emissions Factors Pros Cons No expensive technology needed up front Greater level of accuracy Develops skilled verifiers In depth data for all facilities Needs skilled and accredited verifiers May be a conflict of interest if facility appoints own verifier * Level of confidence dependent on compliance regime and trust in verifiers

CEMS route Continuous Emissions Monitoring – used by US EPA for emissions monitoring of power stations Standardised Can provide for auditing approach – eg US software to check emissions from CEMS – and compare with historical and similar plant

CEMS Pros Cons High degree of impartiality Greater confidence – easier to check calibration than verifier No need for accreditation body High initial costs Lower level of accuracy Still needs auditing authority Not available or suitable for all facilities and all gases

Target setting – creating a market Markets need demand Demand means scarcity Scarcity depends on Getting baseline data – monitoring and reporting Capping emissions below demand (taking into account accuracy) Accuracy will depend on MRV and Scope

Political environment Stakeholder engagement Training of participants Acceptance of trading Competitiveness concerns Lobbying and allocation Who will be best able to participate? Size of company, volume of emissions

Trading Institutions and Architecture Transfer of emissions credits and/or allowances –registries Security issues – approval of traders, who can access systems Anti fraud rules and oversight – avoid double counting, double selling, gaming Rules for release of data Trading platforms

So where would you start – how would this vary in different countries? Identify sectors with most emissions What scope to include Identify the most appropriate point of regulation – upstream, downstream, cost pass through, abatement opportunities What regimes regulatory authorities do you have already?

Getting started Develop rules for monitoring and reporting emissions Regulatory authority – powers of enforcement Legal Framework for trading MRV regime begins – provides baseline data for target setting Mechanism for transferring allowances/credits