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

2. 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.

3. 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

4. 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

5. 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?

6. 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

7. 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

8. 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

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

10. 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

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

12. 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)

13. 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

14. 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

15. 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

16. 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

17. 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

18. 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

19. 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?

20. 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