This paper considers the carbon market aspects of sectoral approaches to reduce greenhouse gas (GHG) emissions in developing countries. It discusses three general ways to link sectoral goals with the carbon market: (i) intensity goals, based on a GHG performance per unit of output; (ii) fixed emission goals, with an ex-post issuance of credits or trading with an ex-ante allocation of allowances; and (iii) technology-based sectoral objectives.

This paper explores the domestic policy implications of moving from a single project approach (i.e., CDM), to a multi-plant, sector-wide carbon market mechanism implied by sectoral crediting and trading. It also touches on possible transition issues, especially from intensity-based emission goals to fixed ones. The paper concludes that sector-based market mechanisms, regardless of the design option chosen, will require some significant upfront effort both nationally and internationally to set appropriate baselines and ensure adequate measurement, reporting and verification in order to generate economically valuable and environmentally-credible credits. Technology diffusion goals may be supported by other means than the carbon market if developing GHG baselines for such activities were too difficult. Sectoral approaches also imply some significant policy effort in countries that adhere to them, to ensure that the baselines are exceeded so that carbon market revenues are generated, and that these revenues represent effective incentives for entities to pursue GHG mitigation, wherever it is most cost-effective to do so.