OECD/IEA Climate Change Expert Group Papers

This series is designed to make available to a wider readership selected papers on climate change issues that have been prepared for the OECD/IEA Climate Change Expert Group (CCXG). The CCXG (formerly called the Annex I Expert Group) is a group of government delegates from OECD and other industrialised countries. The aim of the group is to promote dialogue and enhance understanding on technical issues in the international climate change negotiations. CCXG papers are developed in consultation with experts from a wide range of developed and developing countries, including those participating in CCXG Global Forums.

The full papers are generally available only in English.

The opinions expressed in these papers are the sole responsibility of the author(s) and do not necessarily reflect the views of the OECD, the IEA or their member countries, or the endorsement of any approach described therein.


Market Readiness

Building Blocks for Market Approaches

Market-based mechanisms offer a number of advantages to other regulatory approaches for GHG mitigation such as technology or performance standards and feed-in tariffs. Advantages include their ability to attain an emissions goal at lower cost and to create incentives for innovation among sources covered by the mechanism (i.e. static and dynamic efficiency). Beyond these critical cost benefits, these mechanisms provide a potential revenue source for governments. This paper examines essential elements of “market readiness” for possible new mechanisms, looking at the necessary technical, policy and institutional frameworks that a country and/or its entities need to develop market mechanisms for accessing private and public financing for low-carbon development.

The three main categories of market readiness building blocks covered in the paper are: i) technical readiness, including coverage of emitters, monitoring and verification and establishing registries; ii) policy readiness, including setting clear goals, choosing appropriate instruments and distributing benefits; and iii) institutional and legal readiness, including establishing responsibility for collection of emissions data, issuance of allowance and credits, and handling legal compliance issues. Whilst some of these elements of readiness will be developed in parallel, the paper suggests a phased approach beginning with assessing mitigation potential and feasibility studies of different policy instruments, then establishing the technical framework before the necessary legal and institutional framework, and finally entering a piloting phase with a critical review process. The establishment of existing market mechanisms such as the EU ETS and the CDM provide some lessons on the capacity building challenges encountered in developing market tools, and the time it took to overcome these. However, with the prospects of a more bottom-up and fragmented carbon market post-2012, efforts to harmonise and develop international minimum requirements for some of the market readiness building blocks such as MRV and transaction registries may be required. Such harmonisation efforts would facilitate market access and integration, as well as the development of an international post-2012 accounting framework.


Keywords: mitigation potential, policy instrument, low-carbon development, climate change, market-based mechanisms, greenhouse gas, finance
JEL: Q54: Agricultural and Natural Resource Economics; Environmental and Ecological Economics / Environmental Economics / Climate; Natural Disasters and Their Management; Global Warming; Q58: Agricultural and Natural Resource Economics; Environmental and Ecological Economics / Environmental Economics / Environmental Economics: Government Policy; F53: International Economics / International Relations, National Security, and International Political Economy / International Agreements and Observance; International Organizations; Q56: Agricultural and Natural Resource Economics; Environmental and Ecological Economics / Environmental Economics / Environment and Development; Environment and Trade; Sustainability; Environmental Accounts and Accounting; Environmental Equity; Population Growth
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