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.


Sectoral Market Mechanisms

Issues for Negotiation and Domestic Implementation

This paper reviews proposals for the design of sectoral and related market mechanisms that are being debated both in the UNFCCC negotiations and in different domestic legislative contexts. Decisions on the design and scope of the mechanisms in the UNFCCC negotiations would affect the future supply of credits, while developed countries’ legislations could influence demand. National actions to establish carbon markets may also constrain or enable international developments and options, as domestic policies may establish conditions or restrictions on the import of “international” offset credits or linkages with other national or regional carbon markets.

The paper also addresses the possible principles and technical requirements that Parties may wish to consider, as the foundations for further elaboration of the mechanisms. Beyond principles, a number of elements of a more technical nature need to be sorted out to set up new market mechanisms, such as: eligibility for participation by developed countries, as buyers; technical definition of baselines, including guidance on a process to agree to baseline levels, and possible revisions; length of the crediting period and frequency of issuance of credits; new trading units and registries; and national authorities for the new mechanisms. In the case of trading, a compliance reserve and liability rules may be topics for discussion as well.

The third issue explored by this paper is domestic implementation of sectoral market mechanisms by host countries, and how the transition between current and future mechanisms could be managed. Transition issues including the situation of existing CDM projects vis-à-vis broader crediting mechanisms and also sectoral trading must be clarified. Domestic policy implementation in developing countries is of paramount importance to ensure the effectiveness of possible new international market mechanisms. Several illustrations are offered to show how a mix of policies could be used to outperform a baseline to generate credits, and how credit revenues could be used to further support domestic policy implementation. Among the options discussed are subsidies to low-carbon technologies (e.g. feed-in tariffs), mandated performance standards, and an entity level baseline-and-crediting system.


Keywords: sectoral approach, mitigation, greenhouse gas, climate change, carbon market
JEL: F53: International Economics / International Relations, National Security, and International Political Economy / International Agreements and Observance; International Organizations; Q58: Agricultural and Natural Resource Economics; Environmental and Ecological Economics / Environmental Economics / Environmental Economics: Government Policy; Q54: Agricultural and Natural Resource Economics; Environmental and Ecological Economics / Environmental Economics / Climate; Natural Disasters and Their Management; Global Warming; 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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