Do we need Carbon Markets ? A role for them in post -Kyoto

1. Do weneedCarbonMarkets? A role for theminpost-Kyoto Março 2014

2. ShortAnswer: no • They are just A tool for the development of climate policy. • They are one of many tools: regulation, taxation, information and communication policies, education, adaptation policies (e.g. infrastructure climateproofing). • As a policy tool, they present challenges that are in some ways similar or more daunting than those raised by taxation or other instruments: • So why bother? • NO ONE NEEDS CARBON MARKETS Information Administration Policy

3. Longeranswer: do wehaveanythingbetter? • EVERY SINGLE POLICY OPTION HAS DRAWBACKS • Taxation? • Regulation?

4. Carbon markets can help, if Well-designed Transparent rules Predictable rules Predicated on sound market dynamics (liquidity, solvency) And backed by very very good regulation

5. Theworldpost-Kyoto • Willbe more diverseincommitments/contributions/whateveryouwant to callthem quantifiedemissioncommitments Policy-basedcommitments Conditionedonfinance? • Willbe more flexibleinitsarchitecture Lessof a Annex I/non-Annex I distinction More diversesetofnationalcircumstances More tools (hopefully) atdisposalofcountriesengagingin WYWCT • Allgoodthings, right? Widerparticipation, flexibility, diversity?

6. Not so if at the cost of system credibility • Kyoto accounting system provided very little flexibility on • The shape of commitments (CO2e-based, base year 1990, economywide goals) • The tools (Kyoto only provided three additional tools to whatever countries had already at their disposal – the flexiblity mechanisms) • Kyoto additionally provided flexibility in accounting for land use and forestry • ERGO • There is very little that countries can do under Kyoto to shape further their commitment (to ease their burden) • i.e. Kyoto provided an accounting standard and required modalities

7. Why is this relevant for carbon markets? • Because carbon markets, amongst other things, are informational tools and they are predicated, as all markets, on the transparency of the generation of assets. • So, I, as a trader engaged in buying and selling carbon assets (offset generated credits from CDM, NMM, VCS or allowances generated in the Mexican or Ruritanian market) need to understand the environmental equivalence of these units. Is a unit reduced from a baseline-and-credit project in a steel mill in Colombia equal to the reduction obtained by a company under the Swiss emission trading system? • I, as a policy-maker, need to make sure (even if no trading is happening) that the units that are used for compliance are of good quality and of the same environmental equivalence. • So we need a solution.

8. We need standard setting mechanisms

9. Two standards are needed in a quantified commitment world • Standard for allowance trading: • - akin to the Assigned Amount Unit under Kyoto Protocol, could easily be derived from the national inventory systems of committed countries; we therefore need a set of rules on how such units can be generated • - and finally we need a Standard for Offset unit generation From projects From sectoral initiatives • Let’s not re-invent the wheel though….

10. We could start from somewhere… • Just a suggestion, of course

11. Thankyou!Pedro Martins Baratapedro.barata@get2c.pt