November, 2014

Networked Carbon Markets

Summary

Civil society, Governments and the private sector are exploring how to assess differentclimatemitigation efforts, to enable comparability andimprove the prospects of limiting global warming. Through the Networked Carbon Markets (NCM) Initiative, the World Bank Group (WBG) is convening thesestakeholders todevelop aframework forassessing climate mitigation efforts, and infrastructure to support carbon market related functions. It responds to the need for reliable and well-synthesized information on the relative value of different climate mitigation efforts, given the increasing regulatory fragmentation and heterogeneity that is emerging across and within jurisdictions. The end-goal is to facilitate linking or ‘networking’ of carbon markets so that such linked markets will have greater liquidity and deliver climate smart financing more efficiently.

Since March 2013, the WBG has held extensive stakeholder consultations on NCM which have included two international Working Group meetings comprising representatives from the United Nations Framework Convention on Climate Change (UNFCCC), private sector, developed and developing country governments, academic analysts, non-government organizations, foundations and intergovernmental organizations. NCM complements the WBG’s ongoing low-carbon development activities and its efforts to promote carbon pricing as critical to achieving climate mitigation at large scale in an effective and cost-efficient way.

Context

A warming planet is not just an environmental challenge – it is a fundamental threat to any effort to end poverty and threatens to put prosperity out of the reach of millions of people. The Intergovernmental Panel on Climate Change (IPCC) has warned of the extreme risks to future human wellbeing resulting from a rise in temperature above 2°C. In response, Governments are designing and implementing GHG mitigation effortsthat address climate mitigation that best suit their unique contexts.[1]The bottom-up development of low-carbon efforts has led to a certain amount of regulatory fragmentation and heterogeneity across jurisdictions. As a result, it has become increasingly complex for stakeholders to compare and contrast climate mitigation programs, policies and commitments across jurisdictions.In addition, all evidence suggests that current and planned actions are far from sufficient to achieve a2°C target. The challenge, therefore, is to identify the relative value of mitigation actions in jurisdictions and to incentivize a ‘race to the top’, to bridge the (expected) very large gap between climatemitigation commitments, and the climatemitigation needed to limit warming to under 2°C.

Key components of climate mitigation assessment

Current Initiatives that assess climate mitigation efforts can be organized by the risks and contributions that they capture, including: a program’s carbon integrity risk; a jurisdiction’s policy/regulatory risk and a jurisdiction’s relative contribution to the global climate mitigation effort.The NCM Initiative understands that these Initiatives could benefit from an overarching, coordinating framework that establishes: common language, concepts and general principles; common methodologies to organize the collection and interpretation of data; tools to help guide users in receiving the information.

Program level - Carbon Integrity risk

Carbon integrity risk relates to the extent to which a specific low-carbon program or activity (e.g., regulatory instrument, price instrument and quantity instrument) will achieve its intended outcome.The challenge is to establish an approach that can accommodate the wide range of new and heterogeneous low-carbon programs that are now emerging. Currently, systems like the Clean Development Mechanism provide only a binary ‘yes or no’ outcome on the validity and verification of emissions reductions. However, this limits the ability to differentiate among projects that have met minimum requirements, or to evaluate to what degree projects perform, vis-à-vis the threshold. As a result, there a wide range of low-carbon programs and activities whose overall benefits/risks are not captured by this approach. This is evident in certain sectors, geographies and areas of activity with the highest sustainable development potential or those which contribute most to transformational change.

Jurisdiction level - Policy/regulatory risk

Policy/regulatory risk relatesto the extent to which a jurisdiction’s collective low-carbon policieswill achieve the intended outcomes. It involves technical considerations, such as the extent to which the set of policies designed to achieve the mitigation target within the existing policy context are likely to achieve the intended outcome. It also involvespolitical considerations, such as the extent to which the government has the political will, track-record, and institutional strength to maintain or adjust policies to achieve appropriate mitigation targets.

Global level - Relative climate mitigation contribution

Assessing a jurisdiction’s relative climate mitigation contribution relates to the extent to which its climate mitigation targets are perceived as a sufficient contribution to the global effort to limit global warming. The objective of this approach is to incentivize jurisdictions to increase their level of effort.

Institutional Structures

The WBG is also exploring institutional structures to support a network of carbon markets. One possible structure is a pooled reserve of carbon assets or an ‘International Carbon Asset Reserve’ (ICAR) which could provide a source of liquidity or play a market-maker function. While the form, scope and functions of an ICAR are still being explored, it is intended that such an international (or inter-jurisdictional) instrument would not replace but rather complement and support market stabilization instruments on the level of individual jurisdictions/markets. The ICAR builds on the idea that carbon markets and the mitigation of their inherent risks can be made more efficient by increased connectivity and pooling of risk mitigation measures on an international level. Another structure to support a network of carbon markets is an international settlement platform to track cross-border trades and potentially provide a clearing house function.

Next steps

Work planned to December 2015 includes coordinating, facilitating and organizing Initiatives that assess climate mitigation efforts under a common framework; an analytical work program to enable concept development; and stakeholder consultations and outreach. It also involves developing knowledge products to explore how potential institutional structures can enhance the flow of finance toward the ongoing effort to limit global warming.

[1] See World Bank ‘State and trends of carbon pricing 2014’