Establishment of market-based mechanisms

Submission under the Cancun Agreements | February 2011

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1. Overview

This submission contains the views of the Australian Government on the establishment of market mechanisms, as requested under paragraph 82 of Decision -/CP.16 on Outcome of the work of the Ad Hoc Working Group on long-term Cooperative Action under the Convention (AWG-LCA). Australia also draws attention to its previous submissions on market-based mechanisms [1].

The Cancun Agreements delivered a balanced package of decisions across all UNFCCC bodies. Some items are ready for implementation, and others require further elaboration. Guided by the Cancun Agreements, it will be important to use the negotiating forums at our disposal to progress work in a coordinated way, utilising the bodies best suited and considering joint work programs where useful.

Australia welcomes the opportunity to submit its views under the Cancun Agreements on market-based mechanisms. In summary, Australia considers:

  • Comprehensive and well-functioning market mechanisms will assist countries to commit to, and achieve, ambitious mitigation objectives by facilitating least-cost and effective abatement.
  • Market mechanisms will also be an important means for mobilising long-term private sector finance to developing countries, and will play a critical role in transitioning developing countries to low-emissions development. In addition, markets will provide incentives for the innovation and diffusion of low-carbon technologies.
  • All Parties to the Convention should have full access to expanded and improved market mechanisms to achieve their mitigation actions and commitments.
  • The post-2012 framework should accommodate a broad range of potential market mechanisms to harness all possible mitigation opportunities. This framework should allow Parties to design market-based approaches that best suit their national circumstances, while at the same time ensuring that market mechanisms are consistent with the characteristics agreed in Cancun, including safeguarding environmental integrity.

2. The importance of market-based mechanisms in a post-2012 outcome

Australia’s long-term objective remains a durable, environmentally-effective and legally-binding post-2012 treaty for all major emitters. The Cancun agreements establish the building blocks of this new agreement and our work to implement them will help advance us towards an eventual post-2012 treaty.

Parties must harness all available tools to achieve an ambitious and effective post-2012 outcome. Australia supports a transparent and environmentally rigorous system that supports broad participation and maximises incentives to mitigate. Comprehensive and well-functioning market mechanisms will assist countries to commit to, and achieve, ambitious and effective mitigation objectives by facilitating large-scale emissions abatement opportunities at least cost. Market mechanisms will create incentives for the innovation and diffusion of low-carbon technologies. Australia considers that these mechanisms will also be an important means for mobilising long-term private sector finance to support mitigation action in developing countries.

The potential for market mechanisms to enhance the cost effectiveness of mitigation actions is well documented. Economic analysis conducted by The Garnaut Climate Change Review: Final Report (2008)[2], and by the Australian Government[3] indicate that emissions pricing generated by domestic market mechanisms can achieve substantial cost benefits, in comparison to purely regulatory approaches, to attain the same abatement target.

Further analysis indicates that meeting abatement targets without internationally-tradable emissions units will increase mitigation costs [4]. Organisation for Economic Co-operation and Development (OECD) modelling estimates that a fully integrated global carbon market developed by 2020 could ensure a 50 per cent emissions reduction by 2050, relative to 2005 levels, at an average cost of 0.11 per cent of world GDP growth per annum [5].

Australia considers that all UNFCCC Parties should have access to expanded and improved market mechanisms for the purpose of achieving their mitigation objectives, whether those mechanisms are established under the Protocol or Convention. This includes continuation and reform of international emissions trading, the Clean Development Mechanism (CDM) and joint implementation (JI), in addition to access to a broad range of potential new market mechanisms. Creating barriers between those mechanisms established under the Convention track and those established under the Kyoto Protocol will only increase complexity and decrease the ambition of mitigation pledges, which would be contrary to Australia’s overarching environmental objectives. However, participation in market mechanisms would be voluntary.

3. A framework for market-based mechanisms under the AWG-LCA

A wide range of market-based mechanisms have already been proposed by Parties, including emissions trading systems, sectoral crediting, sectoral trading, crediting on the basis of nationally appropriate mitigation actions (NAMAs), and market mechanisms for reducing emissions from reducing deforestation and forest degradation in developing countries (REDD+)[6]. Australia recognises the potential of these proposals to enhance broader participation in market mechanisms, deliver efficient and effective mitigation action, and attract abatement at a larger scale.

The success of each approach will depend largely on the national circumstances of each implementing Party. As such, there is little benefit in international debate on the merits of one proposal over another. Prematurely limiting options for Parties will adversely impact on the effectiveness of a post-2012 outcome.

Instead, Australia proposes that the focus of discussions this year should be on agreeing upon principles, guidelines and procedures that establish a ‘common framework’, which would accommodate a broad range of market mechanisms within the global architecture. The international framework for market mechanisms should allow flexibility for Parties to design market-based approaches that best suit their national circumstances, while at the same time ensuring that market mechanisms are consistent with the characteristics agreed in Cancun, including safeguarding environmental integrity [7].

Australia considers that such a framework for market mechanisms would encourage broad participation and accommodate the full range of a mitigation action and commitments foreseen at Cancun. Many Parties will wish to link their domestic mitigation measures to the international carbon market. Australia anticipates that an expanded global carbon market will develop over time as Parties develop and implement new market mechanisms and make arrangements for mutually-beneficial trade in emissions reductions or removals.

Negotiating overly prescriptive modalities and procedures for individual market mechanisms in the AWG-LCA would be inhibitive, requiring agreement to detailed design before Parties have had an opportunity to fully explore proposals in a more practical manner. An overly prescriptive approach will not allow sufficient flexibility for Parties to design and implement market mechanisms that are most efficient, effective and suitable for their particular national circumstances.

Agreeing a common framework for market mechanisms could allow Parties to individually or jointly submit, for consideration by other Parties, detailed design proposals of a market mechanism they intend to implement. Taking this approach, the key considerations for the establishment of a ‘common framework’ for market mechanisms include:

  • Whether to specify in the modalities and procedures a set of minimum requirements that each market mechanism must satisfy.
  • Guidelines for the information that should be included in market mechanism proposals in order to facilitate the consideration by other Parties. These may include: consideration of the information requirements of each mechanism; the coverage or boundaries, potential for leakage; the system for measurement, reporting and verification of emissions reductions or removals; information about projected business as usual emissions; and information about reference levels or sectoral targets and the estimated emissions reduction potential of such a mechanism. In considering these issues, Parties must also be conscious of potential overlap between this discussion and the mitigation issues surrounding the information requirements for targets and actions in the annexes.
  • A procedure for other Parties to consider the proposal for a market mechanism, including a possible technical review.
  • Whether there should be any threshold criteria that Parties must meet, either to implement a market mechanism or participate in the trading of units generated from the market mechanism.
  • How units or permits are to be issued and tracked to avoid double counting of emission reductions and removals.

The modalities and procedures established for market mechanisms should be consistent with those that may be determined for mitigation and measurement reporting and verification, including international assessment and review, consultation and analysis, as well as accounting standards. Where possible, procedures and institutional requirements should be consolidated.

It is critical that the AWG-LCA moves quickly to finalise the modalities and procedures for market mechanisms this year to provide a clear basis for Parties to determine their future mitigation actions and commitments. It is also vital that we provide clarity to the private sector on the framework that will shape the post-2012 global carbon market. To do this we will need to make the best use of the time available. To this end Australia considers that progress would be best achieved through workshops prior to formal negotiations.

[1] FCCC/KP/AWG/2008/5, annexes I and II; FCCC/AWGLCA/2008/MISC.5/Add.2 (Part I); FCCC/AWGLCA/2008/MISC.2/Add.1; FCCC/AWGLCA/2009/MISC.1/Add.2; FCCC/AWGLCA/2009/MISC.1/Add.3.

[2] Ross Garnaut, The Garnaut Climate Change Review: Final Report (2008), pp. 310-311.

[3] Report of the Prime Ministerial Task Group on Emissions Trading (2007), <http://pandora.nla.gov.au/pan/72614/20070601-0000/www.pmc.gov.au/publications/emissions/index.html#viewing>, Box 3.2, p. 46; Australian Government Department of Treasury, Australia’s Low Pollution Future: The Economics of Climate Change Mitigation (2008), <http://www.treasury.gov.au/lowpollutionfuture>, p. 195.

[4] Organisation for Economic Co-operation and Development, The Economics of Climate Change Mitigation: Policies and Options for Global Action beyond 2012 (2009), p. 112; Garnaut, above n 2, pp. 337-338; Australian Treasury, above n 3, Chapter 5.

[5] OECD, above n 4, p. 49.

[6] FCCC/AWGLCA/2009/MISC.1/Add.2.

[7] Draft decision -/CP.16: Outcome of the work of the Ad Hoc Working Group on long-term Cooperative Action under the Convention, para. 80.