Thoughts on a
New Market Mechanism
David Hone
Senior Climate Change Adviser
Group CO2
Shell International Petroleum Company Limited
Chairman
International Emissions Trading Association
Copyright of Royal Dutch Shell plc
CONFIDENTIAL
A question of scale
A major transition is required from the current paradigm
From micro-funding / financing to
very large scale project financing
From small scale local projects to
large scale regional change
From billion dollar public funding to
trillion dollar carbon market financing
Project
financing
An existing “market mechanism”
The conventional view of the CDM
The “carbon market”
Project
activity
CERs
issued
The full market mechanism in operation
Carbon market design
within the Kyoto Protocol
National
compliance
National mechanism,
e.g. cap and trade
Project
financing
Project
activity
CERs
issued
International
registry
AAUs
issued
Agreed
target
A carbon market is a
key enabler for change
New technology mechanisms evolve (e.g. for CCS)
China adopts ETS approach
CDM evolves to includes sectors
CDM
Forestry mechanism
Japan technology standards
Norwegian ETS
2000
Maximum
scale
at
Expanding EU-ETS
EU-ETS
lowest cost to society
2005
Pre-Kyoto
Danish-ETS
UK-ETS
2010
Kyoto I
2015
Kyoto II / LCA
2020
Linkages develop
between various
approaches and
more approaches
appear
2025
ADP / Linkage framework
New Zealand ETS
Australian ETS
US States or Federal carbon pricing
Global shipping carbon price
The “glue” that makes the current system work
is the Assigned Amount Unit (AAU)
The AAU;
• Establishes compatible supply / demand across boarders;
• Ensures legitimacy and environmental integrity;
• Binds systems together with a common MRV protocol;
• Leads to the management of emissions on an absolute
basis.
Linkage is simplest between compatible systems with
absolute targets. Otherwise complex arrangements such as
gateways may need to be developed.
National emissions management
Emissions management
against an absolute
target is key to linking.
Developed
Developing
But that can mean a
managed decrease or a
managed increase.
2015-2019 2020-2024 2025-2029 2030-2034 2035-2039 2040-2044
Can easily be cascaded into the economy via “cap-and-trade”
But other policy instruments can be used within the economy
provided the government is prepared to manage the risk.
Core to a New Market Mechanism would be an
instrument which mimics the role of the AAU
Oversight body
e.g. UNFCCC
Programme seeks
recognition
International allowance
allocation, mimics
the role of the AAU
Total Global GHG Emissions
The market builds up over time
2015
Progressive build - up as national
programmes are developed
2020
2025
2030
2035
2040
2045
2050
We need a more holistic view which seeks
to create a functioning carbon market.
CDM
International
Carbon Market
Opt-In
Sectoral
crediting
Domestic
Mitigation
Efforts
Supported
domestic
actions
Domestic
Actions
GCF
Copyright of Royal Dutch Shell plc
CONFIDENTIAL
05 / 2010
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