Comparison and Linkage of Mitigation Efforts in a New Paris Regime
A Workshop Sponsored by the International Emissions Trading Association (IETA),
The Harvard Project on Climate Agreements, and the World Bank Group’s Networked
Carbon Markets Initiative
Thursday-Friday, May 7 - 8, 2015
Harvard Kennedy School
Cambridge, Massachusetts, USA
WORKSHOP SUMMARY FOR PARTICIPANTS
Background and Motivation for the Workshop:
The new international climate-policy regime arising from the UNFCCC Paris agreement will
have a voluntary, pledge-based policy architecture. Governments can pledge to reduce emissions
however much or in whatever manner they think is fair and feasible. Mitigation commitments
(“Intended Nationally Determined Contributions” or INDCs) will therefore be highly heterogeneous.
Given this heterogeneity, the assessment (ex-ante and ex-post) of individual contributions
and of the overall agreement’s effectiveness and equity will require the development and use of
reliable and rigorous tools for quantifying and comparing pledges. Approaches to comparing
mitigation effort will also be essential to enable the transfer of units of mitigation obligation (where
these units are yet to be defined for such a heterogeneous system) from one UNFCCC Party to
another—that is, broadly speaking, to enable linkage—and hence reduce the aggregate cost of
mitigation in the new regime. Finally, it will be highly desirable for parties to increase their
mitigation ambition over time, and it will be difficult for Parties to do so–and encourage others to
do so—in a concerted and coordinated manner without being able to accurately compare effort
across countries.
A workshop was held at the Harvard Kennedy School on May 7-8, 2015 to discuss the
challenges posed by the emerging “bottom up” architecture that will be embodied in the Paris
agreement. The workshop focused on comparability of mitigation effort, with a view toward
facilitating the linking of mitigation systems and the associated ability to exchange units of
mitigation effort between jurisdictions.
The workshop’s agenda and participant list are appended to this summary. The workshop
brought together experts from academia, industry, and non-governmental organizations (NGOs) for
a series of brief presentations on recent research and initiatives, and for extensive discussion. The
following document is a high level summary of the presentations and key discussion points.
Presenters and discussants are not identified in the text, but the presentations may be downloaded
from the following web page:
http://heep.hks.harvard.edu/linkage-workshop-may2015
Day 1
Overview
In the emerging bottom-up climate-policy architecture, countries’ INDCs present a wide
variety of target types and policy options that will be the building blocks of the international
agreement finalized at COP-21 in Paris in December 2015. Various INDCs include (or will include),
for example, absolute targets, peaking targets, intensity targets, efficiency programs, and
technology standards, implemented over varying time periods. The topic of the workshop was
whether and how those highly heterogeneous targets and policy packages can be assessed
quantitatively and compared in a meaningful and rigorous manner. It is important to do so for three
reasons:
1) to enable ex-ante and ex-post review of mitigation effort and accomplishment;
2) to enable transfer of mitigation obligations among jurisdictions (i.e., enable linkage,
broadly defined);
3) to encourage jurisdictions to increase mitigation effort over time, through exchange of
best practices and the application of political pressure (enabled by comparison of effort
and achievement).
Day 1 of the workshop included presentations and discussions of recent research in the field.
Presentation 1: Issues in Comparing Effort in Heterogeneous Systems
The exchange of mitigation obligations between and among entities subject to compliance
obligations in different jurisdictions—or “linking”—can enable greater cost-effectiveness by
narrowing or eliminating differences in marginal abatement costs between different countries or
regions. This leads to an aggregate reduction of cost and reduces emissions leakage. Keeping in
mind the wide variety of INDCs and the wide range of policy instruments needed to achieve the
environmental goals they contain, this presentation looked at linkage between a variety of policy
types to explore how countries might link bilaterally to achieve those benefits, while still having the
freedom to pursue the policies they see as politically feasible and domestically most beneficial.
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Examples of approaches to linkage among varying mitigation systems include:

Linking Cap and Trade with a Tax: If one were to link a tax to a cap and trade system, one
could envision using tax payment credits in place of emissions allowances, or vice versa, and
allowing entities to trade the two types of units.

Linking a cap-and-trade system with a “command-and-control” regulatory system: To link
performance or technology standards to a price system is more complex, but possible if one
can establish expected reductions as a result of the requirements and then generate
tradable credits for any reductions made beyond that level.
o
Challenges with this include ensuring the additionality of reductions and identifying
which reductions can be attributed to the policy in question.
o
This approach raises the question of who gets to claim the value of credits
generated for “extra” reductions, the regulated entity or the government regulators
(though this question may well pertain to other types of homogeneous or
heterogeneous linkage, as well).
Partial or gradual linking is one way constrain asymmetrical financial flows between
jurisdictions arising from different marginal abatement costs or policy-design features, but such
constraints negate some of the efficiency (cost-effectiveness) advantages of a full link. In a Paris
regime, linkage becomes even more complex, due to differences in target types and
implementation/performance timelines, in addition to varying policies designed to achieve the
stated goals. Timeline and policy choice raise additional questions of whether or not dynamic
considerations should be taken into account, for instance looking at how progress feeds back into
revisions of targets (mitigation ambition).
Linking homogenous policy types is already challenging (harmonization of policies is still
required). Heterogeneous policies add further complexity that may require a more centralized
(international) regulatory body to manage the more detailed rules and regulations, though
workshop participants debated this point. In any event, there may not be much appetite for at the
international level for such a multinational regulatory regime, either through the UNFCCC or other
venues.
Presentation 2: Approaches to Comparing Effort
A robust and transparent policy surveillance system will be important in understanding and
tracking commitments (INDCs) and their implementation. This presentation considered what can be
learned from international regimes in other substantive areas to learn lessons about the best way
to conduct and manage policy surveillance.
The presentation examined two distinct elements of comparison—transparency and metrics
for comparison.
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Approaches to and benefits of transparency: Looking at several non-climate international
policy surveillance systems—the IMF, the WTO, the OECD, the Montreal Protocol, CITES and arms
control agreements—researchers found that credibility of information is critical. Moreover, there
are benefits from policy surveillance being delegated to neutral third parties or from the practice of
using permanent professional staff who work together with policy makers and program managers in
the jurisdictions.
The International Monetary Fund and World Trade Organization, to cite two important
examples, have professional staff who work with country teams, often building capacity and
contributing to learning and the sharing of best practices among jurisdictions. Robust and
transparent systems of data collection and analysis—and policy evaluation—are key elements. Peer
and expert input and reviews at the WTO, IMF and OECD have shown that the concept of joint and
mutual scrutiny is one model for encouraging countries to buy into and trust a multinational policy
surveillance regime.
The wide variety of INDCs also presents an opportunity for learning through sharing of
experiences, failures, and successes. If commitments and performance are tracked, there is a real
chance to see what policies are effective—and under what circumstances—and perhaps learn
together about policy design. However, to take advantage of this opportunity we must move
toward a more rigorous, consistent method of surveillance and tracking in order to learn those
lessons.
In this regard, standardizing data collection and analysis methods can provide a service to
those jurisdictions planning and implementing policies by lower the costs of joining and
participating international policy-surveillance regimes. Determining ex-ante what data will be
needed to evaluate effectiveness and compare outcomes ex-post is important to ensure relevant
data collection and tracking is in place. Sharing of best practices and technical expertise can also
enhance countries’ technical capacities.
Motivation and Metrics for Comparison: comparisons can be either normative – with the hope of
measuring progress against some desired goal—or facilitative, which is more focused on supporting
cooperation and sharing. In either approach, the researchers propose three principles for metrics—
that they are: comprehensive, quantifiable, and replicable (or universal applicable). It appears
impossible to find one metric that satisfies all three criteria and some countries may have different
preferences on metrics. For these reasons the presenters recommend a suite of metrics, analogous,
for example, to the way a variety of measures are used when determining macroeconomic
strength/health of a country.
Discussion
A key question is “comparison to what?” is the objective: 1) to compare aggregate
mitigation ambition represented by the INDCs collectively to what would be needed to limit
warming to 2° C; to compare countries’ efforts and outcomes to each other (or to similar countries);
or 3) compare one country’s performance to itself, over time?
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Aggregate comparison relative to 2° C may make countries less likely to want to submit for
assessment and comparison, because the cumulative reductions represented by INDCs are very
unlikely to be adequate to limit warming to 2° C. This would suggest that individual country’s
ambition will be judged inadequate, and governments would probably not wish to open themselves
to such judgments. The 2° C warming target, if taken seriously, implies a fixed budget for future
greenhouse-gas emissions. Any detailed discussion of such a budget leads quickly to the question of
how to allocate it among emitting countries.
However, the question of whether emitters (UNFCCC Parties) should be compared with one
another remains salient even outside a 2° C /budget context, as a means to share best practices,
lessons learned, and to begin to understand who is doing what and what more can and needs to be
done. Moreover, countries may be more willing to be compared to countries that they consider
their peers—that is, if they feel it is a more relevant and reasonable comparison that helps them
take stock of their current efforts. Finally, some may welcome such a comparison to advance
prospects for linkage of mitigation efforts, which might reduce aggregate costs.
Another key question that was discussed—and revisited on the second day of the
Workshop—is that of who does the assessment and comparison and what interests or motives they
may have. Self-assessment may be biased and inconsistent and therefore is unlikely to garner the
broad trust of UNFCCC parties broadly. However, many third party groups have agendas of their
own, and jurisdictions may be hesitant to submit themselves to third party assessment.
Looking at other assessments and indices such as the IMF rankings, corruption index, and
doing-business indicators, there are ancillary benefits to the country of being highly ranked—often
that they are more likely to attract outside investment and business interest. This provides an
incentive to submit to external assessment process and strive to do well in them. It is not easy to
see how to replicate that type of benefit within a carbon-emissions ranking, since there is no
inherent value to a business investor, but that is something worth thinking about to try to generate
more buy in and acceptance of international rankings or comparison efforts.
There are a number of NGOs and research organizations attempting to assess and compare
contributions and plans already, and they often come up with quite different answers depending on
their methodology and assumptions. The Climate Transparency initiative, supported in part by the
World Bank Group, is an independent effort to convene some of these groups to help them better
understand the sources of such discrepancies and to share best practices. The hope is that bringing
these groups together to share data, methodologies, and assumptions could help them converge
around a set of more standardized best practices. From early meetings it seems that groups are
using similar data, but that different areas of emphasis are leading to divergent conclusions. (For
example, some look at historical emissions while some attempt to project forward.) As a group they
are starting to pull together a set of metrics, which together give a sense of policies and efforts in
different places.
Again, there was a comparison made to macroeconomic-indicator data, an example of a
system for which we rarely rely on just one number to assess the “health” of the system. However,
there were different views of whether that is a good parallel for understanding carbon emissions,
and a related concern was raised that with too many metrics, one can “pick and choose,” while
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there is still no centralized way to understand the full environmental picture. The real challenge is
how to navigate the politics of assessment while still maintaining some kind of meaningful metric. It
seems to some participants that it is probably less threatening if the assessment is not directly
linked to a comparison of progress toward achieving 2° C, and that even without such a reference,
the system can still gain a lot from the transparency, learning, and best practices shared in the
process of developing a robust and rigorous measuring and comparison system.
It was noted that regardless of what assessments are used for, it would be helpful to have
international, standard methods to guide organizations that are undertaking such assessments. For
example, for establishing business-as-usual baselines and a clear and shared understanding of what
assumptions are made about consumption and other economic parameters. A related question was
asked about how to separate the question of relative ambition from the effort or cost required to
undertake certain actions, which will vary across countries, depending on their levels of economic
and technological development, nature of their installed industrial base, resource (including energy)
endowments, trading patterns, and other factors.
The question was raised of how to plan for or accommodate surprises that render a target
(much) more—or less—difficult to achieve than originally planned. This is closely linked to the
question of how to evaluate ex-ante and ex-post targets that are conditional on—or indexed to—
factors such as economic growth, external support, or other factors. Participants discussed whether
there is a way to include an automatic correction factor that adjusts targets if certain conditions
change. They also discussed whether such (and which) correction factors are used (or whether
conditions are met) in its INDC would be best left to national governments to determine or if such
decisions would benefit from centralized structure or international guidelines. Correction factors
could be included in INDCs if countries were able to articulate what conditions would prompt them
to revise their targets. This adds another layer of detail and complexity to the target setting and
comparison exercise, but is probably worth considering and trying to accommodate in any
comprehensive effort at policy comparison.
The Workshop agenda was focused primarily on mitigation commitments in INDCs, but it
was noted that some countries—particularly those in the developing world—will refer to finance,
adaptation, loss and damage, and technology in their INDCs. Some of these countries will condition
their INDCs on external financing for mitigation, adaptation, technology, or some combination of
these, which raises questions about which parties are credited with progress toward the objectives
stated in INDCs and how to avoid double counting (among other issues pertaining to conditional
INDCs).
Presentation 3: Options for Restricted Linking: Reporting on Work in Progress
This presentation focused on opportunities for partial or restricted linking. It included an
empirical analysis suggesting that there are certain degrees or types of partial linking that are more
cost effective than others, though none as cost effective as full linkage. Quotas or restricted flows of
allowances in the early stages of linkage between or among jurisdictions may be one way to ease
into linking—“experiments” to determine the impacts of linkage before making a full commitment
to linkage. Such an incremental approach might be especially appealing for jurisdictions that are
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worried about rapid, large-scale, asymmetrical financial flows that may result from linking between
systems with significantly different marginal abatement costs (or significant differences in policy
design). Restricted linking could also serve as a safety net (or safety valve) for unexpected
fluctuations, for example by allowing a limited number of allowances from outside the system to
flow in or be allowed on a unilaterally discounted basis if certain conditions are met, to help
manage supply, and dampen price fluctuations.
Partial or restricted linking allows for some gains from linkage even if immediate full linking
is not politically feasible. The analysis found that even restricted linking can lead to significant
economic gains (See presentation slides in appendix for details). However, the researchers note
that significant uncertainty about (among other factors) economic growth, technological
innovation, and input prices, could make prescribing restrictions to achieve the most efficient
outcomes ex ante quite challenging. The researchers were able to model linkages using exchange
rates to pinpoint ranges in which there were efficiency (cost-effectiveness) gains even without full
linking. Only some exchange rates achieve this goal, and the uncertainty in the system will make
rate setting very challenging.
Presentation 4: Quantifying Ambition and Credibility to Facilitate Linkage of Markets
This presentation discussed how to quantify the ambition and credibility of existing carbonemissions markets to facilitate linking and trade between markets. The right to emit carbon dioxide
(or other greenhouse gases) is a commodity whose value on the market is dependent on the supply
constraint imposed by regulators. It is therefore critical that a linked global market has mechanisms
in place to ensure that participating markets have adequately stringent caps and that those caps are
enforced.
The question of what constitutes “adequate” stringency or ambition is extremely difficult to
answer and has been the primary source of disagreement over 20 years of international
negotiations on the topic. Credibility is a concern in any international agreement in which primary
enforcement is left to sovereign parties. Current discussions about how to quantify and account for
differences in ambition and credibility often combine the two and try to address them jointly. This
analysis addresses each issue separately.
The research recommends an objective measure of ambition that avoids the question of
political and moral responsibility, but nonetheless provides a way forward for markets to link by
creating an upper bound for each individual market cap. A mechanism that succeeds in facilitating
market linking need not settle the entire question of the relative obligations of each country to
combat climate change. It does need to ensure the integrity of carbon markets, specifically, and
therefore needs to prevent a regulatory race to the bottom of ever-looser caps, while leaving room
for countries to negotiate and pursue more ambitious targets as they see fit.
The presentation explored how this could be accomplished by establishing sectorally- and
regionally-differentiated technical baselines, akin to the standardized baselines employed by the
Clean Development Mechanism, to serves as an objective measure against which to determine
eligibility for trade on the global market. Such technical baselines could be calculated using
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regionally-appropriate emissions factors weighted by output to reflect expected emissions from the
covered sectors in the absence of any carbon policy. In this case, countries could set more
ambitious caps, but if their caps exceed the technical baseline they would be excluded from the
global market. Technical baselines could be set by a nonpolitical market committee. Such a
committee could include members from any nations that are implementing carbon markets and are
interested in participating in the global market.
Credibility is equally important. The presentation explored how the same market committee
that establishes technical baselines would need a transparent and robust system of mutual
reporting and oversight to ensure that each jurisdiction is living up to its commitments. It is
reasonable to want safeguards against the possibility that one market under-enforces, thereby
flooding the linked market with excess supply and undermining the effectiveness of the linked
system.
To guard against this, one could require markets to maintain a contingency reserve of
“insurance allowances” that can be used to fill the gaps if an entity is found out of compliance at
the end of a compliance period. The level of that required reserve should vary based on a credit
rating assigned to each market which takes into account a variety of factors, including: strength of
binding domestic laws, transparency of data monitoring and reporting and history of compliance
performance. Those with lower credit ratings would be required to hold a larger percentage of total
allowances in reserve. This allows compliance problems to be dealt with without requiring buyers of
allowances to take on liability for a possible failure of the system.
The presentation focused on whether such an international market committee could be
independent or housed at the United Nations. The work done to establish technical baselines for
markets could build data reporting, monitoring and verification capacity and help to build trust
among market regulators seeking to link and trade with each other.
Discussion
Participants focused in part on the question of what needs to be decided and agreed
multilaterally versus what is better left to domestic decision makers. It may be that the suggested
approaches in these two presentations over-engineer the problem, and that jurisdictions are better
off determining on an all-or-nothing basis whether another jurisdiction is either “good” and trustworthy enough to link with. The work required to develop a granular, sliding scale of
creditworthiness or ambition reflected in partial links, quotas, benchmarks or ratings—and the
potential loss of cost-effectiveness—may be more trouble than they are worth, and may, in fact, be
the wrong approach. This issue was also revisited on the second day of the Workshop, when
participants discussed whether some of the complexity could be addressed by leveraging existing
tools/infrastructure/capacity in non-climate markets (including debt, foreign exchange and other
commodity markets).
These proposals also raise the important question of governance. Could standards like this
grow from agreement among one or two larger jurisdictions that set rules and establish a standing
set of rules that others can take as the “standard offer” or requirement for linking? On the question
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of credibility, one might want to think through in what circumstances other jurisdictions in a linked
system would be compelled or inclined to bail out a partner who has failed in some way.
Publicly rating credibility could in theory lead to a race to the top, in much the same way
that some other public rankings and ratings make countries want to improve or compete to be
more highly ranked. This is often because there are other tangible benefits, such as the ability to
attract capital or business or investments, so the question remains if there are possible benefits to a
higher credibility rating that would help motivate jurisdictions to work toward stronger and more
reliable emissions-reduction programs, even in the absence of binding central governance or
requirements.
There was general agreement that over-engineering the system of linkage might reduce
market efficiency and intimidate potential market participants. On the other hand, the question
remains how to set up the system so that some of these standards and values evolve or emerge
more organically. If we think of the right to emit tons of CO2 as a commodity, then in theory, you
might be able to let standards and rates evolve, based on buyer and seller needs and agreements as
was the case historically in other commodities markets. However, this comparison is not perfect,
because it is hard to measure and verify the CO2 emissions or avoided emissions associated with
each transaction, and this commodity’s market value is only a function of the regulatory
environment, not exogenous supply limitations or organic demand. Alternatively, you could think of
a CO2 emissions allowance as a financial instrument, though those parallels have their limitations,
as well.
It was also noted that while it may be ideal to be able to link fully with trusted and mature
systems, it is worth thinking about discounting or partial linking or credit ratings as an important
transitional tool and as fostering learning opportunities for possible future fully-linked partners. An
important example is the CDM in China, which can be seen as a partial or indirect link in that limited
numbers of CERs were accepted into the EU ETS. There were significant concerns about
additionality of some projects, but it seems likely that China’s considerable experience designing
and implementing emissions-reduction projects and tracking and selling emissions credits was an
impetus for them to consider subnational and national carbon markets—and that their experience
with the CDM was an important opportunity for them to learn and build capacity on carbon pricing
policy. If this was an important driver of China’s current push to establish a national carbon market,
surely that is valuable in and of itself even if there were some efficiency losses along the way.
Essentially, while it might be ideal to link 1:1 to trusted systems, it may not be possible to get there
in one leap, and there may be other benefits to more limited linking at first. Weighing these gains
against the transaction costs and inefficiencies of more complex linking arrangements, as well as
the practical and political feasibility of the more complex linking proposals, is an ongoing exercise.
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Day 2
On day two we were joined by several additional participants from NGOs and IETA’s member
companies, and by more senior representatives from the World Bank. (See appendix for full list of
participants). Day two opened with comments from the hosting institutions and a summary of Day
One presentations and discussion topics, and then proceeded to additional presentations and
discussion.
Opening comments:
Generally speaking, countries are doing what is best for them (acting in their own interest).
The World Bank Group is one institution trying to help them quantify and assign value to those
efforts. One key element of that process is thinking through how their efforts might be compared to
others in a way that makes them tradable. The emerging Durban/Paris policy architecture will likely
merge a top down framework for certain functions—notably measurement, reporting, and
verification (MRV) and systems for ensuring transparency of data on emissions and performance—
with bottom up INDCs. The INDCs will come in a wide variety of forms. This heterogeneity makes
comparison and assessment complex. Companies want a system that functions and that is not too
complex. They want freedom to choose what is best for them, and they want fungibility of
mitigation units, because it gives them greater flexibility to find abatement opportunities and
reduce costs.
Perspective and lessons from the World Bank Group’s Partnership for Market Readiness
(PMR): The PMR has been successful as a forum for technical discussions and sharing of experience,
information, and lessons learned. Initially, it was focused on ETSs and crediting mechanisms, but as
member countries come with more varied ideas, PMR is expanding its scope to work with them on
those efforts. The goal is to try to help them determine how to assign value to their performance
with regard to emissions reduction, possibly through trade. PMR members are working mostly on
technical issues, such as MRV, baselines, and policy design. Countries are interested in the lessons
they can learn from others who are implementing climate policies and want to know what the
emerging framework implies for their efforts. They specifically are trying to understand what they
need to know in the early design and planning stages to make linking and international compliance
easier, even if they are not likely to implement linkage for quite some time.
Discussion
Participants recapped themes of the first day and re-opened the discussion of who should
(or is best equipped) to evaluate INDCs and monitor mitigation performance. Does it make sense to
rely on NGOs to evaluate INDCs? Based on experience in other fields and sectors, it is probably
advantageous for NGOs to be involved in monitoring. However for credibility and impartiality, it was
noted that the system should not rely solely on NGOs. Academia could have an important role to
play, but the assessment regime has to be acceptable to sovereign nations or else they will opt out.
The issue is difficult and political. However, regardless of who performs assessment/MRV, it only
works and is credible and environmentally relevant if there is good information, transparency, and
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consistency over time in the assessment process. (That finance and adaptation will be included in
some INDCs means that efforts to standardize comparison metrics will also need to consider those
elements. A further complication is that INDCs often include what targets are, but not details about
how to get there, which makes assessing causality, and subsequently success or failure even more
difficult.)
Regardless of what is planned centrally, it is likely that countries and some organizations will
do assessments and comparisons of their own. The challenge is in consolidating or normalizing
those in a manner that leads to a meaningful, shared, comparable understanding of what countries
are doing. In the current Post-Copenhagen world, sovereign countries will do what they want, and
any centrally recommended surveillance and assessment regimes must be acceptable to them or
else they will not opt in. It is not reasonable to think that a central agency will be able to set and
impose exchange rates on countries, for example, because the compliance value of an allowance is
determined entirely by an entity’s home regulator, and that is who domestic regulated entities look
to for guidance and to determine their compliance requirements.
As an example, the Climate Transparency initiative, mentioned above, is convening
disparate groups who are analyzing contributions to learn from each other and compare notes on
their approaches, methods, and assumptions. Participants are making some progress toward
converging on a common conceptual framework and terminology. The goal is to move toward a
composite index of sorts, currently in early stages. The Climate Transparency initiative may be a
good step, but many still fear that all of these groups have a bias, and that it might be beneficial to
also find more neutral bodies. One example is the Auditor General in Alberta, which investigates
offsets. Determining who has the authority to assess and how those results are communicated
influences how the analysis and results are received. Sovereigns will decide on their own if they are
interested in opting into the assessment framework, but if it is designed well and transparently,
they may be inclined to borrow best practices rather than recreate the wheel themselves.
We talk a lot about 2° C as the relevant comparator, but maybe we also need to think about
the point at which we turn the corner globally to a state of the world in which greenhouse-gas
emissions are no longer rising in absolute terms and instead starting to decrease. That is an
important milestone that will come sooner than 2° C, so could be useful to consider. A follow up
question was if the IPCC can or should do these comparisons. Many thought that given their
reliance on volunteer time and other responsibilities, it would probably be more effective to
emulate international mutual review panels such as the IMF, WTO, G20 or OECD, which have
professional staff that do periodic reviews with in-country teams.
Presentation 5: Mitigation Value
This presentation was on the concept of mitigation value and how ratings and exchange
rates could be used to rank and compare the mitigation value of various projects, programs and
policies to facilitate trade. The presentation makes a distinction between linking and networking.
Linking, as seen to date, probably means enacting regulatory changes to harmonize policies enough
to link and trade allowances on a 1:1 basis.
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Networking describes exchange and trade among a wider range of policies and programs.
Rating and discounted trading could help facilitate networking among highly heterogeneous policies
without requiring as many regulatory changes to each policy. Mitigation value is defined as the
atmospheric impact of a unit of carbon. While the environmental impact of one ton of carbon
anywhere in the world is the same, the concept of mitigation value reflects the net impact of a
policy or program depending significantly on how policies are designed and measured. Specifically,
counting avoided tons of CO2 means comparison to a counterfactual, so where you start counting
and how you define that counterfactual is critical.
The Networked Carbon Markets (NCM) initiative proposes an independent assessment
framework based on a risk based assessment at three levels:



The program level;
The broader jurisdictional level, looking at the policy context;
The extent to which a country’s actions/pledges are sufficient contributions to the
globel emission reduction effort (similar to assessing ambition) The NCM approach would translate this combined risk evaluation into “exchange rates” or
“trading ratios” to facilitate linkage based on a shared understanding of mitigation value of
programs in different jurisdictions. While some react as if this is impossibly complex, there are in
fact other markets that do similar things. There are parallels in the commodity market, currency
market, and the debt and bond markets. (See presentation slides in Appendix for more detailed
comparison to each market).
Presentation 6: Climate Finance, Carbon Pricing, and Linkage of Mitigation Efforts in a Fragmented
World
This presentation proposed a new type of financial instrument, based on the value of
emissions reductions activities, with a view (in part) to supplement existing sources of capital for
low-carbon investment. Research shows that we need high carbon prices to trigger the type of
investment in technological innovation needed to meet carbon emissions reduction goals, while at
the same time high carbon prices are likely to hurt vested interests, perhaps resulting in stranded
fossil-fuel assets. The private sector also lacks trust in a carbon price remaining in place over the
lifetime of longer investment decisions, which reduces the extent to which investors react to
current carbon prices.
This proposal is to create a financial instrument that represents “value to climate
remediation asset” (VCRA) that provides more up-front support for long-term low-carbon
investments to help reduce the cost of capital, which is otherwise riskier and more expensive,
thereby making low carbon investments more competitive. This instrument would need to be
backed by a capital, most likely coming from donor countries willing to finance the instruments at
first. This value would be linked to the social cost of carbon. Central banks could hold these assets
on their balance sheets and use them to back debt, which could be repaid with carbon credits
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generated by low carbon investments. This proposal is one way to pair excess savings in some
places with the need to provide additional up front capital to low-carbon investments.
Discussion
It was noted that some companies build at enormous scale and often finance large projects
internally; therefore, an instrument like the VCRA may not be something that changes behavior at
the required scale. It is very hard to affect cost of financing at that large scale. It was noted that the
same concerns apply to the Green Climate Fund model.
Discussion points related to the concept of mitigation value and the feasibility of an exchange rate
approach to networking:
The discussion started with the basic question of: Why even try to link such heterogeneous
systems? Would it not be better to simply say that people need to have a market based system in
order to link? The counterpoint to was that linking only homogenous systems leaves some “money
on the table” in terms of cost-effectiveness gains. Moreover, a wide variety of systems is being
implemented, so while heterogeneous linking may be economically and logistically less than ideal,
that is the reality we face. Insisting that every country adopt a similar system in order to link does
not allow countries to develop policies that work for them locally, and is likely to a political nonstarter.
Assuming it is worth trying to link such heterogeneous systems, there is no reason to expect
sovereign countries to abide by an externally imposed exchange rate. The value of an allowance is
in the eyes of the home regulator, so only if they accept the ratings are they meaningful. This is
something that any of the proposals we have discussed need to keep in mind when thinking about
governance and where and how ratings and rankings might be practically useful.
There are some relevant parallels in other financial markets, but they are different in
important ways. Debt, commodities, and foreign exchange markets all have different risk profiles,
and the exchange rates and prices come from supply and demand which is driven by the holder of
the instrument bearing risk of default or devaluation. A similar price signal could evolve if the
holders of carbon emissions allowances were liable for the risk of any changes in rating or valuation,
and if regulators, like the U.S. Environmental Protection Agency, regularly re-rated and revalued the
compliance value of CO2 allowances from various trading partners. If this were the practice, then
exchange rates would be generated by supply and demand based on the market’s expectations of
the current and future compliance value of various allowances.
One major benefit of the mitigation valuation exercise is that it focuses on value to the
atmosphere by anchoring the accounting system to some centralized absolute volume of carbon
emissions, and trying to rate efforts and policies relative to that. This is important because we need
to keep the total atmospheric impact in mind for any of these rating and linking schemes to be
meaningful in helping address climate change.
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An open question about implementation is when and how ratings would be updated, and
what uncertainty that would introduce into the system.
Presentation 7: A Club of Carbon Markets
This proposal suggested the formation of carbon clubs, whose members were linked
jurisdictions. Non-members might opt-in to such a club if they met certain criteria. Clubs would be
complementary to the efforts of UNFCCC and are a way for some countries to mitigate more
ambitiously at present with at least some international reciprocity, while UNFCCC negotiations
continue.
Working from the premise that markets with declining caps are key to the solution, we need
a number of elements of market infrastructure. Those include: transparent tracking and accounting
of emissions units and transactions, and common or mutually recognize guidelines or standards to
ensure the monitoring and integrity of the system. The UNFCCC may be able to provide guidance
for some of this infrastructure, but many of the details can be left to those jurisdictions that are
already starting markets and who are interested in trading. There is no need for UNFCCC to dictate
the details, and there is no need for countries to wait for the international negotiations to conclude
before they begin working together.
A carbon club would be a group of jurisdictions working together on market infrastructure
and standard rules that other countries would want to join, based on clear benefits of membership
that are not otherwise available. These would include aggregate cost savings and liquidity, and also
possibly mutual guarantees that other members would not impose border carbon adjustments.
Club members could also benefit from the ability to share some of the burden of creating and
maintaining trading (e.g., infrastructure, transaction tracking). (The UNFCCC would perform certain
functions, including preventing double counting of emissions reductions applicable toward INDCs.)
The club could establish clear criteria for membership, including that all members have a
market based policy with a hard cap, as well as basic requirements for transparency, data sharing,
and MRV. This idea is modeled on other institutions, notably the WTO, in which there are not
binding treaties being imposed on others. Rather, countries join together and agree to certain
standards and practices in exchange for the benefits (most importantly, in this case, most favored
nation trading status).
Presentation 8: Considering Model Rules for Hubs and Clubs
This presented the idea of creating carbon hubs or clubs, either within or outside the
UNFCCC umbrella. The basic concept was similar to Presentation 7, in that countries work together
to establish common set of rules required for additional countries to join. Outside groups could help
propose model rules for linking that help these groups form. The following were proposed as a
straw man draft for consideration for basic recommended club rules:
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1.
2.
3.
4.
5.
6.
7.
8.
Commitment to comparable targets (which may be rated in some manner)
Common definition of units (allowances, offsets, etc.)
Accepted scope of coverage
Similar emissions-verification checks
Compliance assurance (perhaps with some band; penalty defined)
Shared registry (or network of registries)
Accepted market surveillance system
Agreed distribution of functions
Another key element is thinking carefully about who plays what roles, how much can be
delegated out to others or even privatized, and what needs to be done by each country themselves,
balancing the desire for flexibility and autonomy with ensuring consistency and saving members
work by relying on common infrastructure.
Discussion
A key concept of clubs is that countries will need to opt in and agree to the rules, which in
turn requires that the benefits of joining must be sufficient. “Sufficiency” depends on how much
mitigation potential members are currently undertaking; more benefits will induce countries to
attempt greater increments of ambition. The goal should be to tip the scales for countries that are
on the fence by making an ETS sufficiently appealing and feasible. With regard to feasibility, clubs
can make linkage more accessible and provide support, knowledge, and best practices to make
design and implementation easier for new members. (There may also be broader reputational or
diplomatic reasons for countries to want to join, including recognition as responsible states and
opportunities to use “soft power” for purposes unrelated to climate change.)
Another issue raised was how to deal with countries that do not quite meet the standards
for “sufficiency” in a club. The group discussed whether a discounted value could be applied to units
from these jurisdictions, which could potentially provide them with an “on-ramp” to participate in
the club. Similarly, the group discussed how to incentivize ambition among those countries that are
already in a “club”. One option discussed was whether these countries could be rewarded for their
additional effort and innovation, by assigning a higher value to units from these countries.
A number of presentations throughout the Workshop were similar to these, and it could be
a good concept - but there was skepticism over whether or not so many rules and criteria are
needed for harmonizing. Again the concern was raised that we do not want to over-engineer
markets. The goal should be to allow as much freedom to policy designers in each jurisdiction and
only dictate minimum standards needed for effective trading. Perhaps the number of club rules in
Presentation 8 could be reduced further.
It was noted that complimenting the UNFCCC process is important as we do not want rules
that potentially conflict with UNFCCC efforts or appear to circumvent that process.
It was also highlighted that designers would need to be cognizant of who is in and who is
out in these clubs. The concept could backfire if only wealthy, high capability jurisdictions can join.
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It would not be advantageous for this to become an OECD club, for example. Related—one would
not want membership for the purpose (or perceived purpose) of naming and shaming those
countries not in. Rather, the purpose is to provide benefits for those countries who are members,
so that others aspire to join.
Open questions:




Would club concept lead to a tiering of countries?
Might it lead to the development of multiple clubs with different standards?
Could members who are not completely ready be observer members and get some
benefits?
Could different tiers of clubs benefit from sharing some standard centralized infrastructure?
Summary, Conclusion, and Next Steps
The workshop was a productive two days of discussion that allowed for the sharing of new
ideas and the surfacing of additional challenges, concerns and opportunities drawing on a wide
range of experience and expertise. It is widely recognized that in the current bottom up world,
sovereign countries will do what they see as in their own best interest. However, it was also agreed
that that there is an important and helpful role that outside groups can play including: sharing of
best practices, standardization and support of some of the key infrastructure, and tracking and
assessment of plans and progress. In order for this to be seen as beneficial, it must be done in a
way that is facilitative and not duplicative of the UNFCCC or punitive to countries seeking to plan
and implement their own INDCs.
IETA, the Harvard Project on Climate Agreements, and the World Group are continuing
discussions on this set of issues. The Harvard project will produce a brief, based in part on the
proceedings of this Workshop, that will be released in early November 2015. This brief will serve as
background to an event at COP-21. The institutional collaborators look forward to continued
engagement with Workshop participants and other colleagues focused on the design and
implementation of the Paris agreement.
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