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Providing Impetus - G7 initiate strategic dialogue on Carbon Markets

(Photo: Carbon Market Watch)

In the run-up to the upcoming Paris Climate Change Conference, Germany’s G7 Presidency presented a major opportunity to prominently put the important issue of climate change policy on the agenda this year. At the G7 Summit at Schloss Elmau in Germany, the G7 leaders acknowledged the need for urgent and concerted action to address climate change. Emphasising that decarbonisation of the global economy over the course of this century is required, the G7 leaders committed, among other things, to the long-term objective of applying effective policies and actions, including carbon market-based and regulatory instruments. In order to facilitate a worldwide low-carbon development path, the G7 leaders therefore decided to establish a political platform for strategic dialogue on these issues, and called on other countries to join them. Acting on this mandate, the German Federal Ministry for the Environment, Nature Conservation, Building and Nuclear Safety, has taken concrete steps towards establishing the Carbon Market Platform: Strategic Dialogue on Carbon Markets and the Regulatory Environment, - a kick-off meeting being held in Berlin on the 8th and 9th of October.

Rationale to Establish a Carbon Market Platform
Market-based policies and other regulations that directly or indirectly put a price on greenhouse gas emissions are considered key elements in an effective climate policy mix, and their implementation will be essential if the global community is to avoid dangerous interference in the climate system. The last decade has seen strong progress in this regard, both at international and domestic level, with a wide range of instruments implemented and planned.

However, there remain significant challenges. Progress at UNFCCC level is stalled, and the international carbon market is struggling with low demand for credits. At the same time, domestic approaches are growing, but in a fragmented and uncoordinated manner. The main challenge now is to find how and to what extent the different approaches can be brought together, and what common approaches can maximise benefits to the global community. In this regard, the Carbon Market Platform represents a new opportunity for international cooperation that can provide political impetus on these issues, and ultimately foster a robust and sustainable global carbon market while taking into account national preferences and circumstances.

There are several areas in which the Carbon Market Platform can provide timely impetus to the international process. International negotiations at the UNFCCC are set to draw up a new climate change agreement in Paris this year. This will form the basis for international climate policy architecture to replace the Kyoto Protocol from 2020. To date, 147 Intended Nationally Determined Contributions (INDCs) have been submitted by around 174 countries, with around 93 INDCs implying the use of international and/or domestic carbon markets, cp. Update on the Role of Market Mechanisms in Intended Nationally Determined Contributions elsewhere in this issue. There is clearly great potential for a common framework for carbon markets, developed under the UNFCCC, to allow the international community to achieve more ambitious climate targets, and to foster effective climate policy around the world while enabling cooperation to meet mitigation commitments. However, so far it is unclear to what extent carbon markets will be featured in the Paris agreement and how the UNFCCC will proceed in developing overarching rules and standards. While it is likely that carbon markets will be mentioned in the agreement text in some form or other, it is expected that the details of any potential international accounting framework for Emissions trading will still need to be developed in the period following COP21.

It is here that the Carbon Market Platform can add real value to the international process. By supporting and complementing the UNFCCC in the development of common rules and standards, the platform can ensure that in the future, international carbon markets can deliver environmentally sound and cost-effective climate outcomes. To achieve this, the Platform is designed to bring together interested countries and find a common voice to guide the development of this framework. Key to this process is facilitating open and honest dialogue that can go beyond official negotiating positions to build bridges and find common ground. Several issues were discussed at the first meeting, including the need for robust accounting rules and MRV standards that can ensure transparency and avoid double counting, while remaining flexible enough to allow domestic approaches to flourish. It was also broadly agreed that the G7 countries cannot hope to achieve this alone, so that it is essential to broaden membership from the outset, and ensure that all interested countries can participate in the development of the common framework. In particular, large emitting countries, and countries that have indicated interest in international carbon markets through their INDCs, will be invited to join the Platform on this issue.

Beyond a common accounting framework, the UNFCCC has the potential to further develop flexible mechanisms for international Emissions trading. The success of the Kyoto mechanisms is not only measured in emissions reductions, but in the establishment of a worldwide infrastructure for climate
change mitigation projects. They have demonstrated the ability to stimulate investment mitigation activities, exploit cost-effective abatement options, build up expertise on climate change mitigation in host countries, and give momentum to domestic climate policy. However, due to a dramatic decline in demand and a significant loss of trust in international markets, many project activities are currently regressing, and hard won institutions, infrastructure and expertise in developing countries are at great risk of being demobilised and lost.

On this issue, the Carbon Market Platform also has potential to take positive action, and there is considerable interest in exploring options for promoting the use of market mechanisms in future international cooperation. Broadly, discussions can explore the potential for common actions to restore confidence in international carbon markets and revive the demand for units from emission reduction projects. More specifically, the future of the existing Kyoto mechanisms could be discussed, with a view to adapting them to a post-2020 landscape and complementing them with new mechanisms. A common position on the value of the offset market can send a strong signal to carbon market actors, while there is also potential for common approaches to be developed within the Platform that can provide more concrete support.

While negotiations at the UNFCCC continue to make progress, many countries, and even sub-national jurisdictions, have already implemented or are planning domestic mitigation policies in accordance with their own domestic circumstances. Approaches include carbon pricing instruments such as Emissions trading schemes, carbon taxes and crediting mechanisms, as well as a range of regulatory measures such as fuel taxes, technology standards, and subsidies that may also put an implicit price on carbon. These bottomup efforts are promising, and there is no doubt that action at all levels is required to effectively address climate change. However, an overview of existing instruments shows a fragmented policy landscape. In this regard there is great potential for international cooperation to generate benefits from policy coordination. Firstly, through open dialogue on domestic approaches, the Carbon Market Platform can foster understanding of the different approaches, their drivers and barriers, as well as best practice. Eventually, such dialogue may also uncover options for policy coordination that can enhance environmental integrity, leverage gains in efficiency and reduce competiveness concerns.

First Step - Kick-off Event
Still under its G7 Presidency, Germany hosted the kick-off event of the Carbon Market Platform. This was attended by high level policy makers from the G7 countries and the European Commission as well as representatives of the World Bank, the International Carbon Action Partnership (ICAP), the United Nations Framework Convention on Climate Change (UNFCCC) and the Organisation for Economic Co-operation and Development (OECD).

As it was the kick-off meeting of the Carbon Market Platform, structural and organizational aspects were high on the agenda. It was agreed to establish the Platform for an initial five year period. This timeframe is important in two respects: Firstly, it allows the Platform to focus on the period between
COP21 and 2020, when the new global agreement will come into effect. Secondly, it is expected that during this period, both international and domestic policy approaches will undergo dynamic development, and it is therefore during this time that the Platform can be most effective. For the initial phase of the Platform, a lean and flexible governance model will be set up, with rotating Co-Chairs taking the main steering role. Germany offered to co-chair the Platform for 2016, and a second co-chair is to be decided by the second meeting at the beginning of next year.

The Carbon Market Platform has been conceived as a voluntary forum for strategic political dialogue. It is therefore primarily a country-led initiative. Given that the G7 countries have initiated the Platform’s establishment, it is considered important to extend membership to other countries, especially
major emitters and others that have demonstrated significant climate leadership and have an interest in using carbon markets. The main forum of the Platform will be the annual strategic dialogue that will engage policy-makers at the Director General level, and this will be supported by ongoing preparatory work at the technical level.

Additionally, the aim of the Platform is to facilitate open dialogue between decision makers that can bridge the gap between the highest political level and existing technical initiatives and partnerships. Several international organisations are currently performing technical and political work in a range of related fields and the Platform will cooperate closely with these organisations as technical partners. Key technical partners include the UNFCCC, ICAP, OECD and the two initiatives of the World Bank, the Partnership for Market Readiness (PMR) and the Carbon Pricing Leadership Coalition (CPLC). Through cooperation with these organisations, it is envisaged that the Platform will enable state-of-the-art technical knowledge
and expertise on climate policy to reach decision makers and enter the international political discourse.

Franzjosef Schafhausen, BMUB

This article was published first in Carbon Mechanisms Review 04/2015