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New Market Mechanisms: Where next?

February 2013 - As confirmed once again at the conference in Doha, the design of the new market mechanisms (NMM) is going nowhere fast. How can the instrument be advanced and when can progress be expected? Three prominent experts explain how they see the situation.

Frank Wolke, Head of Climate Change Projects: Enforcing the Project Mechanisms Act, at the German Emissions Trading Authority (DEHSt)

Looking at the work that still needs to be done, I don’t think we’ll see a new, workable market-based approach until 2020 at the earliest. We need examples that demonstrate the potential functions of a mechanism of that kind. To provide those examples, pilot projects must be launched without delay, otherwise the 2020 deadline won’t be met. Efforts to link numerous emissions trading systems could perhaps also serve as a model for bottom-up development of an NMM. Sectoral approaches could be developed for selected countries and sectors based on bilateral cooperation. The positive experience gained in this area will hopefully encourage others to join forces and provide the foundation for international cooperation in the longer term. The German Emissions Trading Authority (DEHSt) is currently conducting research into options for the design and implementation of bilateral agreements for sectoral approaches and their interaction with other market mechanisms. Smaller steps of this nature could prove to be the better approach instead of hoping for a big break-through at one of the next climate summits.

Matthias Krey, CEO, perspectives climate change

The climate change talks in Doha in December 2012 brought only minor decisions on the new market mechanisms. This was largely because some key countries were unwilling to raise their emissions targets (both under the Kyoto Protocol and in line with the Cancun Agreements). Also, last year’s collapse in CER prices killed any appetite for new certificate sources.

With regard to the market-based mechanism (NMM), it is clear that it will be placed under the “leadership and supervision” of the COP and will be based on voluntary participation by Parties. The framework for various approaches (FVA) will be subject to the “decision-making authority” of the Parties. Thus, the influence of the Parties on the actual design of the trading system is likely to be far weaker than for the NMM. For both models, the Parties are required to submit proposals for the future working program by 25 March. However, it can be expected that the development of the new market mechanism will continue in a somewhat half-hearted fashion as long as the problem of over-supply of certificates from the CDM and JI in relation to countries’ emissions targets remains unresolved.

Martin Schröder, KfW Bank

It is regrettable that the previous year’s requirement from COP 17 to adopt modalities and procedures could not be fulfilled in Doha. The EU proposal on the modalities and procedures also went unaddressed. Ideas regarding the FVA are particularly varied. Given the timeline for a new international climate change agreement, and what are still long and drawn-out negotiations, it is all the more important to supplement regulatory development with pilot measures. This would not only provide key findings to assist the international negotiations, but would also create the necessary structures and capacities in partner countries. This in turn would increase the likelihood of enshrining NMM in an international climate change agreement in 2015. NMM certificates would thus be available from 2020, along with the entry into force of the new agreement. The changes agreed in Doha would likely allow use of advance versions of such NMM certificates, including from pilot measures under the Kyoto Protocol, from an earlier date. The design of the FVA and NMM, and possibly the use of certificates from these new approaches, will remain key elements of the future negotiation process.