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Transformative Potential of the New Market Mechanism

JIKO Policy Paper 01/2015

March 2015 - There is general agreement that preventing dangerous climate change requires a fundamental transformation of the global economy. Regarding carbon markets, the EU, for example, has called for the new market-based mechanism (NMM) to be established under the UNFCCC to "facilitate transition towards low carbon economy and attract further international investment". A new JIKO Policy Paper discusses the transformative potential of the NMM and how it should be structured to maximize transformative impact.

The analysis shows that details in the arrangements of the scheme, such as allocation of allowances can significantly influence the incentive structure of the instrument and hence its potential to contribute to transformational change. The authors conclude that carbon pricing is necessary but is by itself not sufficient to redeem the various types of market failures that have led to the unsustainable global socio-economic system we are deemed to change. An NMM should therefore be tailored to complement other national policies.