Published by
New Climate Institute (NCI)
Year
2015

Carbon Market Mechanisms - Role in Future International Cooperation on Climate Change

Carbon market mechanisms were a fundamental component of the Kyoto Protocol, the major international agreement on climate change. Markets were introduced to allow more flexibility on where greenhouse gas emissions are to be reduced and to offer countries the ability to invest in more costeffective mitigation options outside of their boundaries and thus lead to cost savings on the global level, which might in turn facilitated increased ambition for climate change mitigation.

Countries have embarked to negotiate a new international climate agreement to be adopted in Paris in December 2015. The potential role of carbon market mechanisms in the context of international commitments today is more complex, since developing as well as developed countries are expected to take on mitigation commitments in the new agreement. Therefore, a major component of the agreement will be “nationally determined contributions” and they are likely to take various forms. Decisions on the options for future international market mechanisms, namely the New Market Mechanism (NMM) and Framework for Various Approaches (FVA), still need to be taken. The potential position of market mechanisms in a future international climate change agreement remains unclear, largely because the structure the potential agreement itself remains to be clarified.

This discussion paper first provides an overview of the development of the international carbon market mechanisms (section 2) and emerging domestic carbon pricing systems (section 3). It then lays out three distinct but potentially complementary options for market mechanisms in a future climate change agreement (section 4). Also options for narrowing the emissions gap before 2020 using market mechanisms are explored (section 5). Finally the paper provides recommendations for short term action for the G7 countries (section 6).