Designing Effective Regulation for Carbon Markets at the International, National, and Subnational Levels

How can we design effective regulation for carbon markets worldwide?

Project Summary

Government regulation created carbon markets. How can one prevent the occurrence of market abuses in this context? Given that carbon market creators possess ample information able to assist with market monitoring, this project aims to investigate past carbon market abuses, to identify the gaps in oversight frameworks that led to those abuses, and to create new rules and principles for carbon market regulation effective on all levels.

The research questions guiding this project are as follows:

– What principles and rules should guide an effective and feasible multi‐level carbon market regulatory oversight?

– What were the risks of market abuse in the past, how can they be detected, and what are the potential future risks?

– To what extent are existing market regulations and enforcement practices addressing the risks identified?

– How can cooperation be achieved for effective carbon market regulation and oversight at an international level?

– What are the requirements for a feasible and effective regulation for carbon markets at an international, national, and subnational level?

In order to address the complexity of these issues the methodology employed combines several threads. In the first phase researchers will construct an organizational typology of the markets; in a second phase primary data are categorized based on document-based content analyses in conjunction with interview-based information; in the third phase the results of the first two phases are combined. 

Article

Additionality revisited: guarding the integrity of market mechanisms under the Paris Agreement

The Paris Agreement requires mitigation contributions from all Parties. Therefore, the determination of additionality of activities under the market mechanisms of its Article 6 will need to be revisited. This paper provides recommendations on how to operationalize additionality under Article 6. We first review generic definitions of additionality and current approaches for testing of additionality before discussing under which conditions additionality testing of specific activities or policies is still necessary under the new context of the Paris Agreement, that is, in order to prevent increases of global emissions. We argue that the possibility of ‘hot air’ generation under nationally-determined contributions (NDCs) requires an independent check of the NDC’s ambition. If the NDC of the transferring country does contain ‘hot air’, or if the transferred emission reductions are not covered by the NDC, a dedicated additionality test should be required. While additionality tests of projects and programmes could continue to be done through investment analysis, for policy instruments new approaches are required. They should be differentiated according to type of policy instrument. For regulation, we suggest calculating the resulting payback period for technology users. If the regulation generates investments exceeding a payback period threshold, it could be deemed additional. Similarly, carbon pricing policies that generate a carbon price exceeding a threshold could qualify; for trading schemes, an absence of over-allocation needs to be shown. The threshold should be differentiated according to country categories and rise over time.

Article

Evolution of international carbon markets: lessons for the Paris Agreement

The Paris Agreement will greatly benefit from the past experience with international market mechanisms for greenhouse gas (GHG) emissions reductions and related regulatory systems, which have gone through four periods with specific challenges. The first period 1997–2004 operationalized the mechanisms defined in the Kyoto Protocol, the Clean Development Mechanism (CDM) and Joint Implementation (JI). Pilot activities in different sectors were undertaken by the public sector, and the first baseline and monitoring methodologies officially approved. Between 2005 and 2011, the carbon markets expanded massively. The EU emission trading scheme (EU ETS) was linked to the Kyoto mechanisms, creating demand for carbon credits from the private sector. During this “gold rush” period criticism emerged with regarding the uneven geographical distribution of projects, as well as environmental integrity problems related to baselines and additionality. The next period saw a collapse in carbon prices between 2012 and 2014, limiting the development of new projects. The quantitative limits on the use of offsets in the EU ETS were reached and the failure to agree on a new international regime resulted in a drying up of demand from governments. The 2015–2018 period is characterized by a gradual stabilization of the international climate regime. The Paris Agreement adopted in 2015 increases complexity through global participation in mitigation. Future carbon markets will therefore face both old challenges—supply-demand balance, environmental integrity, transaction costs—and new ones—interactions with other policies and national targets, and sectoral/policy baselines and additionality checks preventing hot air proliferation.

Research Team

Regina Betz
Coordinator
Zurich University of Applied Sciences ZHAW

Katharina Michaelowa
Co-Coordinator
University of Zurich

Andrea Baranzini
Principal Member
Haute école de gestion, Geneva

Rainer Baisch
Principal Member
University of Zurich

Paula Castro
Principal Member
University of Zurich

Axel Michaelowa
Principal Member
University of Zurich

Raphaela Kotsch
Principal Member
Zurich University of Applied Sciences ZHAW

Peter Schwendner
Principal Member
Zurich University of Applied Sciences

Michael Mehling
Associated Member
Massachusetts Institute of Technology

Rolf H. Weber
Associated Member
University of Zurich

Karolina Sobecka
Associated Member
Hochschule für Gestaltung und Kunst FHNW

Souraya Hamad
Associated Member
Zurich University of Applied Sciences ZHAW

Status

ongoing

Disciplines

Themes

Regions

Countries

All countries

Host Institution

Coordinator

Year