State of the Carbon Market
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Insert Title Here. Enter subtitle here (if none then delete this text box). Insert author name(s) If you have a photo – drop in here. If Insert date (Month and Year) not then click on box outline and delete © 2008 International Institute for Sustainable Development (IISD) Published by the International Institute for Sustainable Development State of the Carbon Market: How the The International Institute for Sustainable future market can Developmentencourage contributes to sustainable development by advancing policy recommendations on international trade and developing countryinvestment, participation economic policy, climate change, measurement and assessment, and natural resources management. Through the Internet, we report on international negotiations and Background Paper share knowledge gained through collaborative projects with global partners, resulting in more rigorous research, capacity building in developing countries and better dialogue between North and South. IISD‘s vision is better living for all— sustainably; its mission is to champion innovation, enabling societies to live sustainably. IISD is registered as a charitable Peter Wooders and Jean Nolet organization in Canada and has 501(c)(3) status in the United States. IISD receives core operating support from the Government of Canada, provided through the Canadian International Development Agency (CIDA), the March 2009 International Development Research Centre (IDRC) and Environment Canada; and from the Province of Manitoba. The institute receives project funding from numerous governments inside and outside Canada, United Nations agencies, foundations and the private sector. International Institute for Sustainable Development 161 Portage Avenue East, 6th Floor Winnipeg, Manitoba Canada R3B 0Y4 Tel: +1 (204) 958–7700 Fax: +1 (204) 958–7710 E-mail: [email protected] Web site: http://www.iisd.org/ © 2009 International Institute for Sustainable Development (IISD) State of The Carbon Published by the International Institute for Market: How the Sustainable Development future market can The International Institute for Sustainable Development contributes to sustainable encourage development by advancing policy developing country recommendations on international trade and investment, economic policy, climate change, participation measurement and assessment, and natural resources management. Through the Internet, we report on international negotiations and Background Paper share knowledge gained through collaborative projects with global partners, resulting in more rigorous research, capacity building in Peter Wooders and Jean Nolet developing countries and better dialogue between North and South. IISD‘s vision is better living for all–sustainably; March 2009 its mission is to champion innovation, enabling societies to live sustainably. IISD is registered as a charitable organization in Canada and has 501(c)(3) status in the United States. IISD receives core operating support from the Government of Canada, provided through the Canadian International Development Agency IISD acknowledges the generous (CIDA), the International Development support of Environment Canada. Research Centre (IDRC) and Environment Canada; and from the Province of Manitoba. The institute receives project funding from numerous governments inside and outside Canada, United Nations agencies, foundations and the private sector. International Institute for Sustainable Development 161 Portage Avenue East, 6th Floor Winnipeg, Manitoba Canada R3B 0Y4 Tel: +1 (204) 958–7700 Fax: +1 (204) 958–7710 E-mail: [email protected] Web site: http://www.iisd.org/ The Carbon Market Preface The International Institute for Sustainable Development (IISD) has prepared three papers to explore how major developing economies might become effectively engaged in a post-2012 global climate change regime. The goal of this second background paper, The Carbon Market: How the future market can encourage developing participation is to examine the impact the carbon market could have on funding mitigation and adaptation in developing countries. The information in this background paper provides input to the analysis of the main report of the series, Encouraging Developing Country Participation in a Future Climate Change Regime; and should be read in conjunction with that report. The first background paper in the series is, Financing Mitigation and Adaptation in Developing Countries: New options and mechanisms. The Carbon Market Abbreviations and Acronyms AAU Assigned Amount Unit AFOLU agriculture, forestry and other land use AOSIS Alliance of Small Island States APP Asia-Pacific Partnership on Clean Development and Climate A/R afforestation/reforestation AWG-KP Ad Hoc Working Group on Further Commitments for Annex I Parties under the Kyoto Protocol AWG-LCA Ad Hoc Working Group on Long-term Cooperative Action under the Convention CCGT combined cycle gas turbine CCS carbon capture and storage CCX Chicago Climate Exchange CDM Clean Development Mechanism CER Certified Emission Reduction CH4 methane CMP Conference of the Parties serving as the Meeting of the Parties CO2 carbon dioxide CO2e carbon dioxide equivalent COP Conference of the Parties DCSC developing country sectoral commitments DRE decentralized renewable energy EC European Commission EE energy efficiency ERU Emissions Reduction Unit EU European Union EUA European Union Allowance EU-ETS European Union Emission Trading System FAO Food and Agriculture Organization FCPF Forest Carbon Partnership Facility Gt Gigatonne (billions of tonnes) GDP gross domestic product GHG greenhouse gas HFC hydroflourocarbon IEA International Energy Agency IET International Emissions Trading IETA International Emissions Trading Association IISD International Institute for Sustainable Development JI Joint Implementation LDC least developed country LULUCF land use, land-use change and forestry MMSD market mechanism for sustainable development MOP Meeting of the Parties The Carbon Market MRV measurable, reportable and verifiable Mt megatonne (millions of tonnes) N2O nitrous oxide NAMA nationally appropriate mitigation actions OCGT open-cycled gas turbine OECD Organisation for Economic Co-operation and Development OTC over-the-counter ppmv parts per million per volume R&D research and development REDD Reducing Emissions from Deforestation and Forest Degradation SBI Subsidiary Body for Implementation SBSTA Subsidiary Body for Scientific and Technological Advice SCM sectoral crediting mechanism SD-PAM sustainable development policies and measures TOA technology-orientated agreement UNDP United Nations Development Programme UNEP United Nations Environment Programme UNFCCC United Nations Framework Convention on Climate Change U.S. United States of America URC UNEP-Risoe Centre VCS Voluntary Carbon Standard VER Verified Emission Reduction The Carbon Market Table of Contents 1.0 Background ............................................................................................................................................ 1 1.1 Overview ............................................................................................................................................................................... 1 1.2 How Carbon Markets support GHG Mitigation ........................................................................................................... 2 1.3 Development of the Carbon Market to Date ................................................................................................................. 3 2.0 How could the Carbon Market Develop – Demand and Developing World Revenue ............. 4 2.1 Overview of Carbon Market Demand ............................................................................................................................. 4 2.2 Estimating the Potential Range of Demand and Developing Country Revenue ..................................................... 5 2.3 Revenue from Indirect Support: Taxes and auctioning of allowances ....................................................................... 7 3.0 Opportunities for Developing Country Participation .................................................................... 10 3.1 GHG Emissions from Developing Countries: Occurrence and mitigation ........................................................... 11 3.2 Overview of Market Mechanisms ................................................................................................................................... 25 3.3 Options Considered for Developing Countries ........................................................................................................... 25 3.4 Potential Application of the Options – Without Developing Country Commitments ......................................... 27 3.5 Potential and Implementation of Broadened CDM and other MMSDs ................................................................. 24 3.6 Options for Developing Country Commitments ......................................................................................................... 33 3.7 How could Developing Country Participation in the Carbon Market Develop? ................................................... 34 4.0 Conclusions .......................................................................................................................................... 40 4.1 Background ......................................................................................................................................................................... 40 4.2 Development