Costa Rica Market Readiness Proposal (MRP) Partnership for Market Readiness Final Report Ministry of Environment and Energy February 2013 Costa Rica Market Readiness Proposal Contents ACRONYMS ...................................................................................................................................... 6 1 EXECUTIVE SUMMARY ........................................................................................................ 8 2 GENERAL CONTEXT ........................................................................................................... 18 2.1 Costa Rica’s low emissions development goal .................................................................................... 18 2.2 International context: Costa Rica’s pledge on voluntary mitigation action and underlying considerations .................................................................................................................................................. 19 2.3 Overview: composition of Costa Rica’s GHG emissions and projected emissions trends ................... 20 2.3.1 Greenhouse gas (GHG) emissions ................................................................................................... 20 2.3.2 Emissions scenarios ......................................................................................................................... 21 2.4 Review of policy and institutional framework to advance low emissions development .................... 22 2.4.1 National Climate Change Strategy (NCCS) ...................................................................................... 22 2.5 Experience with GHG market instruments .......................................................................................... 24 2.5.1 The Certifiable Tradable Offset (CTO) ............................................................................................. 25 2.6 Carbon Neutrality target and strategy to achieve it ............................................................................ 26 2.6.1 Rationale ......................................................................................................................................... 27 2.6.2 Strategy to achieve Carbon Neutrality ............................................................................................ 27 3 THE COSTA RICAN DOMESTIC CARBON MARKET................................................... 28 3.1 Market framework .............................................................................................................................. 28 3.1.1 Rationale ......................................................................................................................................... 28 3.1.2 General criteria for the Domestic Carbon Market ........................................................................... 28 3.1.3 Convergence between demand and supply in the Domestic Carbon Market ................................. 31 3.1.4 Rationale ......................................................................................................................................... 32 3.1.5 Criteria to guide Regulatory and Institutional Framework considerations ..................................... 32 3.1.6 Regulation and oversight ................................................................................................................ 32 3.1.7 Institutional roles and functions ..................................................................................................... 33 3.1.8 Governance: Importance of Ensuring Independence of the Carbon Board. .................................... 35 3.1.9 Participants ..................................................................................................................................... 36 3.1.10 Supply and demand infrastructure ............................................................................................. 36 3.1.11 The Supply Schemes – A Sectoral Approach ............................................................................... 37 3.2 Policy options for demand stimulus .................................................................................................... 39 3.2.1 Benefits and incentives of the UCC ................................................................................................. 40 3.3 Creation of a market instrument ......................................................................................................... 41 3.3.1 Rationale ......................................................................................................................................... 41 3.3.2 Generation of UCCs ......................................................................................................................... 42 3.3.3 UCC project cycle ............................................................................................................................. 42 3.3.4 Introducing the UCC Standard and the domestic voluntary carbon market ................................... 44 3.3.5 UCC versus the CER – Rationale for Creating a new Asset Class ..................................................... 45 3.3.6 Wholesale sellers............................................................................................................................. 47 3.3.7 Analysis of Marginal Abatement Costs in the Covered Sectors ....................................................... 47 3.4 MRV for the Carbon Neutrality Standard ............................................................................................ 48 3.5 Data and reporting .............................................................................................................................. 49 3.5.1 Rationale ......................................................................................................................................... 49 3.5.2 General criteria to guide data and reporting considerations .......................................................... 49 3.5.3 Data and reporting against the Carbon Neutrality Standard ......................................................... 50 3.5.4 Data and reporting in the domestic market .................................................................................... 50 2 Costa Rica Market Readiness Proposal 3.6 Development of methodologies and protocols................................................................................... 51 3.6.1 Rationale ......................................................................................................................................... 51 3.6.2 General criteria to guide MRV considerations ................................................................................ 51 3.6.3 Recognition of international best practice ...................................................................................... 52 3.7 Registry and data tracking system ...................................................................................................... 53 3.7.1 Rationale ......................................................................................................................................... 53 3.7.2 General criteria to guide registry considerations ............................................................................ 53 3.7.3 Registry features ............................................................................................................................. 53 3.7.4 Registry components ....................................................................................................................... 54 3.7.5 Options for the Registration Project Management and Transactions ............................................ 55 3.7.6 Administration ................................................................................................................................ 55 3.8 International alignment – international third party audit process ..................................................... 56 3.8.1 Rationale ......................................................................................................................................... 56 3.8.2 General criteria to guide the International Third Party Audit Process ............................................ 56 3.8.3 International Third Party Audit Process .......................................................................................... 57 3.8.4 Linking with International Markets and Crediting and Supported NAMAs. .................................... 57 3.9 Next steps requiring PMR support ...................................................................................................... 58 4 MITIGATION POTENTIAL BY SECTORS AND MARKET SUITABILITY ............... 59 4.1 General criteria to guide coverage considerations ............................................................................. 59 4.2 Power generation sector ..................................................................................................................... 60 Considerations for further analysis about market participation .................................................................. 60 4.2.1 Rationale for focusing on the power generation sector .................................................................. 62 4.2.2 Historic and projected emission levels ............................................................................................ 62 4.2.3 Policy context pertaining the use of market instruments to reach low emissions