Bilateral agreements as basis towards piloting sectoral carbon market mechanisms

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The international carbon market is characterised by an activity gap between existing and future market-based mechanisms. Project-based carbon market mechanisms – such as the Clean Development Mechanism (CDM) – no longer provide sufficient incentives for the initiation of greenhouse gas mitigation activities in developing countries. At the same time, procedures and modalities for new mechanisms are not yet defined. This transition period creates substantial challenges to maintain the expertise of various stakeholder groups, to test new mechanism approaches in practice and to support the final definition of new mechanisms. Against this background, the underlying research analysed opportunities for piloting market-based approaches at the sectoral level on the basis of bilateral agreements between donor and implementing countries.
In this respect, the research focussed on three distinct steps. A selection methodology was developed for the prioritization of most promising countries to host pilot activities. This methodology considers criteria which reflect the countries’ activity and ambition levels in the area of carbon markets and climate policy. Furthermore, it was identified that the definition of accepted credited baselines is key to the success of pilots. Concepts to define reference levels based on benchmarking steps are tested for two different sectors, the electricity sector in Chile and the building sector in South Africa. In a last step further considerations were made to support implementation and acceptance of the proposed activities. Prioritised focus areas in this section were the integration into the national and international policy landscape, requirements and next steps towards implementation as well as alternative pathways for immediate implementation action in situations with no carbon market recovery.

Contacts for further information: Carsten Warnecke, Hanna Fekete, Thomas Day