A proposal for the FVA and NMM under the UNFCCC (a.k.a. Creating a global carbon market)

Back in the middle of last year, UNFCCC Executive Secretary Christiana Figueres tweeted:

Are you up to date with #climatechange acronyms? What is EASD? NMM? FVA? WEMA?

The answer is Equitable Access to Sustainable Development, New Market Mechanisms, Framework for Various Approaches and Workplan on Enhanced Mitigation Action. The fact that these are all linked together shouldn’t come as a surprise, given the importance that carbon markets, sustainable development and various national approaches have in developing a global approach to managing CO2 emissions. Two of these workstreams are of particular relevance to the development of a new global agreement and originated at the Durban COP under the Ad Hoc Working on Long Term Cooperative Action (AWG LCA), as outlined below:

The Framework for Various Approaches (FVA)

To conduct a work programme to consider a framework for such approaches (including opportunities for using markets, to enhance the cost-effectiveness of, and to promote, mitigation actions, bearing in mind different circumstances of developed and developing countries), with a view to recommending a decision to the Conference of the Parties at its eighteenth meeting.

 The New Market Mechanism (NMM)

Defines a new market-based mechanism, operating under the guidance and authority of the Conference of the Parties, to enhance the cost-effectiveness of, and to promote, mitigation actions, bearing in mind different circumstances of developed and developing countries, which is guided by decision 1/CP.16, paragraph 80, and which, subject to conditions to be elaborated, may assist developed countries to meet part of their mitigation targets or commitments under the Convention.

Both these workstreams continue, despite the formal end of the AWG LCA in Qatar. Although the initial focus on the NMM appeared to be solely on the development of a new crediting mechanism to provide offsets for developed countries (stemming from the text “ . . . may assist developed countries . . .”), the discussion has evolved. In particular, the FVA and NMM seem to be rapidly converging. At a recent meeting of the Climate Change Experts Group held under the auspices of the OECD, the Secretariat put up a slide which rather said it all.

 Spot the Difference

Of course the two will remain different, but the integration of these two elements of the UNFCCC negotiations could be pivotal.

As part of its consultation process the UNFCCC also seeks the views of Parties and Observer organizations through a submission process. A recent call for submissions on the FVA and NMM has just closed, with the International Emissions Trading Association (IETA) submitting ideas on how FVA/NMM integration might work and the role that the NMM plays within such an approach. The IETA submission (IETA_FVA_NMM_March 2013) offers a pathway to deliver a functioning global carbon market that could then sit at the heart of the new agreement negotiated under the ADP (Durban Platform for Enhanced Action).

Much of the early debate at UNFCCC meetings focused on the specific role of a “market mechanism”. IETA defines a market mechanism as a process by which a market solves a problem of allocating resources, especially that of deciding how much of a good or service should be produced, but other such problems as well. The market mechanism is an alternative, for example, to having such decisions made by government. Rather, it represents the interaction of supply, demand and prices.

In the context of emissions mitigation, the trading structure within the Kyoto Protocol illustrates the part played by the market mechanism. Within its design, the functioning market mechanism is the Assigned Amount Unit (AAU), although many call the CDM the market mechanism. The AAU establishes the need for trade and creates basic supply and demand through the allocation process against national targets relative to actual emissions. This gives value to the AAU, which in turn creates demand and value for CERs under the Clean Development Mechanism (CDM). Without the AAU, the CER has no value and could not exist in a meaningful sense, as such the CDM alone isn’t a market mechanism.

IETA argues that the New Market Mechanism should be modeled on such a design, in effect replicating the role of the AAU under the Kyoto Protocol, but operating in a world of bottom up pledges, nationally designed trading systems and NAMAs – in other words, a series of various approaches operating within a common framework (the Framework for Various Approaches or FVA). This design for the core NMM instrument would give renewed value to the CER and allow the development of additional crediting mechanisms within a new framework. IETA argue that such an approach can scale-up beyond existing crediting mechanisms, such as the CDM and Joint Implementation (JI) to generate impact across entire sectors. Further, an FVA/NMM integration will enable countries to transition from project‐based crediting to real carbon pricing and economy‐wide trading of GHG emission reductions, by promoting mitigation across one or more sectors or sub‐sectors. The NMM will also embody a commitment to reduce emissions by the host country that reflects some level of aspiration across a sector or sub‐sector.

This is something of a brave new world for most countries, but it offers the opportunity for both developed and many developing countries to really embrace the idea of carbon pricing together with the operational and compliance flexibility delivered by trading of emission allowances. Without such an approach, mitigation costs are likely to be higher and less effective over the long term.