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Crossing the Threshold:
“Ambitious” baselines for the UNFCCC new
market mechanism
Andrew Prag and Gregory Briner (OECD)
Global Forum on Environment / CCXG Seminar
21st March 2012
Climate Change Expert Group
www.oecd.org/env/cc/ccxg
www.oecd.org/env/cc/ccxg
Overview
 The new market-based mechanism: trading or
crediting, and what consequence for baselines?
 What’s different from the CDM?
 What do we mean by “broad segments of the
economy” and “ambitious” crediting thresholds?
 Defining ambition to “ensure net
decrease/avoidance of global emissions”
 Towards a process for setting and reviewing
“ambitious” baselines
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Climate Change Expert Group
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Crediting or trading?
 Durban/Cancun decisions not specific
 “Trading” requires allowances for participating sectors to
be issued in advance under a binding cap
 One of the Cancun principles is…
“assisting developed countries to meet part of their mitigation targets”
 How could this be done with allowance-based trading?
Sectors in developing countries
allocated international allowance
units similar to Kyoto AAUs?

Politically unlikely given
limited Kyoto participation
Domestic trading systems in
developing countries link with
those in developed countries?

Unlikely that linking would be
under aegis of UNFCCC
…so focus on a CREDITING mechanism
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Climate Change Expert Group
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How is this different to what a
reformed CDM could do?
Stimulating mitigation
across broad segm ents
of the econom y
Ensuring a net decrease
and/ or avoidance of
global GHG emissions
Complementing other m eans of support
for nationally appropriate mitigation
actions by developing country Parties
 Once a baseline is set for a group of emitters, credits can only be
awarded if average performance beats the baseline. Fundamental
difference to CDM, which rewards individual projects/programmes
 For “net decrease”, baseline level could be “ambitious” assuming
some level of mitigation attained without credits (other means also)
A too-stringent baseline won’t stimulate any action by itself; other
incentives may be needed, financed nationally or internationally
…but design of credit distribution is crucial
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Climate Change Expert Group
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What is a broad segment?
 An emissions baseline is a
quantified estimate of how
emissions may evolve
according to a storyline and
set of assumptions
 A baseline can be broadened only so far as the storyline
and assumptions remain appropriate, perhaps not as far
as a conventional “sector”
 “Groups” of emitters could be defined according to
relevant attributes such as product output, processes,
vintage or technology
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Climate Change Expert Group
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Setting the crediting threshold
 Crediting threshold: baseline level used to determine
award of credits, not necessarily tied to “business as usual”
 How to define ambition in this context?
Deviation from
“BAU”.. but when
does “conservative”
become “ambitious”?
Quantifying and
including expected
effects of specific
policy measures?
Defined according to a
predefined emissions
target?
 Two broad approaches to setting the threshold level:
 Emissions projection – how would emissions for the
group evolve according to assumptions?
 Performance benchmarks – a specific emissions
factor applied to group of emitters in question
6
Climate Change Expert Group
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Can we really define a
business-as-usual projection?
Emissions
 Can we project BaU and calculate a deviation from it?
 So many variables means BaU very hard to define
Start of
crediting period
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 A clear crediting
threshold is
needed to operate
Plausible
BaU
a crediting
BaU range
x%
mechanism.
Crediting threshold
Crediting
threshold
Precisely how
Credited
Credited
mitigation action
action
mitigation
much domestic
action this includes
is a different
End of crediting
debate
period
Climate Change Expert Group
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Ambition pre-defined by
UNFCCC pledges and baselines?
 Some developing country mitigation actions are in the form
of quantified pledges measured as reduction against BAU
 Such projections tend to be national but can include sector
modelling that could influence crediting thresholds
 The pledge could be seen as pre-establishing an
appropriate level of ambition for a crediting threshold…
 … but what if the pledge is specifically defined so that credit
revenues are a means to achieve the pledge rather than to
surpass it?
8
Climate Change Expert Group
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Ambitious performance
benchmarks
 Performance benchmarks can be a means to define a
crediting threshold without focusing on BAU
 Varying availability of data may make different
approaches valid in different circumstances:



Power sector: building on CDM grid emissions factor calculation
(effectively more “ambitious” under a broad-based mechanism)
Energy-intensive industry: EU ETS product benchmarks based
on top 10% performers
Generalising to other sectors: for example, coal mine
methane capture rates.
 Benchmarks can be updated or designed to be dynamic
as a means to build in ambition
9
Climate Change Expert Group
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Towards a UNFCCC process for
crediting thresholds
 What does “guidance and authority of the COP” mean for setting
crediting thresholds?
?
Who can
propose a
threshold?
Following what
methods or
rules?
How to demonstrate
appropriate
ambition?
What kind of
approval or
review process?
 UNFCCC guidance or rules could require certain steps whilst being
flexible in implementation:
 Guidance on defining scope of crediting thresholds, categorising
assumptions, demonstrating data quality etc
 Possible requirement to demonstrate treatment of existing and
planned policy measures and impacts on the threshold level
 Possible requirement to “cross check” proposed crediting threshold
levels using alternative method
10
Climate Change Expert Group
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Questions for discussion
 Will the new mechanism operate by issuing credits or
ex ante tradable allowance units?
 Is the concept of “ambitious” crediting thresholds
appropriate and achievable?
 Should national pledges under UNFCCC affect “ambition”
of crediting thresholds, and how?
 What approaches and requirements could be used to set
thresholds under the new mechanism?
 What role for benchmark methodologies from CDM or EU
ETS product benchmarks?
 What guidelines or rules from UNFCCC and who can
“approve” baselines?
11
Climate Change Expert Group
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Extra slides
12
Climate Change Expert Group
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Distributing credits in a new
crediting mechanism
New Crediting Mechanism
“Credit-driven”
Credits are distributed to
individual installations
“Aggregated”
The quantity of credits due is
calculated by comparing the
aggregate performance of the
group with the baseline
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“Policy-driven”
Credits are kept by the
government and used to
finance mitigation policies
“Disaggregated”
The quantity of credits due is calculated
by comparing the performance of
individual installations within the group
with the baseline
Climate Change Expert Group
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Benchmark used for CDM baseline can be
more “ambitious” under sector scheme
Existing emitters
Emissions
factor
0.8
used for
CDM
0.6 1
Assume new plants
have output of 1000
units
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New additions
scenario 1
0.9 0.8
Under CDM, green
plant earns 200 credits
Under sector scheme
covering all new plant
additions, ZERO credits
issued.
Overall emissions
INCREASE relative to
baseline level: 100
tonnes
Climate Change Expert Group
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New additions
scenario 2
0.6 0.6 0.9 0.8
Under CDM, each
green plants earn 200
credits (400 total).
Under sector scheme
covering all new plant
additions, total 300
credits issued.
Overall emissions
DECREASE relative to
baseline level: 300
tonnes