London, 5 March 2010

The International Emissions Trading Association today released a report on new financial mechanisms to go beyond the UN’s Clean Development Mechanism.  The need for an expansion of the role of private finance in international climate change efforts has driven two of the major proposals made in the UNFCCC negotiations over the past couple of years. Both Sectoral Crediting and NAMAs (Nationally Appropriate Mitigation Actions) Crediting, start from the basic premise that emission-reducing activities in developing countries should be aggregated and credited at a level much higher than a single project.

The concept of Sectoral Crediting was championed by the EU for most of last year. Before Copenhagen, however, the proposal had been met with skepticism from most developing countries, and apprehension from much of the private sector, who were eager to know more about how the mechanism could be made to work in practice.

IETA’s new report, “Thinking Through the Design Possibilities for a Sectoral Crediting Mechanism: Three Options to Encourage Discussion” was presented today at a meeting of the European Climate Platform at the Centre for European Policy Studies in Brussels.  IETA’s President and CEO Henry Derwent  said:

”Developed countries are expecting a major increase in the size of the carbon market and in private sector financial contributions to low-carbon investment. Everyone agrees the CDM is not big enough. Developing countries have made it clear they would prefer direct assistance from rich countries’ Governments, but it seems impossible to do what needs to be done without new mechanisms to incentivise private spending.  No-one has been giving this adequate attention.  IETA’s members want to start a serious debate on what these mechanisms might look like, and how they could be made to appeal to businesses and investors.”

IETA’s newest publication lays out three possible design options for a Sectoral Crediting Mechanism (SCM), explaining the implications of each in terms of incentives to participate, finance structure, and investment risk. The aim is to elaborate a concept that still means little to most policy-makers and begin the search for a mechanism design that meets the needs of both developed and developing countries as well as the private sector.

The paper’s opening message is that the creation of a SCM is not simply a step up from traditional project- based CDM. It requires an entirely new set of considerations and brings with it new challenges. Instead of focusing on the aggregate nature of the win or lose of the mechanism, as has been common among EU representatives, IETA has focused on putting forth designs that stay true to the two critical motivations that drove the concept’s development in the first place: the desire to “stretch” the amount of emission reductions achieved for each offset credit issued, and to incentivize the significant scale-up of private finance-driven emission reduction efforts.

Henry Derwent added, “IETA’s extensive experience with the CDM has shown that careful mechanism design will be crucial to ensuring private sector participation as well as a smooth transition into a more diversified global carbon market.  Policymakers must be very sensitive to the implications of design choices on the private sector’s decision to participate. There needs to be progress here if the global climate agenda is to move forward.”

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Download the report here:

Attachments:

IETA, Crediting Mechanisms

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