Market-based measures

Question 1

What are market-based measures? And what do they do?

Answer 1

• a way of regulating by using business models and market forces to give economic incentives to reduce emissions by associating a cost with GHG emissions

Question 2

What are examples of market-based measures?

Answer 2

• carbon markets: emissions trading systems (cap and trade, baseline and credit)
• carbon offsetting mechanisms: a process that involves a reduction in, or removal of, carbon dioxide or other greenhouse gas emissions from the atmosphere in order to compensate for emissions made elsewhere
• other approaches: carbon taxes, climate-related subsidies and subsidy removal

Question 3

What is the rationale of market-based measures?

Answer 3

• environmental resources are public good, and having a production made by one actor that have negative impacts on another creates an indirect cost for individuals who did not agree to it
• it is better to internalise negative effects by making the polluter pay of its activites then for society to pay for it (polluter pays principle, rio nr. 16)
• correcting market failures in a cost-effective way

Question 4

What are some pros for using market-based mechanims when regulating climate change?

Answer 4

• ways to achieve results at the lowest possible overall cost
• improve price signals, allow industry greater flexibility, create incentives to reduce emissions, support employment (new jobs relating to climate change?)

Question 5

What are some cons for using market-based mechanims when regulating climate change?

Answer 5

• paying our way out of the problem
• maintaining status quo (delaying action)
• designed to serve the financial industry, not the environment
• creating the ‘right to pollute’ since pollution is still allowed just that it has a price

Question 6

What types for carbon markets exist?

Answer 6

• compliance carbon markets: created as a result of int. regional and/or national policy or regulatory requirement
• voluntary carbon markets: refers to issuance, buying and selling carbon credits, on a voluntary basis, can be national or int., currently not regulated (very loosely), governed by private standards

Question 7

What are some characteristics of compliance carbon markets, and some challenges?

Answer 7

• emissions tarding - tradable permit schemes
• creation of new property rights
• integration into the legal system
• envionmental efficiency - risk of carbon leakage
• practical challenges: risk of over-allocation or scarcity, how effective is it to reduce emissions
• linkage of emissions trading systems: cap and trade vs. baseline and credit
• use of governmental revenues

Question 8

What are the differences between cap and trade vs. baseline and credit as emissions trading systems?

Answer 8

cap and trade
- set a total limit/cap on maximum quantity of emissions
- creates a fixed environmetal outcome

baseline and credit
- relative targets set by defining a baseline
- creates an uncertain environmental outcome

Question 9

What are some examples of int. and regional carbon markets?

Answer 9

• kyoto markets
  
  • clean development mechanism
  • joint implementation
  • int. emissions trading
• EU markets
  
  • EU ETS
  • effort sharing
  • energy-related markets
• ICAO global market measure
  
  • CORSIA - carbon offsetting and reduction scheme for int. aviation

Question 10

How are carbon taxes different from emission trading systems?

Answer 10

• carbon taxes places a direct tax/cost on emissions themselves, while as emissions trading systems give a cost on allowances to be able to emit a certain amount of carbon which can be traded if not used
• easier to know the cost of carbon with taxes then with emissions trading because the price depends on the market

Question 11

What are some characteristics of the voluntary carbon market, and some challenges?

Answer 11

• been in place for over a decade
• mostly driven by corporate climate pledges/commitments - creates demand to buy carbon offsets
• unprecedented growth in demand for voluntary carbon credits in recent years
• main growth drivers: corporate carbon neutrality pledges, consumer interests in carbon offsetting, legal requirements - mitigation and disclosure, investment market
• could play a significant role in achieving Paris objectives - mobilization of finance for climate reductions and removals
• many challenges
  
  • lack of governmental oversight and proper regulation
  • risk of abuse and greenwashing
  • double countinh and double claiming
  • environmental integrity concerns
  • overreliance on carbon offsetting
  • lack of public trust in the reliability of private standards