2011/02/21

Proposals for Market-Based and Non-Market-Based Mechanisms
for Negotiations under AWG-LCA
Naoki Matsuo1

Motivation and objective of the Proposal
The COP Decision at Cancun on AWG-LCA process invites submission of views on newmarket and/or non-market mechanisms from the Parties and accredited observers by Feb. 21,
2011 inD. Various approaches, including opportunities for using markets, toenhance the cost-effectiveness of, and to promote, mitigation actions, bearing
in mind different circumstances of developed and developing countries.
Here we submit our proposals representing our views.

Proposal for new market-based mechanism:“Sustainable Development Indexed Mechanism”
Background
CDM and other market-based mechanisms internalize the value of GHG emission reductions
into market. They have been established through many efforts as promising tools to foster
many activities to reduce GHG emissions. We believe that they should also be used for thecompliance of the quantified target under the UNFCCC/LCA process, although a further
continuous reform is needed.
However, we learned through experiences of CDM that it is difficult to establish non-GHG
values through the GHG emission reduction crediting scheme only. The current market
mechanisms try to motivate private companies to reduce GHG only; they have not provided
any incentives to realize non-GHG values such as to foster technology transfer.
Various efforts have been made to incorporate non-GHG values through other channels, but
not yet sufficient.
Given that the UNFCCC recognized that the climate mitigation is an element of sustainable
development, it is desirable to create some non-GHG market value for sustainable
development within mitigation actions.
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Climate Experts, Ltd. and PEAR Carbon Offset Initiative, Ltd. (n_matsuo@climate-experts.info)1Strategy: Menu Approach
There are a variety of concepts on how to support sustainable development. It is almost
impossible to have a common metric to represent the value that can be shared by all Parties.
Therefore, we propose that each Party should have sovereignty over what is the appropriate
metric to support its own sustainable development.
On the other hand, it is meaningful to initiate a discussion (not negotiation) process for thecomponents of the sustainable development and how to index them as well as how to integratethem into a single indicator. It would be better to have a common methodologicalframework/guidelines2 but we can leave a room for discretion for each Party to decide aweight factor of each index (as well as an option of the indexing methodology), which can becalled menu approach.
Based on the discussions (possibly for a year), each Party may decide its own sustainable
development indicator and submit it to the associated supervisory body to give it anappropriate market value.
It should be noted that such value is not limited to be used for CDM but also can be applicable
to any activities of MRV-based instruments (in the sense of GHG emission reductions) under
he UNFCCC.

Decision toinitiate theprocess•COP%decision%to%create%a%new%mechanism%for%SD
•Ini7ate%the%process%for%indexa7on
•Ini7ate%the%process%for%monetary%value%crea7on%(e.g.,%subsidy%system)
•Common%metric%establishment
SD Indices•1.%%Each%component%of%SD
Guidelines/Methodologies •2.%%Indexa7on%methodology%of%each%component
SD Indicatorby each Party

•Each%Party%can%choose%freely%for%
the%weight%factors%of%each%SD%index%
to%seGle%its%own%SD%indicator%(SDI)
SDV assigned
to eachactivity

•SDV%is%calculated%by%(veriﬁed%emission%reduc7ons)%%
x%(SD%Indicator%of%the%ac7vity)%
for%each%MRVLbased%ac7vity%
Monetizationof each SDV2

•Money%is%
provided%by%
the%Financial%
Mechanism

Although we have common/standardized methodology to index each component of the sustainable
development, we may have several options such as Tier 1, 2, 3 in the IPCC GHG Inventory Guidelines
based on each Party’s situation. In addition, the methodologies/guidelines will be reviewed/revised
regularly.

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Followings are an example of methodological aspects to be discussed.
Indexing3 the value of each SD component
For creating the market-based value, we need an indicator (called SDI hereafter), which
specifies the significance of the value.
In the case of GHG emissions, “CO2-equivalent” is the indicator, which is selected by theCOP. Each index represents the physical quantity (mass) of each GHG. In order to convert
each GHG index into a single indicator (CO2e), COP has chosen GWPs as the relative weightfactors for conversion.4
Once we have agreed (politically) on methodological aspects of the indicator (SDI) to specify
the sustainable development components quantitatively, we can then create newmarket-internalized values (called SDV) as to be discussed later.
First of all, we can set the necessary process as follows:1.

List several components of the sustainable development to be indexed.

2.

Discuss and establish methodologies to index each component.
indexing methodologies may co-exist for one component.

3.

The components and indices are to be reviewed every two years.

SeveralThen, each Party is to choose the relative weight factors specific to the activities in thecountry.
The following table is a simplified example:
SD component

Index

Description

Description

Technology

Cutting-edge:100%
BAT: 75%

Targeting the poor

Directly: 100%
Indirectly: 50%

Energy security

RE: 100%
EE: 100%
Fuel switch: x%(dependent on fuel)Categories
specified by theParty
Can becategorized byincome level
Portion offuel-switch isdetermined byeach Party3Country
specific relative
weight factors
20%

40%

10%

Here we define “index” as a parameter to specify the significance of each element.
“indicator” for a conversion of indices with some rules (by specifying weight factors).
4Activity
specificSDI

We also define

For setting weight factors, we can leave some room for discretion to be determined politically: (1)whether we use emissions of each GHG and radiative forcing-based GWP, (2) which document ormaterial will be referred, and (3) which time-horizon will be applied.

3Bio-diversity

Graded A, B, C

Host country
expert judgment

5%

Ditto

Ditto

5%Ditto
...

Ditto
...

5%...

Other local
environment
Gender...
Total

Each index is normalized to 1

Table:

100%–%

Sustainable development index for a country (example)

Sustainable development indicator SDI is defined as:
SDI=for each activity.

∑SD component (country-specific) (weight factor)country-specific * (indexed value)common
It is noted that0 ≤ SDI ≤ 1.5

Since we are considering (sustainable development components of) climate mitigation-relatedvalue, we set the new value (SDV) asSDV=(GHG emission reductions) * SDI.

where SDI is the indicator to be determined above for each activity.
Creating a New Value
Once we can define the indicator SDI and SDV above, how can we value them in the market?
Here we show two options:[Option 1:

Tradable commoditization]

Setting a target on SDV for each Annex I country to attain and making SDV tradable. This
option needs an intensive negotiation process for target setting and includes large
uncertainties for the market price.
[Option 2:Subsidy]

A fund should be established to provide money that is proportional to the SDV of therelevant activity to the implementer. The fund is contributed as a part of the financial
support by the developed countries specified by the Copenhagen Accord/Cancun Agreement.
A fixed amount per a unit of SDV must be preferable for activity implementers to hedge therisks.65This only shows the relative

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This option may not be preferable for activity

This does not mean that the value is less than that of emission reductions.
significance to the fully-contributing fictitious activity
Another option is to fix the total amount of the budget.
implementers due to the unpredictable unit price of SDV.

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[Option 3:Preferential treatment of the financial assistance of the activity]

For implementation of the activity, finance is important. Therefore, some channel for aninternational preferential financing scheme should be established or incorporated into theprogrammes of the existing financial institutions based on the SDI (not SDV).7
It should be noted that Option 3 can be used together with Option 1 or 2.
Targeted Activities and Supervisory Body
Since SDV requires “the amount of emission reductions” as the mechanism under theUNFCCC, the targeted activities are those with MRV processes for GHG emission reductions.
In this sense, we can start this value-making mechanism for CDM, JI and NAMA. If othermechanisms with MRV are introduced under AWG-LCA, SDV will be applied to activities
under such new mechanisms. In order to encourage early actions, on-going CDM projects
can be credited by these indicators.
A supervisory body of this mechanism, which will approve methodologies for MRV, shouldbe established under the COP. For CDM, JI, current MRV processes can be used. For
NAMA, some standardized methodologies to be developed can be applied.
It should be noted that for this mechanism, the concept of additionality is NOT necessary
because the concept of this mechanism does not aim to create the value for the emission
reductions itself.8 It may be preferable to define emission reductions as the gap between
with/without the activity. This implies that business-au-usual activities for sustainable
development can obtain SDV if they reduce GHGs by using the methodologies ofCDM/JI/NAMA without additionality check.

Proposal for non-market-based mechanism: “HFC 23 Destruction Fund”
CDM does not cover emission reduction efforts by new HCFC 22 plants. It means that
non-covered plants do not have an incentive to destroy HFC 23, thus all of them are released
to atmosphere without recovery.
As is well known, this technology is quite cost-effective and huge amount of emissions can bereduced easily. Equipment that costs only a few million dollars can reduce several million
tCO2e per annum. Therefore, it is effective to establish a fund contributed by developing
countries to install and operate such HFC 23 destruction equipment in HCFC 22 plants thathave not been covered by CDM.

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It should be noted that the amount of required finance is not linked to the amount of emission
reductions.
8

The reason why additionality of environmental integrity concept is needed for CDM is that CER
implies emission increase in developed countries.

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