November, 2014
Networked Carbon Markets
Summary
Civil society, Governments and the private sector are exploring how to assess different climate
mitigation efforts, to enable comparability and improve the prospects of limiting global warming.
Through the Networked Carbon Markets (NCM) Initiative, the World Bank Group (WBG) is convening
these stakeholders to develop a framework for assessing climate mitigation efforts, and infrastructure to
support carbon market related functions. It responds to the need for reliable and well-synthesized
information on the relative value of different climate mitigation efforts, given the increasing regulatory
fragmentation and heterogeneity that is emerging across and within jurisdictions. The end-goal is to
facilitate linking or ‘networking’ of carbon markets so that such linked markets will have greater liquidity
and deliver climate smart financing more efficiently.
Since March 2013, the WBG has held extensive stakeholder consultations on NCM which have included
two international Working Group meetings comprising representatives from the United Nations
Framework Convention on Climate Change (UNFCCC), private sector, developed and developing country
governments, academic analysts, non-government organizations, foundations and intergovernmental
organizations. NCM complements the WBG’s ongoing low-carbon development activities and its efforts
to promote carbon pricing as critical to achieving climate mitigation at large scale in an effective and
cost-efficient way.
Context
A warming planet is not just an environmental challenge – it is a fundamental threat to any effort to end
poverty and threatens to put prosperity out of the reach of millions of people. The Intergovernmental
Panel on Climate Change (IPCC) has warned of the extreme risks to future human wellbeing resulting
from a rise in temperature above 2°C. In response, Governments are designing and implementing GHG
mitigation efforts that address climate mitigation that best suit their unique contexts.1 The bottom-up
development of low-carbon efforts has led to a certain amount of regulatory fragmentation and
heterogeneity across jurisdictions. As a result, it has become increasingly complex for stakeholders to
compare and contrast climate mitigation programs, policies and commitments across jurisdictions. In
addition, all evidence suggests that current and planned actions are far from sufficient to achieve a 2°C
target. The challenge, therefore, is to identify the relative value of mitigation actions in jurisdictions and
to incentivize a ‘race to the top’, to bridge the (expected) very large gap between climate mitigation
commitments, and the climate mitigation needed to limit warming to under 2°C.
1
See World Bank ‘State and trends of carbon pricing 2014’
November, 2014
Key components of climate mitigation assessment
Current Initiatives that assess climate mitigation efforts can be organized by the risks and contributions
that they capture, including: a program’s carbon integrity risk; a jurisdiction’s policy/regulatory risk and
a jurisdiction’s relative contribution to the global climate mitigation effort. The NCM Initiative
understands that these Initiatives could benefit from an overarching, coordinating framework that
establishes: common language, concepts and general principles; common methodologies to organize
the collection and interpretation of data; tools to help guide users in receiving the information.
Program level - Carbon Integrity risk
Carbon integrity risk relates to the extent to which a specific low-carbon program or activity (e.g.,
regulatory instrument, price instrument and quantity instrument) will achieve its intended outcome. The
challenge is to establish an approach that can accommodate the wide range of new and heterogeneous
low-carbon programs that are now emerging. Currently, systems like the Clean Development
Mechanism provide only a binary ‘yes or no’ outcome on the validity and verification of emissions
reductions. However, this limits the ability to differentiate among projects that have met minimum
requirements, or to evaluate to what degree projects perform, vis-à-vis the threshold. As a result, there
a wide range of low-carbon programs and activities whose overall benefits/risks are not captured by this
approach. This is evident in certain sectors, geographies and areas of activity with the highest
sustainable development potential or those which contribute most to transformational change.
Jurisdiction level - Policy/regulatory risk
Policy/regulatory risk relates to the extent to which a jurisdiction’s collective low-carbon policies will
achieve the intended outcomes. It involves technical considerations, such as the extent to which the set
of policies designed to achieve the mitigation target within the existing policy context are likely to
achieve the intended outcome. It also involves political considerations, such as the extent to which the
government has the political will, track-record, and institutional strength to maintain or adjust policies
to achieve appropriate mitigation targets.
Global level - Relative climate mitigation contribution
Assessing a jurisdiction’s relative climate mitigation contribution relates to the extent to which its
climate mitigation targets are perceived as a sufficient contribution to the global effort to limit global
warming. The objective of this approach is to incentivize jurisdictions to increase their level of effort.
Institutional Structures
The WBG is also exploring institutional structures to support a network of carbon markets. One possible
structure is a pooled reserve of carbon assets or an ‘International Carbon Asset Reserve’ (ICAR) which
could provide a source of liquidity or play a market-maker function. While the form, scope and functions
of an ICAR are still being explored, it is intended that such an international (or inter-jurisdictional)
instrument would not replace but rather complement and support market stabilization instruments on
the level of individual jurisdictions/ markets. The ICAR builds on the idea that carbon markets and the
mitigation of their inherent risks can be made more efficient by increased connectivity and pooling of
risk mitigation measures on an international level. Another structure to support a network of carbon
markets is an international settlement platform to track cross-border trades and potentially provide a
clearing house function.
November, 2014
Next steps
Work planned to December 2015 includes coordinating, facilitating and organizing Initiatives that assess
climate mitigation efforts under a common framework; an analytical work program to enable concept
development; and stakeholder consultations and outreach. It also involves developing knowledge
products to explore how potential institutional structures can enhance the flow of finance toward the
ongoing effort to limit global warming.