7 Conclusions and areas for future study.

To date, there is concern that the set of climate change policies currently in place are insufficient to slow anticipated climate change. This is because the growth rate in current emissions appears inconsistent with trajectories that scientists predict would stabilize the global climate. At the same time, most governments have expressed their intent to slow or reverse emission rates. Moreover, parties to the UNFCCC are committed to finding ways to reach a cooperative strategy that extends beyond the Kyoto Protocol's first commitment period and the Bali Roadmap agreed upon at the most recent conference of the parties provides a process for doing so.

Beneath the overarching unease about the efficacy of current policies is an on-going debate about whether current market-based policies deliver expected environmental benefits. In the specific case of voluntary and Kyoto project-based emission reductions, there are a variety of issues. For one, policy makers worry that safeguards built into the respective project cycles are not sufficient to guarantee delivery of the combination of environmental and developmental benefits the projects promise. One consequence is that EU member states have placed limits on how related tradable permits can be used. In addition, a variety of supplemental private and public quality certifications have emerged in order to further distinguish among UNFCCC-approved offsets. Stalled efforts to solve project design obstacles in forestry projects that would allow project-based investments to go forward are another area of concern. At present, investments in reforestation and afforestation are meager and international agreement on how to slow deforestation is missing. In addition, problems about how to accurately gauge emission reductions from sector-wide projects and current implementation rules for CDM and JI appear to leave identified sources of mitigation untapped in transport and energy systems and inefficient buildings. Even so, the ability of private markets to mobilize capital in other areas has proved much greater than originally anticipated. Moreover, in the case of Australia and possibly the United States, domestic tradable permit programs will become better integrated with Kyoto's international system. These points are encouraging, because they suggest a strengthening of the markets needed for effective policy, but they also raise questions about how voluntary and regional systems in those countries will transform under new rules and how they will influence present markets for framework-based credits and projects.

All of this can be expected to influence the future direction of policy research. As has been discussed, much of the economic literature to date has been predictive and focused on evaluating alternative policy proposals; this is reflected in the large portion of the associated economics literature devoted to numeric models and methods. Looking forward, this type of research will certainly remain important for several reasons. First, an on-going analysis of related proposals will be needed within and outside the IPCC process. For this, policy makers will want to focus increasingly on explaining the relationships among carbon-market policy, research and technology diffusion and capital formation. In addition, the most recent research on vulnerability suggests large differences in the geographic distribution of climate change effects. For this reason countries will want to develop greater detail on differences specific policies have on their own vulnerability. These areas of research will require further advances in modeling approaches and a greater level of specificity than current models can manage. An increase in the use of country-specific modeling is also anticipated as countries will want to evaluate the adaptation policies and the effects of tradable instruments.

In addition, the growing number of project-based investments, together with the emergence of formal markets for tradable permits and derived financial products, will open up new areas for applied research. By way of example, project-based studies are likely to address questions concerning environmental additionality, spillovers and technology transfer that have in the past been addressed using modeling methods. In addition, while models typically suggest that CDM and JI projects will locate where abatement costs are lowest, project-based studies might better be able to examine the role institutions and other determinants of transaction costs play in investment decisions. Observations from formal exchanges can be used to examine the performance of market efficiency and integration. This is especially useful since current policies sometimes limit how tradable instruments can be used. Information across markets and among derivative markets can also be exploited to reveal how market participants price the risks associated with potential policy reversals, guarantees of quality, and performance risk related to specific types of contracts.

Annex I: Glossary of acronyms

Acronym                             Meaning

AAU                           Assigned Amount Unit

AIJ                      Activities Implemented Jointly

AIE                      Accredited Independent Entity

CCX                         Chicago Climate Exchange

CDM                       Clean Development Mechanism

CER                       Certified Emission Reduction

CFI                       Chicago Financial Instrument

CGE                      Computable General Equilibrium

COP                     UNFCCC Conference of the Parties

DOE                      Designated Operational Entity

ERPA                 Emissions Reduction Purchase Agreement

ERU                         Emission Reduction Unit

EU ETS             The European Union Emission Trading Scheme

GGAS                    Greenhouse Gas Abatement Scheme

GHG                              Greenhouse Gas

IPCC               Intergovernmental Panel on Climate Change

JI                            Joint Implementation

JISC               Joint Implementation Supervisory Committee

lCER                       Long-term CER under LULUCF

LULUCF               Land Use, Land-Use Change and Forestry

NAP                         National Allocation Plan

NETS                   National Greenhouse Gas Emissions
                                 Trading Scheme

NGAC                New South Wales Greenhouse Gas Abatement
                                  Certificate

ODA                     Overseas Development Assistance

OECD               The Organization for Economic Co-operation
                                and Development

MtCO2e                   Million tons of CO2 equivalent

PCF                          Prototype Carbon Fund

PDD                     Project Design Document, for CDM

RGGI                   Regional Greenhouse Gas Initiative

RMU            Removal Unit, for GHG removal from the atmosphere
                                 through LULUCF

SBSTA                  Subsidiary Body for Scientific and
                              Technological Advice

tCER                       Temporary CER under LULUCF

tCO2e                        Ton of CO2 equivalent

UNFCCC               United Nations Framework Convention on
                                 Climate Change