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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

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
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Title Annotation:Carbon Markets, Institutions, Policies, and Research
Publication:Carbon Markets, Institutions, Policies, and Research
Date:Oct 1, 2008
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