New Market Mechanisms: Prerequisites for Implementation

The Durban climate conference decided to establish a new market-based mechanism (NMM) that is to cover broad segments of countries’ economies. This article aims to explore the essential prerequisites for the implementation of an NMM. In addition to a theoretical discussion it considers the cases of China and Mexico. The article finds that the challenges in establishing market mechanisms that cover a broad segment of the economy are formidable and most developing countries have serious capacity constraints. Lead times can be expected to be at least 3–5 years. To move the process forward, it may be useful to consider promoting pilot activities similar to the Activities Implemented Jointly pilot phase that preceded the introduction of the flexible Kyoto mechanisms and the demonstration activities for Reducing Emissions from Avoided Deforestation and Forest Degradation.

by Wolfgang Sterk, Florian Mersmann

The European Union (EU) is advocating strongly for the introduction of new market-based mechanisms (NMM) that should cover whole sectors or â€œbroad segments of the economyâ€. The Durban climate conference decided to establish such a new mechanism, with the details to be decided at the subsequent conference in Qatar. However, little progress was made over the course of 2012, so the conference in Qatar adopted a new mandate for the elaboration of implementation details by the end of 2013.

The question is, however, which developing countries would actually be able to implement such new mechanisms, a task that would pose substantial challenges in terms of data gathering, setting appropriate sectoral targets and measuring, reporting and verifying emissions and reductions. This paper therefore aims to explore the essential prerequisites for the implementation of new market mechanisms.

As a basis for the analysis, the first chapter will briefly introduce the different types of NMM recently discussed. It will focus on differing design features and notable differences. The second chapter will outline and categorize preconditions to be met nationally in order to implement an NMM. As a tentative third step, the NMM readiness of Mexico and China, two of the countries most often cited in relation to NMM, will be analysed along the factors identified. A conclusion sums up the findings of the previous chapters and considers current and future needs and challenges in New Market Mechanisms.

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published: Lexxion Verlagsgesellschaft mbH, Issue 4/2012 (December 2012), 12|2012
Keywords: Policy Tax Instruments, China, Mexico