The international community is moving forward swiftly in combating climate change and adapting to its unavoidable consequences. The Paris Agreement, the first global climate agreement, entered into force on 4 November 2016, barely a year after it was agreed by the contracting parties. There are some issues still to be clarified before the implementation of the agreement begins in 2020. The provisions that still need to be agreed include those pertaining to international market-based instruments in Article 6 of the agreement.
Nonetheless, the use of market-based climate policy instruments is moving forward outside of the framework of the agreement. Emissions trading systems and carbon taxes are being used in many national and subnational jurisdictions. The International Civil Aviation Organization (ICAO) has also decided to introduce a market-based mechanism.
The Federal Environment Ministry is actively involved in the technical design of these international climate policy instruments and is advancing the dynamic development of price-based instruments worldwide. In this context, the German government has launched numerous initiatives in the area of international carbon markets together with international partners. Germany also supports research activities and dialogue forums to spur the development of innovative approaches in all aspects of the carbon market. Below is an overview of the diverse portfolio of initiatives.
Market development initiatives
Carbon Market Platform
More and more countries are introducing market instruments such as carbon taxes or emissions trading schemes at national level. The spread of national pricing systems is a positive development, but it remains uncoordinated. Greenhouse gas emitters can still operate in numerous regions and economic sectors without paying the price for the impacts of their emissions. This is why Germany proposed establishing a platform for a strategic dialogue on the carbon market during its G7 Presidency in 2015. This dialogue platform is intended to identify key principles for developing rules and guidelines on carbon markets and to support the harmonisation of national instruments. By supporting exchange among interested countries, the platform also promotes new forms of cooperation and joint approaches in the area of carbon markets.
Partnership for Market Readiness (PMR)
In addition to bilateral cooperation with individual countries, the German government participates in multiple international initiatives for the development of market-based policy instruments, including the World Bank’s Partnership for Market Readiness (PMR). The PMR currently comprises more than 30 countries, including some of the world’s biggest emitters. The partnership was launched in 2010 during the climate negotiations in Cancún. It aims to help interested countries prepare and implement innovative carbon market instruments.
The World Bank PMR initiative uses a two-step process: First, with the help of the PMR, participating countries create what are called Market Readiness Proposals (MRPs), which outline specific measures intended as targeted preparation for the introduction of market-based climate instruments. Once the MRPs are approved, the countries move on to the second step, receiving technical and financial support in the development and implementation of the planned measures. In addition to these support measures, the PMR promotes exchange of information between countries that already use market-based instruments and countries that are still working on introducing them. In 2014, the PMR opened up to subnational participants, extending its reach.
Carbon Pricing Leadership Coalition (CPLC)
The aim of the Carbon Pricing Leadership Coalition (CPLC) is to promote pricing mechanisms for carbon and other greenhouse gases worldwide. Germany is a partner of the coalition, which was established by the World Bank and introduced in November 2015 on the sidelines of the Paris Climate Change Conference. The coalition brings together national and subnational governments, businesses and civil society in order to support the implementation of existing carbon pricing policies and to push for the introduction of new carbon pricing mechanisms. The CPLC is thus, for example, working together with the newly founded Global Maritime Forum to move forward on decarbonising international shipping. The CPLC is also a dialogue platform where participants can discuss their experience with carbon pricing policies. The knowledge gained through designing and implementing carbon pricing policies will be compiled by the CPLC. The work of the coalition receives political and scientific guidance from bodies set up for this purpose.
Pilot Auction Facility (PAF)
The international carbon market, which to date has been based on the flexible Kyoto Protocol mechanism, has almost completely broken down. This situation has seriously jeopardised ongoing projects under the Clean Development Mechanism (CDM) and is hampering the swift implementation of new projects, even though great mitigation potential does exist. To meet the threat of climate project closures, the German government and its partners have launched a number of initiatives to counteract these developments. One of these initiatives is the Pilot Auction Facility for Methane and Climate Change Mitigation (PAF), which was established in 2015 by the World Bank.
The initiative addresses projects that are in danger of closure due to low carbon credit prices but only require a minimal amount of additional revenue in order to ensure their continued operation. PAF’s aim is to stimulate investments in these kinds of projects by guaranteeing a minimum price for climate credits. To maximise the climate benefit, these are auctioned off as tradeable put options. Competitive bidding determines the minimum credit price that will be sufficient for the project operators to invest in climate projects. The third auction was held in January 2017. The first two auctions in 2015 and 2016 focussed on projects reducing methane emissions in landfills. The 2017 auction featured projects for reducing emissions of nitrous oxide, which, like methane, is a potent greenhouse gas. Nitrous oxide’s climate impact is 265 times that of carbon dioxide.
Transformative Carbon Asset Facility (TCAF)
Norway, Germany, Sweden and Switzerland launched another initiative, the Transformative Carbon Asset Facility (TCAF), with the World Bank during the Climate Change Conference in Paris. In the meantime, the UK and Canada have joined. The initiative helps developing countries set up and implement market-based climate instruments by providing results-based payments for measurable emissions reductions at sectoral level. With an initial public funding target of 500 million US dollars, the plan is to mobilise private business investments and to leverage over two billion US dollars of climate investments in total. The facility will promote mitigation in large-scale programmes in order to move away from the programmatic approach and achieve transformative impact in partner countries. By promoting measures that are part of the countries’ climate action strategies, the facility aims to strengthen national climate action efforts and to gain long-term contributions for the movement to achieve climate-friendly, sustainable development. The work of the facility is closely linked to international climate policy processes. The transformative experience should be transferable to other regions and contribute to the implementation of the Paris Agreement.
Nitric Acid Climate Action Group (NACAG)
Another initiative started by Germany focusses on reducing nitrous oxide emissions. The Nitric Acid Climate Action Group (NACAG) has the ambitious goal of stopping nitrous oxide emissions arising from the production of nitric acid worldwide by 2020. Nitric acid is a nitrogen compound used for the production of fertiliser all around the world. Abatement technology for nitric acid producers is relatively inexpensive and simple to use. In the past, the Clean Development Mechanism (CDM) helped prevent a major share of these emissions. Due to the collapse of prices, there is a risk that abatement technology will no longer be operated and that this low-cost reduction potential will be lost. In order to press onward with the sectoral transformation, NACAG offers information and consultation and makes financial support available for partner countries willing to continue mitigation efforts independently after 2020. This is intended to create incentives for the continuation of CDM projects and the initiation of new measures.
International Carbon Action Partnership (ICAP)
While efforts have been under way to establish a global carbon market at international level, regional, national and subnational actors have been successfully setting up their own carbon markets. The German government consults with partner countries during preparation and set-up of emissions trading systems, building on experience gained during the introduction and implementation of the EU ETS.
The International Carbon Action Partnership (ICAP) is a forum for technical dialogue in support of these processes. The partnership was started by 15 governments, including the German government, in 2007. ICAP is made up of countries, federal states and cities that have introduced emissions trading schemes. ICAP also holds training sessions on emissions trading every year for participants from developing countries and emerging economies from various regions. It is also an important contact point for reliable and current information on emissions trading worldwide. The ICAP secretariat has its headquarters in Berlin and is funded by the Federal Environment Ministry. The partnership now includes over 30 members.
PoA Working Group
In the context of the further development of the Clean Development Mechanism (CDM), the BMUB was a strong advocate for the programmatic approach. The programmatic approach makes it possible to bundle multiple individual CDM projects under one programme of activities or PoA. This allows projects to address small-scale emissions sources and lowers costs associated with project implementation. The programmatic approach was particularly successful with regard to projects in the area of energy efficiency, such as programmes distributing clean and efficient stoves. These programmes and others often contribute significantly to sustainable development. Although the CDM and its programmatic approach have limited future prospects, the concept is still very interesting because it is also suitable for use under other climate policy instruments and in international climate finance. This is why the BMUB is continuing its long-term involvement in the area of PoAs, even though the focus of the work has expanded slightly.
The PoA Working Group, financed by the BMUB and coordinated and headed up by Perspectives GmbH, plays a key role in this. The working group is devoted to scientific, regulatory and policy aspects of PoAs, originally as a part of the CDM, but now increasingly with an eye to international climate financing and the new cooperation mechanisms of the Paris Agreement, which are still to be developed. The group offers a platform for dialogue and thus facilitates exchange of experience and the coordination of support services for PoAs. The PoA Working Group is made up of established expert members, together with representatives from the BMUB, the World Bank, the United Nations Development Programme (UNDP), the CDM Project Developer Forum, the Designated National Authorities Forum (DNA Forum), the German Emissions Trading Authority and a few other members.
Foundation “Future of the Carbon Market”
The Foundation “Future of the Carbon Market” (Stiftung “Zukunft des Kohlenmarktes”) was established with the goal of promoting programmatic climate measures, or programmes of activities, POAs, under the Clean Development Mechanism (CDM). The programmatic approach of the CDM is promising because it is appropriate for small projects that contribute both to emissions reductions and, in particular, to sustainable development. The foundation’s approach allows many microprojects to be bundled together in a larger programme. This keeps the administrative costs for individual activities very low.
One of the major hurdles that PoAs face is lack of adequate seed capital. Payments from the CDM cannot be used for this purpose because they are only received after successful implementation of the activities. The foundation makes seed capital available to address this. The foundation was set up with funding from the BMUB in the amount of 10 million euros. Once PoAs supported by the foundation are successfully implemented, the seed capital that was advanced is paid back from the income earned through emissions credit sales. This also recapitalises the foundation. Due to the deterioration of CDM market prospects, the foundation took the decision in 2017 to impose a moratorium on CDM projects; these projects can no longer receive support. The foundation nonetheless continues to support the PoA concept and work on planning and methodology in this area.
Emissions offsetting for the German government’s business travel
Air travel has a particularly large ecological footprint, not just because large amounts of CO2 are released, but also because the high altitudes make the climate impact of the emissions greater than if they were released close to the ground. Air travel is frequently unavoidable in an increasingly globalised world, and this is also true for business travel undertaken by German government employees.
The German government therefore decided to offset the greenhouse gas emissions arising from all business travel, by air or car, undertaken by employees of ministries and other federal authorities during the current legislative period (2014 to 2017). To do this, the government makes use of credits from the CDM, setting additional criteria in order to support projects of particularly high quality. To date, credits from five projects have been used: a project for household biogas in China and Nepal, a project on generating electricity with harvest residues in India, a wind power project in Costa Rica and a project on generating electricity from landfill gas in Mexico. The German government was supported by the German Emissions Trading Authority (DEHSt) in implementing this idea. DEHSt calculates the emissions arising from the business travel, selects climate projects and is responsible for acquiring and cancelling the necessary credits.
In addition to these current activities, the German government carried out many other initiatives in the past in the field of the international carbon market. The links below lead to project descriptions on carbon-mechanisms.de.