When countries work to combat climate change, they employ various strategies to curb greenhouse gas emissions. There are two main approaches with distinct characteristics and roles in shaping environmental policy: market and non-market mechanisms.
Greenhouse gas (GHG) emissions are quantified, measured in tonnes of CO2 equivalent (CO2e), to measure how much a country emits GHG compared to other countries. Each country sets limits, also called caps, on GHG. The right to emit a specific amount of GHG becomes a valuable commodity in the market mechanisms. Applying market principles, emissions trading, or cap and trade allows countries or companies that exceed their emission reduction targets to sell unused emission rights to those falling short.
This system, exemplified by the European Union Emissions Trading System (EUETS), creates a flexible environment where companies can plan long-term emission reduction strategies. The Kyoto Protocol introduced three market mechanisms: emissions trading, the Clean Development Mechanism (CDM), and joint implementation (JI).
Under emissions trading, companies can buy and sell emission units, providing monetary incentives for emission reductions. CDM and JI, project-based mechanisms, reward projects that reduce emissions below the “business-as-usual” levels. Certified emission reductions (CERs) and emission reduction units (ERUs) are earned and traded, allowing companies and countries to meet their emission reduction obligations. These mechanisms promote flexibility and incentivise various projects, from renewable energy initiatives to enhanced cookstove programs.
Market and Non-Market Approaches in the Paris Agreement
In the Paris Climate Change Agreement, negotiators recognised the benefits of global cooperation in emission reduction but also acknowledged the need for diverse approaches beyond market mechanisms. Article 6 of the agreement reflects this balance, calling for cooperation to enhance ambition, foster sustainable development, and encourage broad participation in climate action.
The agreement introduces a new market mechanism, building on lessons from previous mechanisms like CDM and JI. Simultaneously, it establishes a framework for non-market approaches, a diverse set of strategies that don’t rely on traditional market mechanisms. While the new market mechanism details are to be determined, parties must also define the non-market approaches mechanism.
Non-market approaches, as envisioned by the parties, focus on cooperation in climate policy and may include fiscal measures such as carbon pricing or emission-reducing taxes. This broad framework allows for various strategies, reflecting the diverse nature of climate actions globally.
In summary, market mechanisms provide flexibility and incentives for emission reductions through trading, while non-market approaches, as outlined in the Paris Agreement, offer a broader, more varied set of strategies to encourage global cooperation in the fight against climate change. The ongoing evolution of these mechanisms underscores the complexity and importance of international collaboration in addressing one of the most pressing challenges of our time. Read more about the market and non-market mechanisms here. (nsh)
Banner photo: The Indonesia Carbon Exchange (IDX Carbon) was officially launched on 26 September. (Source: Indonesia Stock Exchange Youtube channel)