The Fridtjof Nansen Institute

Linking treaties to expand the market

Kristian Tangen and Henrik HasselknippeA post-2012 Architecture

Bonn June 12 2003

The Fridtjof Nansen Institute

Merits and shortcomings of cap-and-trade

• Merits– Cost effectivness and price signals

– Large reduction at low prices

– TEETH!

• Shortcomings– High prices: Politically impossible

– Need other instruments for technological change

Create incentives for cap-and-trade Develop supplementing instruments

The Fridtjof Nansen Institute

Challenges & Solutions

• Negotiations of several treaties– GOOD: Fewer negotiation parties– BAD: Fewer trade-offs, package deals

• Challenge – Weaker incentives for cap-and-trade?

• Solution?– Linked multi-treaty system– Differentiated rights and duties– Graduation thresholds

The Fridtjof Nansen Institute

Linking rights and duties

UNFCCC/KP/CDM

Reporting Treaty

SupportTreaty

TradingTreaty

Other treaties-Technology-Development

Rights: Only parties negotiate

The Fridtjof Nansen Institute

Reporting Treaty

• Reporting: first step for effective policies• Rights

– Gateway to Support and Trading treaties

• Duties – Comply with reporting requirements

• Reporting requirements– Kyoto-style reporting (art. 5,7 & 8)– For sectors or whole economy– Depends on developing level– E.g. only CO2 from energy

The Fridtjof Nansen Institute

Support Treaty

• Below threshold• Duties

– Compliance with Reporting Treaty

• Rights– Participation

– Capacity building

– Financial support

• Above threshold• Duties

– Compliance with Trading Treaty

• Rights– Participation

The Fridtjof Nansen Institute

Cap-and-trade Treaty

• Duties– Caps for sectors, or the whole economy– Caps only sectors covered by Reporting Treaty

• Rights– Full participation in emissions trading– Can be party to Support Treaty– Additional support for newcomers

The Fridtjof Nansen Institute

Caps

• To be set by negotiations between parties to the Trading Treaty

• Possibility, one of many– Caps set as reduction from BAU – BAU has to be approved by review team – Lower reductions for newcomers

• Example– Newcomers: -0.1% from BAU– Veterans: -2% p.a. from BAU– With various levels in between?

The Fridtjof Nansen Institute

Possible first steps

• Bottom-up processes• Trading countries (EU, Japan, Canada)

– Should develop common currency

– Discuss linking and future evolution

• Reporting– Increase support for developing country reporting

• Technology and innovation– Establish framework for international cooperation

• Sensible also if KP does not enter into force