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Shaping the Next Generation of Carbon Markets

Rachel Kyte's picture

 Smoke coming out of two smokestacks at a factory in Estonia. - Photo: World Bank/Flickr

Right now, the carbon markets of the future are under construction in all corners of the world.

China is determined to pursue low-carbon development and is embracing the market as the most efficient way to do so. Wang Shu, the deputy director of China's National Development and Reform Commission, told us this week that he sees the "magic of the market" as the most efficient way to drive China's green growth.

Five Chinese cities and two provinces are piloting emissions trading systems with the goal of building a national carbon market. Chile is exploring an emissions trading system and focusing on energy efficiency and renewable energy. Mexico is developing market-based mechanisms in energy efficiency that could cut its emissions by as much as 30 percent by 2020. Costa Rica is aiming for a carbon-neutral economy by 2021.

Each of the countries pioneering market-based mechanisms to reduce their domestic carbon emissions are leaders. Bring them together in one room, and you begin to see progress and the enormous potential for a powerful networking domestic system that could begin to produce a predictable carbon price -- a sina que non for the speed and scale of climate action we need.

That's happening this week at the World Bank.

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From Vietnam to California, Turkey to Australia, government officials are sharing new ideas and experiences on emissions trading and other innovative market instruments to curb greenhouse gas emissions. They're members of the Partnership for Market Readiness (PMR) -- a growing coalition of over 30 developed and developing countries that are the first movers in building a second-generation market.

While Australia's system is controversial in some quarters at home, in the PMR, its representatives sharing their lessons -- the challenges and the successes -- and other countries are learning from them.

The California representatives, who held the second auction of their carbon market this year, were relieved to find that the issues that they are grappling with as they build their system have been faced elsewhere, and they do not reinvent the wheel.

The leaders I spoke with are buoyed and enthused by each other's progress. It isn't easy, but they are excited by the speed with which market approaches are taking hold.

While the countries in the PMR (pdf) hope that this bottom up approach will work and that others will join the fold, they need at some point the supporting infrastructure to ensure exchangeability between their systems -- the common definitions and common registries that would value carbon evenly and enable trading.

At least 35 countries, 18 sub-national jurisdictions in the U.S. and Canada, and the seven Chinese cities and provinces -- covering about one-third of China's GDP -- will soon be participating in emissions trading systems. Connecting these markets has to be a priority to support their success and the world's ability to prevent a temperature rise that would endanger food security, water security, and human lives.

When countries are aligned, motivated, and leading by doing, you get something we don't always see when discussing combating climate change -- a commitment to speed, moving to scale, and frank and candid conversation about what works, what doesn't, and why.

A few months ago, the World Bank commissioned a scientific report, "Turn Down the Heat: Why a 4°C Must Be Avoided," that concluded that the world will warm by 4°C by the end of this century with devastating consequences if we don't take concerted action now.

Laying the groundwork for a predictable price on carbon is key to any climate solution. The PMR is leading the way.

This post first appeared in Huffington Post.

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