Filling in the Details: The Fundamental Questions
The following questions should be asked of each proposed new mechanism.
How will the new mechanism reduce emissions?
For example, will emissions be reduced through the introduction of an intensity-based orabsolute ‘no lose’ target; through support for a domestic policy measure; or through thetransfer of lower-emitting technologies?2.
What is the mechanism’s source of funding
?For example, if emissions reduction credits are issued to governments or private entitieswith the intention of being purchased, who is the buyer?
; if emission reductions aresupported by a multilateral fund, who contributes to or invests in the fund?; if emissionreductions stem from the transfer of technology, who funds the transfer and manages IPR?
What is the incentive structure for participation within the mechanism?
For example, how are the following actors drawn to participate in the mechanism:(1) National and local governments, (2) emitting entities in the host country,
and(3) other project developers and investors, international or domestic?
How does the mechanism harness private sector ingenuity and capitalize on privatesector aptitude for efficiently and effectively discovering low-cost solutions?
In other words, do private sector actors have the ability to take the initiative in terms of identifying, investing in, and/or implementing emission reductions, or are theyfundamentally dependent upon other actors to provide the return on their investment orto ‘move first’?5.
What are the supply/demand dynamics of the mechanism?
In other words, when considering the level of activity that the mechanism aims toincentivize, can the necessary investment or demand for credits reasonably be expected tomaterialise? For instance, for credit-issuing mechanisms, what impacts do levels of ambition or supplementarity limits have on demand, and should they be considered inconjunction with possible new supply of emission reductions?
What are the major political risks of this mechanism, and can these risks bemitigated?
For example, if a government fails to carry out its obligations under the mechanism, ordoes so unsatisfactorily, to what extent, if any, does it impact private sector investment? Isit possible to isolate the private sector from this risk or to mitigate the risk to investors?
In what ways can this mechanism create perverse incentives or unintendedconsequences, and how can these risks be mitigated?
For example, will this mechanism discourage further government regulation (e.g. higherfuel efficiency standards) because governments wish to preserve the carbon finance drawnto their country? Will the mechanism impact decisions taken on environmentalconservation (e.g. bio-fuel demand driving rainforest clearing for agroforestry operations)?
questions lie equally crucial
questions as well.Examples of functional questions include: What governance arrangement is necessary for thismechanism?; Is there a need to measure, report, and verify emission reductions achievedthrough the mechanism, and at what level; Is it necessary to determine additionality and,considering past experience, how can this be done successfully?; What data is required to getthe mechanism up and running, and how will that data be gathered?; In what time frame canthis mechanism be fully functional and, until then, how can the Parties ensure that emissionreduction activities do not lose momentum?
Will credits be fully fungible with AAUs and domestic compliance units? If not, how will they be utilized?
If crediting takes place at the sector or national level, not directly to the private entity, what is theincentive mechanism for private participation? For example, will there be a domestic program forcrediting below this level, and how will it be constituted and managed to reduce risk to participatingprivate sector entities?