The Fragmentation of Carbon Markets

Bilateral agreements as basis towards piloting sectoral market mechanisms

International climate protection projects to offset domestic reduction obligations have entered a critical stage. The current situation of the international carbon market is characterised by an activity gap between existing and future market-based mechanisms. However, a minimum activity level is required to maintain the expertise of various stakeholder groups and to test new mechanism approaches in practice.

Against this background, a research project funded by the German Emissions Trading Authority (DEHSt) and conducted by Ecofys assessed opportunities provided by bilateral agreements for piloting market-based approaches at sectoral levels. The research work follows different steps, in assessing those opportunities:

  1. Country selection methodology
    Prioritization of countries to host pilot activities considers criteria which reflect the countries’ activity and ambition levels in the area of carbon markets and climate policy.
  2. Approach to defining reference levels
    The definition of accepted credited baselines is key to the success of pilots. Concepts to define reference levels based on benchmarking steps are tested for two different sectors (the Chilean electricity sector and the low-income segment of the buildings sector in South Africa).
  3. Steps towards implementation
    Recommendations for actions by policy-makers for the implementation of bilateral sector pilots will be developed taking into account the prevention of market fragmentation.

Country stakeholders and sector experts contributed to all parts of the research through workshops and interviews.