Which approaches are discussed and most likely to be implemented?

Sectoral approaches can contribute to global emission reductions on a large scale. It is estimated that the emission reduction potential of the most feasible sectors in India and China alone is more than 5 Gt per year. If sectoral approaches are designed in a way that allows the generation of carbon credits, e.g. as offsetting mechanisms (sectoral CDM) or sectoral crediting, they will contribute to the supply of carbon credits. 

Recently, numerous options on how to design sectoral approaches have been debated between governments, industry, scientific bodies and civil society actors. The options of major interest today are “sectoral crediting” and “sectoral trading”. Nevertheless, crediting of National Appropriate Mitigation Actions (NAMAs) might also become very relevant. Perspectives is following the UN negotiations as well as the international scientific debate on sectoral approaches very closely. In this context we consult governments on the road to Copenhagen and beyond.

Perspectives is aware that besides being an attractive option for the international climate policy sectoral approaches face potential challenges. For each of the options under discussion there are multiple means of designing it – inter alia in terms of institutional set-up, coverage of sector and enforcement options and the definition of appropriate business-as-usual scenarios. The decision for one or the other design option will significantly influence the impact of sectoral approaches on the international carbon market.

Assuming that the stability of the international carbon market and its price signal is one of the political objectives, policy makers must ensure that the implementation of new sectoral instruments does not lead to a sudden oversupply with carbon credits. Since supply and demand determine the commodity price on the carbon market, the price will remain stable or even increase as long as there is enough demand for credits. Currently, the main demand for international carbon certificates comes from the EU ETS installations. In the future, other national and/or regional emissions trading schemes, e.g. the ones currently planned in the US and Australia will create additional demand.

Another important aspect is private sector engagement. The sectoral approaches currently under discussion may add further options for private sector engagement and business opportunities besides today’s CDM and JI. Depending on the scope of the approach, sectoral emission reductions may become economically attractive alternatives to the CDM or domestic mitigation. However, policy makers must ensure that there are sufficient, direct and clear incentives for private investors. If credits are allocated to a sector or a government, there will not be an incentive for a company to invest in climate friendly technologies.

In summary, sectoral crediting or trading as well as crediting of NAMAs has a huge potential to complement today’s options for mitigation and carbon credit generation in a truly global climate policy regime. It offers an opportunity to address the specific mitigation potential of certain sectors in different host countries in a practical way and to increase the options for private actors to contribute to emission reductions and identify business opportunities.