Gearing as a Market Access Mechanism for Efforts to Reduce Emissions from Deforestation and Degradation (REDD) in Developing Countries
Executive summary
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Addressing environmental integrity has been a key focus of international climate change negotiations. Arguably, there has been mixed success to date at achieving this, as evidenced by restrictions on access of some emissions units to emissions markets. Finding practical methods for addressing these issues is critical to the successful completion of upcoming climate change negotiations and the inclusion of new sectors, such as emissions from deforestation in developing countries, in future agreements. This report considers one option, referred to as "gearing", for taking account of environmental integrity issues associated with reducing emissions from deforestation and degradation in developing countries (REDD). Gearing has the potential to pave the way for the inclusion of REDD in a future climate change agreement.
Gearing involves either:
- adjusting the quantity of units that can be generated by an activity ("crediting approach"); or
- adjusting the quantity of units generated by an activity that can be retired for a given quantity of emissions ("compliance ratio"); or
- a combination of these approaches ("hybrid")
to reflect the environmental uncertainty associated with that activity. Gearing is implemented through adjustment factors that reflect the degree of uncertainty associated with particular issues.
Potentially, gearing can be applied to the following issues associated with REDD:
- Natural and indirect effects causing deforestation and degradation;
- Measurement error;
- Leakage;
- Non-permanence;
- Hot air;
- Additionality; and
- Double counting.
Gearing can also potentially be applied to issues, such as co-benefits, that do not directly relate to emissions avoided by an activity.
To demonstrate the application of gearing the paper provides an illustrative estimate of a REDD gearing factor for a selected policy scenario. The paper estimates an initial gearing factor of 0.30 based on estimates from the literature for levels of uncertainty in relation to measurement, reference levels, leakage and nonpermanence. A gearing factor of 0.30 implies that for every tonne of emissions reduction claimed, 0.30 units would be credited (or eligible for retirement). This factor would be expected to increase in time as uncertainties are revised and estimates are refined.
Gearing can be implemented through incorporating it into an international agreement or it can be applied by national or regional emissions trading schemes. Implementation at an international level is preferable.
Gearing rates should be based on sound science. This will ensure consistent treatment of all sources of deforestation and fair treatment of different countries. Conservative gearing factors should be used initially to promote confidence in REDD units. This provides the opportunity for adjustment later as information on supply and other factors becomes available.
There are several considerations that determine which gearing factors should be included in a REDD mechanism. These include the nature of the issue, its significance, practicability, and the type of mechanism.
Gearing is a flexible method for promoting management of environmental quality issues that can be readily adjusted as new information comes to hand. Different gearing rates can be used to provide incentives for more accurate measurement and accounting by suppliers of units.
An initial comparison of the crediting, compliance ratio and hybrid gearing approaches indicates that the crediting approach performs best in terms of providing incentives to address environmental integrity concerns, providing certainty for the market and ease of implementation. The compliance ratio, however, may be more attractive to suppliers. There is a risk of too much complexity with the hybrid method.
Applying the estimated gearing factor of 0.30 to estimates for the price of emissions units in 2020 indicates that, while such a rate would cause a significant reduction in incentives for supply, the resulting unit price should be sufficient for encouraging REDD activity. This conclusion is based on the observation that estimated prices after gearing are still greater than most estimates for the marginal cost of REDD.
Appropriately applied, gearing could successfully minimise concerns about the environmental quality of REDD activities and units. Supplying nations will wish to ensure that gearing does not threaten the overall value from REDD. However, these concerns may be reduced if gearing results in higher prices for REDD units through providing more certainty about the quality of the units.
Finally, the potential application of gearing need not be limited to REDD. Its flexibility and relative ease of application means it is a potentially useful tool for addressing issues in other areas similar to those discussed in this report.
Structure of report
Chapter 1 presents a detailed description of gearing and the rationale for it. Chapter 2 follows with a discussion of quality of currently trading emissions units. Chapter 3 presents a quantitative assessment of gearing factors and their aggregation into indicative gearing ratios. Chapter 4 discusses system design, negotiation, and administration. Chapter 5 pursues the implications for incentivising REDD regimes. Chapter 6 concludes.
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