Region: Global
Country: Global / Non-Specific
Sector: Energy and Power
Keywords: Emission Reduction Program **
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Document Summary:
This paper aims to develop guidance on the pricing based on opportunity cost pricing for Adjusted ERCs. Adjusted ERCs are emission reduction credits that come with corresponding adjustment.
Document Details:
Every country has mitigation opportunities in different sectors with varying costs depending on several factors such as the maturity of technologies, access to finance, policy support, and natural resources available. A country can plan its nationally determined contribution (NDC) based on such abatement cost information and prepare its strategy to achieve the NDC most effectively.
The provision of Corresponding Adjustment under Article 6 of the Paris Agreement is an important factor to consider when the country decides to engage in international carbon markets. When the host country transfers authorized emission reduction credits1 or internationally transferred mitigation outcomes (ITMOs), Corresponding Adjustment creates an obligation and the associated liability for the host country – i.e., the host country has to increase its NDC burden by the volume transferred. Without informed decisions, countries may oversell and end up having to implement more expensive mitigation activities to meet their NDCs. This potential liability to the host country is linked to the marginal cost and the associated opportunity cost of meeting the NDC.
The Global Change Analysis Model (GCAM)2 suggests that many or most host countries would need to charge Corresponding Adjustment fees well above US$25/ tCO2e in addition to the cost of the emission reduction credits. Such Corresponding Adjustment cost is NDC-specific and varies depending on the level of NDC ambition. Each country can derive its own Corresponding Adjustment costs through modelling exercises3, and the more ambitious the host country’s NDC is, the higher the cost is.
This opportunity cost-based pricing approach is one possible way to mitigate the overselling risks (risking the NDC compliance) linked to corresponding adjustment. Alternative approaches include: earmarking mitigation activities that go beyond host country NDC compliance needs and selling them at a price that covers the costs of respective mitigation activity; setting a uniform corresponding adjustment fee in linkage to a global least-cost scenario to achieve the 2030 NDC pledges or the climate goals of the Paris Agreement; and auctioning ITMOs. Advantages and disadvantages of each approach are provided in chapter 5.
Lastly, developing suitable institutional structures is important to ensure that such pricing approaches are appropriately considered and assessed by the government and used to effectively support achieving the NDC commitments. Chapter 6 suggests establishing a sovereign climate fund as one possible institutional structure with an illustration of potential transaction flows.
Updated: January 11, 2024
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