Six recommendations to combat climate change with market mechanisms

From carbon pricing to cap-and-trade programmes, market-based policies are designed to cost-effectively reduce greenhouse gas emissions by creating financial incentives for companies to emit less. But these mechanisms need to be carefully designed to ensure their effectiveness in mitigating emissions while also enabling sustainable economic growth.

While acknowledging that market mechanisms are only one part of the policy mix, ICC strongly welcomes the availability of market-based instruments under the Paris Agreement. We believe these systems-if properly designed and implemented-could create new channels for climate finance, lead to technology transfer and capacity-building and hence support sustainable development in many areas.

Here are ICC’s six recommendations to build robust and comprehensive market mechanisms to curb carbon emissions and achieve the long-term goals of the Paris Agreement.

1. Build a robust framework for measuring, reporting and verification

In order for climate change mitigation to be an effective planning tool, countries need reliable information on emissions and actions. Measuring, reporting and verification (MRV) of states’ progress is an important building block of the international climate regime.

It is vital that future emissions reduction projects are supported by robust and comprehensive MRV systems to encourage investments by business. This will contribute to reducing risks and widening engagement from the business community.

2. Integrity, transparency and reliability of emission reductions

In order to gain trust from all stakeholders, the environmental integrity of mitigation actions must be preserved under any chosen market mechanism. This can be achieved through the development and adoption of transparent standards that projects have to fulfil under a market instrument.

3. Ambition and predictability

Business recommends that countries outline in a transparent way how they intend to increase their ambition using voluntary cooperation and market-based instruments. This could be reflected in their Nationally Determined Contributions (NDCs).

4. Technology neutrality

Governments and business will need to deploy a whole host of technologies to counter the effects of climate change. A principle of technology neutrality should therefore be applied to encourage the widest range of sustainable options, and identify the most cost-effective mitigation options.

5. Accessibility by parties and business

While standards are vital for environmental integrity, they should not lead to unnecessary administrative burdens that could prevent certain businesses – particularly small- and medium-sized enterprises (SMEs) – from implementing and participating in market instruments.

6. Working on sectoral baselines and standards for emissions reduction levels

A baseline is a level of emissions that serves as a reference to set a goal or target and measure progress. When setting a baseline, variables include metrics, scope and historical reference data.

The private sector is advised to maintain transparency on establishing baselines by including, for example, open and transparent consultation with experts of the specific economies.

Read the ICC policy paper on market mechanisms

Related links

• Private sector action needed to realize ambition of Paris Agreement
• Eight carbon pricing principles to cut emissions and boost business
• Climate Finance a Year after Paris: Driving Politics into Action
• ICC hails entry into force of Paris Agreement