Prospects for Markets for Internationally Transferred Mitigation Outcomes under the Paris Agreement
The Paris Agreement provides for parties to use internationally transferred mitigation outcomes in implementing their Nationally Determined Contributions. This paper analyzes forward trading of these outcomes in the presence of two forms of uncerta...
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| Language: | English |
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World Bank, Washington, DC
2022
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| Online Access: | http://documents.worldbank.org/curated/en/099552405162236712/IDU0f7638e1c0b51d04e62091b30b30c5caa8a55 http://hdl.handle.net/10986/37457 |
| Summary: | The Paris Agreement provides for
parties to use internationally transferred mitigation
outcomes in implementing their Nationally Determined
Contributions. This paper analyzes forward trading of these
outcomes in the presence of two forms of uncertainty: (1)
uncertainty about the fulfillment of Nationally Determined
Contribution targets, and (2) uncertainty about the
existence and functioning of the forward, options, and
future spot markets markets for internationally transferred
mitigation outcomes. When parties can sell and buy
internationally transferred mitigation outcomes forward,
access to call options for late purchases leads to
correspondingly larger forward sales, or less current
mitigation. Access to put options for late internationally
transferred mitigation outcome sales does not affect forward
trading outcomes but increases late sales for net sellers.
Access to options markets is welfare enhancing for all
parties, and call options help parties stay in compliance
with their Nationally Determined Contributions at the Paris
Agreement end point, 2030. The existence of internationally
transferred mitigation outcome markets may be in peril,
however, as banking beyond 2030 is not allowed. The
availability and functioning of internationally transferred
mitigation outcome markets can be enabled or improved by
increased climate finance provided by donors. With no
options markets, host countries will still sell
internationally transferred mitigation outcomes forward,
albeit less so, and rely on access to more expensive
“backstop” mitigation for ex-post compliance with their
Nationally Determined Contributions. Closed-form solutions
are derived for trading and its welfare impacts in all the
option contract alternatives, given that parties’
uncertainties about fulfilling their commitments are
uniformly distributed. The welfare impact of the
availability of put and call option contracts is then
strongly increasing in uncertainty, and in ex-post and
forward outcome prices. |
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