From the Kyoto Protocol to the Long Term Cooperative Action: Critical implications and opportunities for a New Market based Mechanism (NMM)

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Introduction 
 
 
The fifth report of the Intergovernmental Panel on Climate Change (IPCC) 
concluded that humans are causing a sudden change in Earth's climate due to rising 
emissions of greenhouse gases in the atmosphere. (IPCC, 2013). 
Alongsidethe intense uprising of scientific condemnation, the United Nations, the 
European Union, as well as other nations and international organizations, would like to 
see carbon emissions and greenhouse gas emissions significantly reduced. 
The goal would be to overcome the international commitments already existing 
(Kyoto Protocol), in order to limit or avoid the rise in average global temperature and to 
stay within a 2 degree Celsius maximum average global increase. 
At the global level, the current market- and non-market-based mitigative solutions, 
together with the existing flexible mechanisms (i.e. CMD, JI and ETS) implemented 
after the establishment of the Kyoto Protocol, have not managed to a achieve a 
substantial reduction in the level of greenhouse gases emissions in the environment;   
therefore one of the proposed solutions seems to lie in the realization of  a scaled-up new 
market-based mechanism (NMM). 
This thesis has as its main goal the analysis of the new market mechanism (NMM) 
which adopts a mechanism that covers the emissions of broader sectors of a country's 
economy rather than single and individual industries,proposed as a complementary 
solution to the current active market instruments. 
To this end, the new market mechanism might further reduce GHG emissions in the 
atmosphere by extending the carbon market, and especially by encouraging the 
economies of developing countries to achieve ever more ambitious abatement (scaling 
up the market), thus accelerating the deployment of green technologies to reach long-
term environmental sustainability.
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Introduced during the Durban Conference of the Parties held on December 2011, the 
idea of the NMM, whichtakes  a sectoral approach instead of a project-based one, is 
currently much debated by scholars on the field, as well as by policymakers. Although a 
broad consensus on this mechanism is still lacking, the international community is 
moving forward by adopting case studies and pilot projects that are gradually taking off 
in order to test this new mechanism. 
 
Research approach 
 
To find out whether the new market mechanism can be advantageous as a means to 
increase mitigation, we are going to evaluate the system from several points of view:  
particularly analyzing the expected role and design features, and tracing a brief 
indication on the functional feasibility within developing countries. 
The theme of the NMM raises many questions in the scientific community about the 
possibility of reaching ambitious levels in reducing emissions, and in particular whether 
and how this premise could overcome the limitations imposed by the Kyoto Protocol. 
The research is developed on the basis of the contributions of several economic and 
political studies that have examined the matter following the Conference of the Parties 
held in Durban at the end of 2011. 
Retracing the main lines followed by this recent research, we will first try to 
understand  if indeed there is a (real) need to adopt a new market mechanism in addition 
to  the existing ones. 
First, it was considered necessary to explore the systemic context/architecture 
within which the new market mechanism will be likely adopted. There is extensive 
literature on the governance of the international system that can help us to clarify the 
current and future role of markets within international climate policy. 
It was then necessary to analyze the existing flexible mechanisms developed 
through Kyoto. Thanks to the large number of studies that have focused mainly on the 
calculation of performances achieved, it was considered useful to examine the factors 
that have restrained the performance of the system in order to try to show how the new
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mechanism has originated: partly in searching for a solution to overcome the issues 
encountered. 
It is interesting to notice that even today the design and a real role for this 
mechanism has not been formalized. The author believes that it is undoubtedly necessary 
to take brief and short-term precautions before formulating a unique, final and long term 
decision regarding the system. To this purpose,it will be useful to draw up a scenario that 
includes the time required for the implementation. Some of the early empirical research 
has brought to light some clear prerequisites for several host countries. The author will 
investigate these issues in order to finally draw the appropriate conclusions on the 
practical feasibility of the mechanism. 
 
Contents of the thesis 
 
After a brief introduction, to contextualize the issue of climate change and point out 
the responses from the international community through the United Nations Framework 
Convention on Climate Change (UNFCCC), the Kyoto Protocol and flexible 
mechanisms, the first chapter of the thesis will focus on the evolution of the method of 
centralized international governance, and will try to give an answer to the problems that 
this global approach has met over the years, illustrating some possible solutions and the 
ways in which the UNFCCC has moved forward. 
In front of the changing responsibilities on climate change, partly due to the impact 
of new emerging economies, the problem of how to designate a new post-Kyoto 
international agreement, and how to resolve the issue of negotiation between countries 
with regard to the latter, require urgent consideration. We will try to understand if there 
is maneuvering space,with reference  to the last COP, held in Warsaw in 2013. 
Although some useful features on how to achieve an effective agreement will be 
given, the negotiating problem will require substantial structural revision, which, as we 
shall see, should carefully review some basic features in the UNFCCC architecture. 
In the second chapter we will summarize the main results in terms of performance 
of the Kyoto Protocol and its flexible market mechanisms (CDM, JI, ETS).
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In these terms, we will try to understand if and what were the main lessons learned, 
with particular attention given to the critical reasons that have led to a weakening in the 
overall performance of the systems. Focus will be finally given to the European 
Emission Trading Scheme, which is now the largest system for the reduction of GHG 
emissions currently in operation. Such performances will be analyzed within the two 
main phases of operation of the EU-ETS (between 2005 and 2012), the changes adopted 
with the implementation of the third phase (2013), and the critical role that the economic 
crisis has had, assessing how much and in what ways it impacted the system. 
The results will be quantified in terms of the amount of emissions reduction 
achieved, and in terms of the impact on business profits and product prices. A final 
section of the second chapter will be dedicated to calculating the impact that the EU-
ETS has had on investment and innovation. 
The third chapter will focus on the current proposal regarding the so-called new 
market mechanisms (NMM). The NMM and FV A constitute two new proposals for the 
cost-effective reduction of emissions of GHGs. Although the first is considered a 
mechanism, and the second a de-facto regulatory framework, both are systems that aim 
to encourage participation and ambition among States. Having clarified this distinction, 
the thesis will proceed to analyze in detail the NMM. In a first step we will clarify the 
role that this mechanism will likely play, dedicating particular attention to the 
motivations and the main driving principles that have originated and developed. In a 
second step, we will focus our attention on the possible forms of design that could be 
prefigured. Particular attention will be dedicated to the major role of responsibility that 
the government of the host country will be required to have, compared to other flexible 
market mechanisms. 
The last paragraph of the thesis verifies and analyzes the considerations to be made 
concerning the possible application of pilot projects within developing countries that 
should adopt the NMM. In the latter case, we are going to identify the main obstacles 
that can be found within the economies considered, and at the same time the 
opportunities that could be available. Then, a list of suggestions is made by the literature 
on the subject. Important questions that need to be assessed are as follows: whether the
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system is applicable; approximately how much time is needed; which parameters must 
be complied with, and especially if the NMM will be sustainable in the future.
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Chapter 1 
 
Climate Change, global warming and international regulation 
 
 
 
1 Premise / preliminary statements 
 
Climate change ‘will double’ el Niño events 
“Draughts in Australia and flooding in the Americas associated with the deadly El 
Niño weather phenomenon are likely to be twice as common this century because of 
climate change, scientists warn.”(Banning-Lover, 2014) 
 
The most authoritative scientific advisory Forum set up by the United Nations 
Organization, the Intergovernmental Panel on Climate Change (IPCC), observed a 
clearly changing outlook in theEarth’s regulative processes, confirming that there has 
been a general and repeated worsening inglobal weather conditions in recent years. 
The fifth report of the IPCC concluded that, over the past century, there has been a 
well-documented sudden change of surface temperatures due to the increase of 
Greenhouse Gases emissions (GHGs). (IPCC, 2013)(Fig. 1.1)
 
The report shows the high correlation of emissions due to human activity and the 
climate change phenomenon, and it advocates that is necessary to take a more 
cooperative action in order to reach greater reductions of emissions on a global scale. 
 
Although the growing scientific warnings against the risks for the events registered 
during the last decades, such as el Niño and other growing anomalies of the climate’s 
natural cycles, the variability in temperatures does not seem to be stopping.(Condon & 
Sinha, 2013) (Fig. 1.2)