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Evolution of international carbon markets: lessons for the Paris Agreement

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  • Axel Michaelowa
  • Igor Shishlov
  • Dario Brescia

Abstract

The Paris Agreement will greatly benefit from the past experience with international market mechanisms for greenhouse gas (GHG) emissions reductions and related regulatory systems, which have gone through four periods with specific challenges. The first period 1997–2004 operationalized the mechanisms defined in the Kyoto Protocol, the Clean Development Mechanism (CDM) and Joint Implementation (JI). Pilot activities in different sectors were undertaken by the public sector, and the first baseline and monitoring methodologies officially approved. Between 2005 and 2011, the carbon markets expanded massively. The EU emission trading scheme (EU ETS) was linked to the Kyoto mechanisms, creating demand for carbon credits from the private sector. During this “gold rush” period criticism emerged with regarding the uneven geographical distribution of projects, as well as environmental integrity problems related to baselines and additionality. The next period saw a collapse in carbon prices between 2012 and 2014, limiting the development of new projects. The quantitative limits on the use of offsets in the EU ETS were reached and the failure to agree on a new international regime resulted in a drying up of demand from governments. The 2015–2018 period is characterized by a gradual stabilization of the international climate regime. The Paris Agreement adopted in 2015 increases complexity through global participation in mitigation. Future carbon markets will therefore face both old challenges—supply–demand balance, environmental integrity, transaction costs—and new ones—interactions with other policies and national targets, and sectoral/policy baselines and additionality checks preventing hot air proliferation. This article is categorized under: The Carbon Economy and Climate Mitigation > Policies, Instruments, Lifestyles, Behavior

Suggested Citation

  • Axel Michaelowa & Igor Shishlov & Dario Brescia, 2019. "Evolution of international carbon markets: lessons for the Paris Agreement," Wiley Interdisciplinary Reviews: Climate Change, John Wiley & Sons, vol. 10(6), November.
  • Handle: RePEc:wly:wirecc:v:10:y:2019:i:6:n:e613
    DOI: 10.1002/wcc.613
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    Cited by:

    1. Bikramaditya Ghosh & Spyros Papathanasiou & Vandita Dar & Konstantinos Gravas, 2022. "Bubble in Carbon Credits during COVID-19: Financial Instability or Positive Impact (“Minsky” or “Social”)?," JRFM, MDPI, vol. 15(8), pages 1-16, August.
    2. Wolfgang Buchholz & Dirk Rübbelke, 2020. "Overstraining International Climate Finance: When Conflicts of Objectives Threaten Its Succes," Working Papers 2020.17, Fondazione Eni Enrico Mattei.
    3. Raphael Calel & Jonathan Colmer & Antoine Dechezleprêtre & Matthieu Glachant, 2021. "Do carbon offsets offset carbon?," CEP Discussion Papers dp1808, Centre for Economic Performance, LSE.
    4. Lee, Chi-Chuan & Li, Xinrui & Yu, Chin-Hsien & Zhao, Jinsong, 2022. "The contribution of climate finance toward environmental sustainability: New global evidence," Energy Economics, Elsevier, vol. 111(C).
    5. Dylan Gibson & Leslie A. Duram, 2020. "Shifting Discourse on Climate and Sustainability: Key Characteristics of the Higher Education Fossil Fuel Divestment Movement," Sustainability, MDPI, vol. 12(23), pages 1-17, December.
    6. Matthias Honegger, 2023. "Toward the effective and fair funding of CO2 removal technologies," Nature Communications, Nature, vol. 14(1), pages 1-3, December.
    7. Katharina Michaelowa & Axel Michaelowa & Bernhard Reinsberg & Igor Shishlov, 2020. "Do Multilateral Development Bank Trust Funds Allocate Climate Finance Efficiently?," Sustainability, MDPI, vol. 12(14), pages 1-19, July.
    8. Hanna-Mari Ahonen & Juliana Kessler & Axel Michaelowa & Aglaja Espelage & Stephan Hoch, 2022. "Governance of Fragmented Compliance and Voluntary Carbon Markets Under the Paris Agreement," Politics and Governance, Cogitatio Press, vol. 10(1), pages 235-245.
    9. Karishma Ansaram & Paolo Mazza, 2022. "Dependence structure among carbon markets around the world: New evidence from GARCH-copula analysis," Working Papers 2022-ACF-03, IESEG School of Management.
    10. Guitao Zhang & Xiao Zhang & Hao Sun & Xinyu Zhao, 2021. "Three-Echelon Closed-Loop Supply Chain Network Equilibrium under Cap-and-Trade Regulation," Sustainability, MDPI, vol. 13(11), pages 1-26, June.
    11. Heath Milsom, Luke & Roland, Isabelle, 2021. "Minimum wages and the China syndrome: causal evidence from US local labor markets," LSE Research Online Documents on Economics 113850, London School of Economics and Political Science, LSE Library.
    12. Deng, Changzhe & Su, Zhifang & Feng, Yufang, 2024. "Extreme climate and corporate financialization: Evidence from China," Economic Analysis and Policy, Elsevier, vol. 81(C), pages 306-321.

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