Publication: Prospects for Markets for Internationally Transferred Mitigation Outcomes under the Paris Agreement
Loading...
Date
2022-05
ISSN
Published
2022-05
Author(s)
Editor(s)
Abstract
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.
Link to Data Set
Citation
“Strand, Jon. 2022. Prospects for Markets for Internationally Transferred Mitigation Outcomes under the Paris Agreement. Policy Research Working Papers;10045. © World Bank. http://hdl.handle.net/10986/37457 License: CC BY 3.0 IGO.”
Associated URLs
Associated content
Other publications in this report series
Publication The Asymmetric Bank Distress Amplifier of Recessions(Washington, DC: World Bank, 2025-07-11)One defining feature of financial crises, evident in U.S. and international data, is asymmetric bank distress—concentrated losses on a subset of banks. This paper proposes a model in which shocks to borrowers’ productivity dispersion lead to asymmetric bank losses. The framework exhibits a “bank distress amplifier,” exacerbating economic downturns by causing costly bank failures and raising uncertainty about the solvency of banks, thereby pushing banks to deleverage. Quantitative analysis shows that the bank distress amplifier doubles investment decline and increases the spread by 2.5 times during the Great Recession compared to a standard financial accelerator model. The mechanism helps explain how a seemingly small shock can sometimes trigger a large crisis.Publication From Tailwinds to Headwinds(Washington, DC: World Bank, 2025-07-10)The first quarter of the twenty-first century has been transformative for emerging market and developing economies (EMDEs). These economies now account for about 45 percent of global GDP, up from about 25 percent in 2000, a trend driven by robust collective growth in the three largest EMDEs—China, India, and Brazil (the EM3). Collectively, EMDEs have contributed about 60 percent of annual global growth since 2000, on average, double the share during the 1990s. Their ascendance was powered by swift global trade and financial integration, especially during the first decade of the century. Interdependence among these economies has also increased markedly. Today, nearly half of goods exports from EMDEs go to other EMDEs, compared to one-quarter in 2000. As cross-border linkages have strengthened, business cycles among EMDEs and between EMDEs and advanced economies have become more synchronized, and a distinct EMDE business cycle has emerged. Cross-border business cycle spillovers from the EM3 to other EMDEs are sizable, at about half of the magnitude of spillovers from the largest advanced economies (the United States, the euro area, and Japan). Yet EMDEs confront a host of headwinds at the turn of the second quarter of the century. Progress implementing structural reforms in many of these economies has stalled. Globally, protectionist measures and geopolitical fragmentation have risen sharply. High debt burdens, demographic shifts, and the rising costs of climate change weigh on economic prospects. A successful policy approach to accelerate growth and development should focus on boosting investment and productivity, navigating a difficult external environment, and enhancing macroeconomic stability.Publication Intergenerational Income Mobility around the World(Washington, DC: World Bank, 2025-07-09)This paper introduces a new global database with estimates of intergenerational income mobility for 87 countries, covering 84 percent of the world’s population. This marks a notable expansion of the cross-country evidence base on income mobility, particularly among low- and middle-income countries. The estimates indicate that the negative association between income mobility and inequality (known as the Great Gatsby Curve) continues to hold across this wider range of countries. The database also reveals a positive association between income mobility and national income per capita, suggesting that countries achieve higher levels of intergenerational mobility as they grow richer.Publication The Macroeconomic Implications of Climate Change Impacts and Adaptation Options(Washington, DC: World Bank, 2025-05-29)Estimating the macroeconomic implications of climate change impacts and adaptation options is a topic of intense research. This paper presents a framework in the World Bank's macrostructural model to assess climate-related damages. This approach has been used in many Country Climate and Development Reports, a World Bank diagnostic that identifies priorities to ensure continued development in spite of climate change and climate policy objectives. The methodology captures a set of impact channels through which climate change affects the economy by (1) connecting a set of biophysical models to the macroeconomic model and (2) exploring a set of development and climate scenarios. The paper summarizes the results for five countries, highlighting the sources and magnitudes of their vulnerability --- with estimated gross domestic product losses in 2050 exceeding 10 percent of gross domestic product in some countries and scenarios, although only a small set of impact channels is included. The paper also presents estimates of the macroeconomic gains from sector-level adaptation interventions, considering their upfront costs and avoided climate impacts and finding significant net gross domestic product gains from adaptation opportunities identified in the Country Climate and Development Reports. Finally, the paper discusses the limits of current modeling approaches, and their complementarity with empirical approaches based on historical data series. The integrated modeling approach proposed in this paper can inform policymakers as they make proactive decisions on climate change adaptation and resilience.Publication Global Poverty Revisited Using 2021 PPPs and New Data on Consumption(Washington, DC: World Bank, 2025-06-05)Recent improvements in survey methodologies have increased measured consumption in many low- and lower-middle-income countries that now collect a more comprehensive measure of household consumption. Faced with such methodological changes, countries have frequently revised upward their national poverty lines to make them appropriate for the new measures of consumption. This in turn affects the World Bank’s global poverty lines when they are periodically revised. The international poverty line, which is based on the typical poverty line in low-income countries, increases by around 40 percent to $3.00 when the more recent national poverty lines as well as the 2021 purchasing power parities are incorporated. The net impact of the changes in international prices, the poverty line, and new survey data (including new data for India) is an increase in global extreme poverty by some 125 million people in 2022, and a significant shift of poverty away from South Asia and toward Sub-Saharan Africa. The changes at higher poverty lines, which are more relevant to middle-income countries, are mixed.
Journal
Journal Volume
Journal Issue
Collections
Related items
Showing items related by metadata.
Publication Paris Climate Agreement and the Global Economy(World Bank, Washington, DC, 2018-04)The 2015 Paris Climate Agreement was the first instance of countries adhering to take a collective action against global warming. More than 190 countries came forward and submitted their contributions in the form of Intended Nationally Determined Contributions, reflective of their ability and capacity to reduce greenhouse gas emissions, as each country set its own targets and actions. For some countries, it meant a significant decline in their emissions by 2030, while others, like China, the United States, and India, decided on a more gradual phasing out extending beyond 2030. This paper estimates the economic impacts of implementation of the Paris Climate Agreement in terms of its implications for welfare, gross domestic product, investments, and trade for major countries and regions. It uses a computable general equilibrium framework to model global, regional, and country impacts. The analysis suggests that the economic impacts will be mostly felt in the European Union if the Paris Agreement is fully implemented. The European Union is likely to suffer a welfare loss of 1.0 to 1.5 percent by 2030. Among non-European countries, Australia, New Zealand, and Mexico will also be affected, with an expected welfare loss of about 1.5 percent. Some of the major emitters, such as China and India, will experience minimal impacts to their welfare, and the United States will experience a welfare loss of only about 0.7 by 2030. The sectoral analysis of production and trade suggests a significant loss to fossil fuel–based sectors, while clean energy sectors can experience significant gains.Publication The Economic Potential of Article 6 of the Paris Agreement and Implementation Challenges(International Emissions Trading Association, University of Maryland, and Carbon Pricing Leadership Coalition, Washington, D.C., 2019-09)This technical paper investigates the potential economic and environmental outcomesassociated with the use of Article 6 of the Paris Agreement by participating countries.The extent to which countries use Article 6, and how they use it, will be informed by design choices agreed upon by negotiators in forthcoming Conference of the Parties (COP) meetings, particularly the next one to be held at COP 25 in Chile and by the agreements made between participating parties. We use the Global Change Assessment Model (GCAM), an integrated assessment model, to quantify the economic potential of Article 6. We go on to discuss real world considerations and potential implications of design choices currently under consideration by negotiators. We find that Article 6 has the potential to reduce the total cost of implementing nationally determined contributions (NDCs) by more than half (~250 billion dollars/year in 2030), or alternatively facilitate the removal of 50 percent more emissions (~5 gigatonnes ofcarbon dioxide per year [GtCO2/year] in 2030), at no additional cost. We note, however, that careful framing in both the design and implementation of Article 6 is essential. A poorly designed and implemented framework could frustrate the achievement of Paris goals, whilea well-designed and implemented framework could further them. We conclude by identifying gaps in the research that would be useful to address before COP 25 in Chile.Publication Climate Finance, Carbon Market Mechanisms and Finance "Blending" as Instruments to Support NDC Achievement under the Paris Agreement(World Bank, Washington, DC, 2019-06)This paper considers the impacts of "finance blending" whereby climate finance is added to international carbon markets for offset trading. The paper first discusses climate finance and the carbon market as free-standing finance solutions by high-income countries to increase mitigation in low-income countries. Climate finance solutions have advantages for high-income countries due to their greater flexibility and general efficiency. A favorable aspect of well-functioning offset markets is that all participating countries face a similar and robust carbon price. With finance blending and "all attribution to the carbon market," the market equilibrium is inefficient, as mitigation is excessive in low-income countries and too low in high-income countries. Instead, mitigation outcomes in the offset market should be attributed to the two finance types in proportion to their finance shares provided to the low-income countries through this market. When climate finance is added to the carbon market, the ambition level for emissions reductions for donor countries should be raised equivalently; otherwise, the added climate finance leads to no increase in global mitigation. When low-income country market participants have limited access to credit markets, climate finance can increase mitigation by supplying the capital required to implement efficient mitigation projects.Publication Ensuring Environmental Integrity under Article 6 Mechanisms(World Bank, Washington, DC, 2021-04-06)Ensuring environmental integrity is recognized as an important goal under Article 6. This paper examines factors that affect environmental integrity under Article 6 of the Paris Agreement, and identifies practical approaches for implementing the concept based on lessons learned from the World Bank’s pilot activities and feedback from stakeholders in pilot countries. The starting point is the commonly accepted definition that environmental integrity is ensured as long as global greenhouse gas (GHG) emissions do not increase as a result of transfers of mitigation outcomes (MOs) (when compared to the scenario where such transfers did not take place). Under the Kyoto protocol, not all countries had mitigation obligations. In contrast, the Paris Agreement requires all countries to voluntarily adopt individual targets, articulated in their nationally determined contribution (NDC). This effectively introduces a national commitment or emissions cap for the entire economy or for the sectors covered by the NDC. This means that the transfer of MOs will affect the host country’s ability to achieve its own NDC if decisions related to such transfers do not take into account the need for corresponding adjustments and the opportunity cost of making such adjustments. In this context, ensuring environmental integrity - transferring MOs without affecting the country’s ability to meet its NDC and ensuring that such transfers do not lead to an increase in global GHG emissions - requires the assessment of two aspects: (1) stringency of NDC compared to business as usual (BAU): whether the country’s emissions cap or NDC is stringent enough and its targeted GHG emissions are not higher than what will be expected under business as usual (BAU) conditions; and (2) unit quality: whether the volume of transferred MOs generated from a mitigation activity is accurately calculated by setting a stringent or conservative baseline.Publication Assessment of Net Mitigation in the Context of International Greenhouse Gas Emissions Control Mechanisms(World Bank, Washington, DC, 2016-03)This paper discusses the scope for market mechanisms, already established for greenhouse gas mitigation in Annex 1 countries that ratified the Kyoto Protocol, for implementing "net mitigation," defined here as mitigation beyond Annex 1 countries' formal mitigation requirements under the Kyoto Protocol. Such market mechanisms could be useful for establishing and extending greenhouse gas mitigation targets also under the Paris Agreement from December 2015. Net mitigation is considered in two possible forms: as a "net atmospheric benefit," or as an “own contribution” by offset host countries. A main conclusion is that a “net atmospheric benefit” is possible at least in the short run, best implemented via stricter baselines against which offsets are credited; but it can also take the form of offset discounting whereby offset buyers are credited fewer credits. The latter, although generally inefficient, can be a second-best response to certain imperfections in the offset market, which are discussed in the paper. There is less merit for claiming that "own contributions" can lead to additional mitigation under existing mechanisms.
Users also downloaded
Showing related downloaded files
Publication Business Ready 2024(Washington, DC: World Bank, 2024-10-03)Business Ready (B-READY) is a new World Bank Group corporate flagship report that evaluates the business and investment climate worldwide. It replaces and improves upon the Doing Business project. B-READY provides a comprehensive data set and description of the factors that strengthen the private sector, not only by advancing the interests of individual firms but also by elevating the interests of workers, consumers, potential new enterprises, and the natural environment. This 2024 report introduces a new analytical framework that benchmarks economies based on three pillars: Regulatory Framework, Public Services, and Operational Efficiency. The analysis centers on 10 topics essential for private sector development that correspond to various stages of the life cycle of a firm. The report also offers insights into three cross-cutting themes that are relevant for modern economies: digital adoption, environmental sustainability, and gender. B-READY draws on a robust data collection process that includes specially tailored expert questionnaires and firm-level surveys. The 2024 report, which covers 50 economies, serves as the first in a series that will expand in geographical coverage and refine its methodology over time, supporting reform advocacy, policy guidance, and further analysis and research.Publication Argentina Country Climate and Development Report(World Bank, Washington, DC, 2022-11)The Argentina Country Climate and Development Report (CCDR) explores opportunities and identifies trade-offs for aligning Argentina’s growth and poverty reduction policies with its commitments on, and its ability to withstand, climate change. It assesses how the country can: reduce its vulnerability to climate shocks through targeted public and private investments and adequation of social protection. The report also shows how Argentina can seize the benefits of a global decarbonization path to sustain a more robust economic growth through further development of Argentina’s potential for renewable energy, energy efficiency actions, the lithium value chain, as well as climate-smart agriculture (and land use) options. Given Argentina’s context, this CCDR focuses on win-win policies and investments, which have large co-benefits or can contribute to raising the country’s growth while helping to adapt the economy, also considering how human capital actions can accompany a just transition.Publication Lebanon Economic Monitor, Fall 2022(Washington, DC, 2022-11)The economy continues to contract, albeit at a somewhat slower pace. Public finances improved in 2021, but only because spending collapsed faster than revenue generation. Testament to the continued atrophy of Lebanon’s economy, the Lebanese Pound continues to depreciate sharply. The sharp deterioration in the currency continues to drive surging inflation, in triple digits since July 2020, impacting the poor and vulnerable the most. An unprecedented institutional vacuum will likely further delay any agreement on crisis resolution and much needed reforms; this includes prior actions as part of the April 2022 International Monetary Fund (IMF) staff-level agreement (SLA). Divergent views among key stakeholders on how to distribute the financial losses remains the main bottleneck for reaching an agreement on a comprehensive reform agenda. Lebanon needs to urgently adopt a domestic, equitable, and comprehensive solution that is predicated on: (i) addressing upfront the balance sheet impairments, (ii) restoring liquidity, and (iii) adhering to sound global practices of bail-in solutions based on a hierarchy of creditors (starting with banks’ shareholders) that protects small depositors.Publication Classroom Assessment to Support Foundational Literacy(Washington, DC: World Bank, 2025-03-21)This document focuses primarily on how classroom assessment activities can measure students’ literacy skills as they progress along a learning trajectory towards reading fluently and with comprehension by the end of primary school grades. The document addresses considerations regarding the design and implementation of early grade reading classroom assessment, provides examples of assessment activities from a variety of countries and contexts, and discusses the importance of incorporating classroom assessment practices into teacher training and professional development opportunities for teachers. The structure of the document is as follows. The first section presents definitions and addresses basic questions on classroom assessment. Section 2 covers the intersection between assessment and early grade reading by discussing how learning assessment can measure early grade reading skills following the reading learning trajectory. Section 3 compares some of the most common early grade literacy assessment tools with respect to the early grade reading skills and developmental phases. Section 4 of the document addresses teacher training considerations in developing, scoring, and using early grade reading assessment. Additional issues in assessing reading skills in the classroom and using assessment results to improve teaching and learning are reviewed in section 5. Throughout the document, country cases are presented to demonstrate how assessment activities can be implemented in the classroom in different contexts.Publication World Development Report 2006(Washington, DC, 2005)This year’s Word Development Report (WDR), the twenty-eighth, looks at the role of equity in the development process. It defines equity in terms of two basic principles. The first is equal opportunities: that a person’s chances in life should be determined by his or her talents and efforts, rather than by pre-determined circumstances such as race, gender, social or family background. The second principle is the avoidance of extreme deprivation in outcomes, particularly in health, education and consumption levels. This principle thus includes the objective of poverty reduction. The report’s main message is that, in the long run, the pursuit of equity and the pursuit of economic prosperity are complementary. In addition to detailed chapters exploring these and related issues, the Report contains selected data from the World Development Indicators 2005‹an appendix of economic and social data for over 200 countries. This Report offers practical insights for policymakers, executives, scholars, and all those with an interest in economic development.