Leveraging Ambition Through Carbon Markets

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A new EBRD paper

By Szymon Mikolajczyk and Lieke ‘t Gilde

We study the effects of a broader uptake of carbon markets, showing it can help lower the cost of achieving mitigation targets and help countries ratchet up ambitions on Nationally Determined Contributions (NDCs) to limit global warming to 1.5 °C. We show that the cost savings potential of carbon markets post-2020 is larger than under the Kyoto Protocol with both developed and developing countries needing to commit to emissions reductions targets now, enabling them to benefit from regional abatement cost differentials. We find that carbon markets can offer much-needed flexibility for countries to meet their NDC commitments, acting as a risk management tool in the transition to a net-zero economy. As carbon markets offer the opportunity to bring in the private sector at scale, a strong enough carbon price can guide new investment opportunities in emission reductions and removals. Our findings highlight the importance of accurate and robust accounting of greenhouse gas emission reductions, a pre-requisite for securing environmental integrity. Innovative carbon market measurement, reporting and verification (MRV) approaches, using digital technologies, can lend a helping hand. 

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