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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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 |
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okr-10986-374572022-05-20T05:10:32Z Prospects for Markets for Internationally Transferred Mitigation Outcomes under the Paris Agreement Strand, Jon PARIS AGREEMENT NATIONALLY DETERMINED CONTRIBUTIONS CLIMATE FINANCE INTERNATIONALLY TRANSFERRED MITIGATION OUTCOME (ITMO) OPTIONS CONTRACTS FORWARD CONTRACTING CARBON MARKET EMMISION REDUCTION CLIMATE CHANGE GLOBAL WARMING 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. 2022-05-19T18:03:58Z 2022-05-19T18:03:58Z 2022-05 Working Paper http://documents.worldbank.org/curated/en/099552405162236712/IDU0f7638e1c0b51d04e62091b30b30c5caa8a55 http://hdl.handle.net/10986/37457 English Policy Research Working Papers;10045 CC BY 3.0 IGO http://creativecommons.org/licenses/by/3.0/igo World Bank World Bank, Washington, DC Policy Research Working Paper Publications & Research |
| repository_type |
Digital Repository |
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Foreign Institution |
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Digital Repositories |
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World Bank Open Knowledge Repository |
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World Bank |
| language |
English |
| topic |
PARIS AGREEMENT NATIONALLY DETERMINED CONTRIBUTIONS CLIMATE FINANCE INTERNATIONALLY TRANSFERRED MITIGATION OUTCOME (ITMO) OPTIONS CONTRACTS FORWARD CONTRACTING CARBON MARKET EMMISION REDUCTION CLIMATE CHANGE GLOBAL WARMING |
| spellingShingle |
PARIS AGREEMENT NATIONALLY DETERMINED CONTRIBUTIONS CLIMATE FINANCE INTERNATIONALLY TRANSFERRED MITIGATION OUTCOME (ITMO) OPTIONS CONTRACTS FORWARD CONTRACTING CARBON MARKET EMMISION REDUCTION CLIMATE CHANGE GLOBAL WARMING Strand, Jon Prospects for Markets for Internationally Transferred Mitigation Outcomes under the Paris Agreement |
| relation |
Policy Research Working Papers;10045 |
| description |
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. |
| format |
Working Paper |
| author |
Strand, Jon |
| author_facet |
Strand, Jon |
| author_sort |
Strand, Jon |
| title |
Prospects for Markets for Internationally Transferred Mitigation Outcomes under the Paris Agreement |
| title_short |
Prospects for Markets for Internationally Transferred Mitigation Outcomes under the Paris Agreement |
| title_full |
Prospects for Markets for Internationally Transferred Mitigation Outcomes under the Paris Agreement |
| title_fullStr |
Prospects for Markets for Internationally Transferred Mitigation Outcomes under the Paris Agreement |
| title_full_unstemmed |
Prospects for Markets for Internationally Transferred Mitigation Outcomes under the Paris Agreement |
| title_sort |
prospects for markets for internationally transferred mitigation outcomes under the paris agreement |
| publisher |
World Bank, Washington, DC |
| publishDate |
2022 |
| url |
http://documents.worldbank.org/curated/en/099552405162236712/IDU0f7638e1c0b51d04e62091b30b30c5caa8a55 http://hdl.handle.net/10986/37457 |
| _version_ |
1764487191360176128 |