Market Based Mechanisms to reduce GHG Emissions in Asia

Countries in Asia are steadily addressing the need to reduce emissions through the deployment of market-based mechanisms (MBMs), such as carbon taxes, cap and trade programs, baseline and credit programs, and the development of renewable electricity and energy efficiency standards. Furthermore, MBMs are serving a critical role in aiding emerging economies in Asia in meeting their Nationally Determined Contributions (NDC) targets. These findings are the result of a series of case studies undertaken by the Resources to Advance LEDS Implementation (RALI) project. MBMs are policy tools that create incentives for managing GHGs cost-effectively and can be used to satisfy broader economic and environmental objectives. As the world’s biggest emitter of greenhouse gases (GHGs), Asia plays a critical role in driving climate mitigation activity and achieving GHG reduction targets. To reach these targets, countries have been mobilizing resources and navigating policy options to finance climate change mitigation projects and improve carbon intensive activities.

Authors of the case study found that MBMs provide regulated entities the flexibility to reduce emissions in the most cost-effective way by internalizing the cost of emissions into decision-making and business processes. These regulating instruments foster innovation, engage the private sector, and provide more options for reducing GHGs than a typical command-and-control regulation. For instance, under a cap-and-trade scheme, an emitter can either reduce emissions by developing low carbon technologies or by purchasing offsets to stay compliant. A carbon tax, another MBM, imposes a fee on each unit of emitted carbon, which aims to gradually shift the market away from carbon-intensive processes by making fossil fuel plants less competitive than renewable counterparts. MBMs provide flexibility for regulated entities by offering multiple compliance options and allowing entities to select the lowest cost and most efficient approach to managing emissions, often at a facility level.

The case study authors also found that the most effective MBMs are structured around explicit objectives and capitalize on existing policies, stakeholder consultations, and cost management. When implemented effectively, MBMs provide immense benefits to regulators and regulated entities, as shown in countries such as China and Korea, where mitigation action is critical for sustainable development during rapid economic growth. There are also conditions under which an MBM may not be the appropriate strategy, but some concerns, such as market manipulation or tangible costs and benefits, may be mitigated if they are explicitly addressed in the program design. MBMs can also be designed to generate revenue that can be deployed for sustainable development to help achieve additional goals.