Prospects for Markets for Internationally Transferred Mitigation Outcomes under the Paris Agreement

Jon Strand

Environmental & Resource Economics, 2024, vol. 87, issue 10, No 4, 2683-2716

Abstract: Abstract The Paris Agreement (PA) opens for parties to use Internationally Transferred Mitigation Outcomes (ITMOs) for implementing their Nationally Determined Contributions (NDCs). This paper analyzes spot, forward and options market trading of ITMOs up to the end of the first PA trading period (2030), given uncertainty about (1) the fulfillment of parties’ NDC targets, and (2) the existence and functioning of the ITMO markets, as ITMO banking beyond 2030 is not allowed. Closed-form solutions are derived for options trading and its welfare impacts given uniform distributions of parties’ uncertainties about fulfilling their individual commitments. Access to call options for late ITMO purchases leads to larger forward ITMO sales or less current mitigation, help parties stay in NDC compliance in 2030, brings early revenue to low-income parties, and is welfare enhancing for all parties. Access to put options for late ITMO sales is less important, and will not be used when put options are not subsidized and parties are risk neutral. The ITMO markets can be enabled by donor-provided climate finance. Effectively functioning ITMO markets can dramatically reduce parties’ costs of achieving their NDCs, and could increase parties’ ambitions, then also reducing global greenhouse gas emissions under the agreement.

Keywords: Paris agreement; Nationally determined contributions; Uncertainty; Climate finance; ITMOs; Options contracts; Forward contracting (search for similar items in EconPapers)
JEL-codes: G15 G23 Q54 Q56 (search for similar items in EconPapers)
Date: 2024
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://link.springer.com/10.1007/s10640-024-00899-2 Abstract (text/html)
Access to the full text of the articles in this series is restricted.

Related works:
Working Paper: Prospects for Markets for Internationally Transferred Mitigation Outcomes under the Paris Agreement (2022)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:kap:enreec:v:87:y:2024:i:10:d:10.1007_s10640-024-00899-2

Ordering information: This journal article can be ordered from
http://www.springer. ... al/journal/10640/PS2

DOI: 10.1007/s10640-024-00899-2

Access Statistics for this article

Environmental & Resource Economics is currently edited by Ian J. Bateman

More articles in Environmental & Resource Economics from Springer, European Association of Environmental and Resource Economists Contact information at EDIRC.
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().