In this report for Enel, a NERA team led by Senior Vice President and Environment Group Head Dr. David Harrison considers the incentives of key actors to develop or participate in a sectoral crediting mechanism (SCM) for greenhouse gas emission reductions. Sectoral approaches have become prominent in international discussions of new market mechanisms to reduce greenhouse gas emissions in developing countries and set the stage for broader international agreements. The SCM is a particular form of sectoral approach in which a developing country and a developed country agree upon a crediting baseline level of emissions intensity for a sector that is below the business-as-usual level. The developing country would receive valuable credits for reductions below this crediting baseline—based upon its actual emissions intensity and output level—but would incur no liability if the emissions intensity of the sector remained above the crediting baseline level.

The objective of this report is to evaluate incentives under an SCM, recognizing that, to have any chance of success, the mechanism needs to be attractive to three key groups: (1) host governments, such as China and India; (2) buyer countries, such as those participating in the European Union Emissions Trading Scheme (EU ETS); and (3) private parties, including local parties and international investors. The authors examine alternative frameworks that could be developed to provide viable programs.

Dr. Harrison delivered a presentation summarizing this report at a workshop and conference on New Market Mechanisms organized by the International Emissions Trading Association and Enel in Brussels on 13–14 October 2011.