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.
For emerging economies in Asia attempting to reconcile climate change objectives with growth and development, MBMs can provide a platform to work toward this balance. For more information on notable MBM activities launched in Asia, a detailed case study, the latest feature in the RALI Series, provides a comprehensive overview of market-based policies and lessons learned from a range of successfully implemented MBMs across Asia.
Emily Kent is a Climate Change and Sustainability Specialist at ICF, a global professional services firm that delivers consulting services and technology solutions in energy, climate change, and other areas. Emily manages the development of the Clean Energy Emission Reduction (CLEER) Tool, which enables users to estimate, track, and report greenhouse gas reductions from clean energy. She has four years of experience in greenhouse gas analysis and inventory development, and she supports climate change mitigation capacity building efforts through the USAID RALI Project.
Megha Kedia is a Climate Change and Sustainability Specialist at ICF. She supports a range of capacity building projects at international, federal, and state levels on developing greenhouse gas emission reduction programs and policies. She also supports the development of various tools and methodologies that help quantify the impact of low emission development strategies.
Deborah Harris is a Climate Change and Sustainability Director at ICF. She is a greenhouse gas and sustainability expert with experience in managing and working on interdisciplinary teams to serve a range of international, federal, state, and local clients. Her work focuses on development and implementation of greenhouse gas emission reduction programs, policies, and plans.