Seeding the Market: Auctioned Put Options for Certified Emission Reductions

There are a number of reasons for considering some kind of market-based, pay-for-performance mechanism to mitigate developing country greenhouse gas (GHG) emissions. This policy brief lays out arguments for the auctioned put option as a pay-for-performance mechanism that would allow governments or philanthropic organizations to support and catalyze markets for GHG reductions. The existing offset market, with its detailed methodologies for calculating emission reductions, offers tools that could be borrowed by such a mechanism. Auctioned put options could target a subset of Clean Development Mechanism (CDM) projects—segregated by type of project or country of origin—or an entirely different set of activities, such as REDD+ (reduced emissions from deforestation and degradation plus conservation, sustainable forest management, and enhancement of carbon stocks). The key element is that there must be standardized rules (or the promise of rules) detailing how emission reductions get counted and certified.