ABSTRACT

A baseline and credit mechanism is a common design element of environmental policies that can target, among others, an increase in renewable energy consumption, improve energy efficiency, or incentivize emission reductions. In principle, it is also the underlying mechanism of voluntary carbon markets (VCMs). The basic idea behind baseline and credit mechanisms is a country or private sector entity’s obligation (or other motivation) to comply with a specific baseline, for example, renewable energy consumption or carbon emissions, against which the actual performance is measured. If the activities of an entity fail to meet the set baseline, the entity can purchase credits from other entities below the baseline. Hence, an entity above the baseline can “offset” its non-compliance (CCA, 2014). On a global scale, the most prominent example of baseline and credit mechanisms are the “joint implementation” mechanism (Art. 6) and the “Clean Development Mechanism” (CDM) (Art. 12) of the Kyoto protocol. These allow developing countries to implement emission reduction projects, thereby generating certified emission reduction units (ERU) and emission reduction (CER) credits that can be traded with countries with binding commitments to “offset” their emissions. The European Energy Certificate System (EECS), commonly known as trading Guarantees of Origin (GO), can also be understood as a baseline and credit mechanism. Its implementation was motivated by the Renewable Energy Directive (RED) 2009/28/EC, with national commitments to target shares in renewable energy consumption by 2020. The EECS allows consumers to purchase renewable GOs for electricity generation, offsetting part of their non-renewable generation. Similarly, the EU system for the certification of sustainable biofuels allows to generate GO credits that can be sold to other market participants (ECA, 2016). In the case of VCMs, the baseline and credit mechanism allows companies with emission-intensive activities to claim carbon neutrality by offsetting their emissions by purchasing carbon credits. The main difference between baseline and credit mechanisms compared to a cap and trade system is that a baseline and credit system only generates credits for achieved emission reductions that can be used to offset current or past emissions. In the cap and trade system, emission allowances are generated based on the cap and independently from the potential implementation of emission reduction measures (BMWK, 2022).