Sectoral crediting mechanisms such as sectoral no-lose targets have been proposed as a way to provide incentives for emission reductions in developing countries as part of an international climate agreement, and scale up carbon trading from the project-level Clean Development Mechanism to the sectoral level.

Countries would generate tradable emission credits (offsets) for reducing emissions in a sector below an agreed crediting baseline. However, large uncertainties in the regulator's predictions of the counterfactual business-as-usual baseline are likely to render sectoral no-lose targets an extremely unattractive mechanism in practice, at least for the transportation case study presented here. Given these uncertainties, the regulator faces a tradeoff between efficiency (setting generous crediting baselines to encourage more countries to opt in) and limiting transfer payments for non-additional offsets (which are generated if the crediting baseline is set above business-as-usual).

The first-best outcome is attainable through setting a generous crediting baseline. However, this comes at the cost of either increased environmental damage (if developed country targets are not adjusted to account for non-additional offsets), or transfers from developed to developing countries that are likely to be too high to be politically feasible (if developed country targets are made more stringent in recognition that many offsets are nonadditional). A more stringent crediting baseline still generates a large proportion of non-additional offsets, but renders sectoral no-lose targets virtually irrelevant as few countries opt in.

This paper introduces a tool to analyze the future developments of the international steam coal market, the "COALMOD-World" model. Steam coal is a major fuel for electricity generation today and its use is expected to grow dramatically in the coming decades, despite the potential negative external effect on the climate through the CO₂ emissions.

In tandem with the growth of global coal usage, the volume of the international trade coal market has been increasing in recent years. This trend is expected to continue, and an increasing global trade means that many countries will rely on imports. Identifying how the trade flows will develop and where steam coal will come from in the future - a primary purpose of the model - can help us better assess possible energy security issues.

The combination of model theory and detailed market analysis provides the ground for the development and the implementation of the model.  The model setup follows the organization of the value-added chain of the steam coal sector. The value chain is complex and there are various types of players involved at each stage. Producers can be large national and sometimes state-owned companies. There are a few large multinational coal companies but also many smaller companies, usually operating in one country only. Transport infrastructure can be built by the mining company or by another entity. Often, it consists of rail infrastructure but in some countries trucks or river barges are used. Export ports can be dedicated to one company or be operated by another company. Traders as intermediaries also play a role as they can be vertically integrated or contractually connected to every stage of the industry. This modeling framework allows for detailed analysis of how the global coal trade may evolve in the coming decades.