Spain: words that succeed and climate policies that fail

Abstract

The two project-based Kyoto mechanisms, joint implementation (JI) and the clean development mechanism (CDM), require a determination of the “baseline”, the development of greenhouse gas (GHG) emissions in the absence of the project. This paper examines, whether absolute (given in tCO₂ equivalent) or relative baselines (“benchmarks”, given, e.g. in tCO₂ equivalent/MWh) should be applied for JI/CDM projects in the energy sector. Accuracy of the GHG emission reduction and manageability of GHG emission balances are used as evaluation criteria. The results show that relative baselines are a more accurate instrument for the estimation of emission reductions in JI/CDM projects in the energy sector without posing significant additional risks to the management of GHG emission balances for large entities. In comparison to absolute baselines, relative baselines indicate in a more realistic and conservative manner the amount of emission reductions obtained in the energy system and give more appropriate incentives to project sponsors. The additional risks of relative baselines are likely to be small compared to the normal deviation of the domestic/internal GHG emissions. The findings are in line with the Marrakesh Accords, which set restrictions to application of absolute baselines.     

Application of the Multiple Benchmark System (MBS) to selected case study projects

Abstract

Joint Implementation (JI) and the Clean Development Mechanism (CDM) have been established under the Kyoto Protocol as project-based instruments to mitigate greenhouse gases of the industrialized countries to the levels imposed by their Kyoto commitments. An unresolved issue associated with the implementation of these two flexibility mechanisms, concerns the choice of the appropriate baseline for calculating the emission reductions in JI or CDM projects. This article describes a computerized tool that constructs and compares different types of standardized baselines and benchmarks. The analysis focuses on the suitability of several different types of benchmarks for assessing the emission reductions of certain types of projects. The analysis is also expanded into a discussion of the extent to which benchmarks reduce the crediting of non-additional projects and limit the risk of missed additional investments. This tool has been applied to actual JI and CDM projects in the Russian Federation and Indonesia.     

Accounting for flexibility against uncertain baselines: lessons from case studies in the eastern European energy sector

Abstract

The Kyoto Protocol defines two project-based flexibility mechanisms: joint implementation (JI) and the cleandevelopment mechanism (CDM). The main methodological problem associated with both these mechanisms isthe choice of an appropriate baseline: since the baseline is, by definition, counterfactual, it imposes considerable uncertainty on the accounting framework. Little work to date has been carried out on trying to estimate how largethis uncertainty might be for particular project types. This paper aims to fill this gap by proposing an approach to baseline construction which explicitly acknowledges this uncertainty. This approach is illustrated through theexamination of pilot JI projects in the energy sector in eastern Europe, and then discussed in terms of its implicationsfor climate policy. The results presented are estimates of the range of counterfactual uncertainty in greenhouse gas emission reductions based on the construction of a number of possible baselines for each project. This range is found to be about ±35% for demand side projects, ±45% for heat supply projects, ±55% for cogeneration projects, and ±60% for electricity supply projects. Estimates of uncertainty in the costs of the pilot projects are also found to be high. The paper discusses the problems arising from such large uncertainty and starts to indicate how this uncertainty may be managed.     

Accounting for flexibility against uncertain baselines: lessons from case studies in the eastern European energy sector

The Kyoto Protocol defines two project-based flexibility mechanisms: joint implementation (JI) and the clean development mechanism (CDM). The main methodological problem associated with both these mechanisms is the choice of an appropriate baseline: since the baseline is, by definition, counterfactual, it imposes considerable uncertainty on the accounting framework. Little work to date has been carried out on trying to estimate how large this uncertainty might be for particular project types. This paper aims to fill this gap by proposing an approach to baseline construction which explicitly acknowledges this uncertainty. This approach is illustrated through the examination of pilot JI projects in the energy sector in eastern Europe, and then discussed in terms of its implications for climate policy. The results presented are estimates of the range of counterfactual uncertainty in greenhouse gas emission reductions based on the construction of a number of possible baselines for each project. This range is found to be about ±35% for demand side projects, ±45% for heat supply projects, ±55% for cogeneration projects, and ±60% for electricity supply projects. Estimates of uncertainty in the costs of the pilot projects are also found to be high. The paper discusses the problems arising from such large uncertainty and starts to indicate how this uncertainty may be managed.     

Carbon Accounting and Cost Estimation in Forestry Projects Using CO2Fix V.3

Carbon and financial accounting of projects in the Land Use, Land-Use Change and Forestry sector is a topic of hot debate. Large uncertainty remains concerning the carbon dynamics, the way they should be accounted and the cost efficiency of the projects. Part of the uncertainty can be alleviated by standardisation and transparency of reporting methods. For this reason we further developed CO₂FIX, a forest ecosystem carbon model, with modules for carbon and financial accounting. The model is applied to four cases: 1) Joint implementation afforestation project in Romania, 2) Forest management project in Central Europe, 3) Reduced impact logging possibly under the Clean Development Mechanism (CDM) in the future, and 4) Afforestation with native species under the Clean Development Mechanism. The results show the wide applicability of CO₂FIX, from degrading grasslands as baseline cases to multiple cohort forest ecosystems. Also the results show that Forest Management in the European case can generate considerable amounts of carbon emission reductions. Further, the results show that although reduced impact logging is not yet an allowed option under the Clean Development Mechanism, it shows promising results in that it is 1) very cost effective, 2) seems to be able to generate intermediate amounts of credits and 3) seems to us as a project type that is not prone to leakage issues. These results are yet another indication to seriously consider reduced impact logging as an eligible measure under the CDM.     

Trading biomass or GHG emission credits?

Global biomass potentials are considerable but unequally distributed over the world. Countries with Kyoto targets could import biomass to substitute for fossil fuels or invest in bio-energy projects in the country of biomass origin and buy the credits (Clean Development Mechanism (CDM) and Joint Implementation (JI)). This study analyzes which of those options is optimal for transportation fuels and looks for the key variables that influence the result. In two case studies (Mozambique and Brazil), the two trading systems are compared for the amount of credits generated, land-use and associated costs. We found costs of 17–30 euro per ton of carbon for the Brazilian case and economic benefits of 11 to 60 euros per ton of carbon avoided in the Mozambique case. The impact of carbon changes related to direct land-use changes was found to be very significant (both positive and negative) and can currently only be included in emission credit trading, which can largely influence the results. In order to avoid indirect land-use changes (leakage) and consequent GHG emissions, it is crucial that bioenergy crop production is done in balance with improvements of management of agriculture and livestock management. Whatever trading option is economically most attractive depends mainly on the emission baseline in the exporting (emission credit trading) or importing (physical trading) country since both bio- and fossil fuel prices are world market prices in large scale trading systems where transportation costs are low. Physical trading could be preferential since besides the GHG reduction one could also benefit from the energy. It could also generate considerable income sources for exporting countries. This study could contribute to the development of a methodology to deal with bio fuels for transport, in Emission Trading (ET), CDM and the certification of traded bio fuels.     

Implementing CDM for the Indian dairy sector: prospects and issues

What is the potential for developing small-scale CDM projects in India to reduce enteric methane emissions from cattle and buffaloes? The issue of baseline setting for prospective CDM projects is a complex one in the Indian context. The baselines constructed on the basis of aggregate emission rates at the national level are unlikely to be precise as methane emission rates are influenced by the livestock and feed characteristics, which vary widely across regions in an agro-climatically diverse country like India. This calls for establishing a project specific baseline underpinned with regional methane emission rates. The various aspects of sustainable development that merit consideration in formulating a CDM project in the Indian dairy sector include; increasing the productivity of animals, increasing the net income of producers, decreasing the cost of milk production and the transfer of safe technologies. The projects in the sector would be able to meet the ‘additionality’ conditions of the CDM. However, there are a number of constraints in implementing the enteric methane mitigation strategies through a CDM project at the field level. The article discusses these technical, financial, socio-cultural and institutional barriers along with possible responses to these constraints.     

Technology transfer by CDM projects

Abstract

Technology development and transfer is an important feature of both the United Nations Framework Convention on Climate Change (UNFCCC) and its Kyoto Protocol. Although the Clean Development Mechanism (CDM) does not have an explicit technology transfer mandate, it may contribute to technology transfer by financing emission reduction projects using technologies currently not available in the host countries. This article analyses the claims about technology transfer made by CDM project participants in their project design documents. Roughly one-third of all CDM projects, accounting for almost two-thirds of the annual emission reductions, involve technology transfer. Technology transfer varies widely across project types and is more common for larger projects and projects with foreign participants. Equipment transfer is more common for larger projects, while smaller projects involve transfers of both equipment and knowledge or of knowledge alone. Technology transfer does not appear to be closely related to country size or per-capita GDP, but a host country can influence the extent of technology transfer involved in its CDM projects.     

Evaluating cost-effective strategies for meeting regional CO2 targets

Various climate protocol proposals oblige different industrialized countries to reduce CO₂ and other greenhouse gas emissions. In principle, the total costs of these obligations could be substantially reduced if emission reductions are implemented in regions with low marginal costs for CO₂ reduction. This has been difficult to quantify because of lack of models with suitable regional and sectoral detail. In this paper we perform these calculations by taking advantage of the capability of the IMAGE 2 model to compute regional emissions and costs. Two main options are examined for allocating emission reductions required of industrialized regions in a cost effective manner: (1) allocating them among industrialized regions (2) allocating them among all world regions. The cost savings for each of these options are presented. The main conclusions are that (a) it is of great importance for the cost comparisons of protocols to use a well defined baseline scenario and clearly formulated targets, and (b) large economic benefits, in the order of 35–65%, can accrue from joint-implementation agreements which allocate investments on the basis of net marginal costs of CO₂ emission reduction.     

Carbon accounting for sinks in the CDM after CoP-9

Abstract

The role of sinks in the clean development mechanism (CDM) has been a subject of controversy for several reasons; one being that temporary carbon storage in forests appeared to prevent any opportunity to use them as an option to reduce permanent greenhouse gas (GHG) emissions. In Milan (December 2003), the Conference of the Parties (CoP) decided to address this problem by introducing two types of expiring units: temporary CERs (tCERs) and long-term CERs (lCERs). Countries committed to emission reductions may acquire these units to temporarily offset their emissions and thus to postpone permanent emission reductions. As further decided by the CoP, baseline emissions of GHGs and the enhancement of sinks outside the project boundary will not be accounted for in the calculation of tCERs or lCERs. The contribution of CDM-sink projects to GHG emissions abatement will therefore be greater than what will be credited to them. On the other hand, permanent GHG emissions that may result as a consequence of the implementation of sink project activities are treated as non-permanent. If these emissions are above avoided baseline emissions, CDM-sinks will result in net increases of GHG emissions into the atmosphere. After briefly reassessing the non-permanence problem, this article explains how tCERs and lCERs should be quantified according to Decision 19/CP.9 of CoP-9 and how calculations are implemented in the forthcoming software CO₂ Land. Using a simple numerical example, it illustrates how the GHG accounting rule adopted at CoP-9 may result in net increases of GHG emissions. In the conclusion, a possible solution to this problem is proposed.     

Linking the CDM with domestic carbon markets

Certified emission reductions (CERs) from Clean Development Mechanism (CDM) projects have traditionally served as an indirect link between cap and trade systems around the world. However, since 2010, import restrictions have increased. Reasons for import limitations include the supplementarity principle, genuine concerns about the environmental integrity of CERs and social benefits of CDM projects, pressure from domestic emissions mitigation industries, concerns about competition in the industries in which reductions take place, as well as the attempt to pressure advanced developing countries to accept national emissions commitments under a future international climate policy regime. It is shown that import limitations lead to a decrease in CER prices and a race to generate CERs as quickly as possible. Such effects are visible in the CDM market after the EU announced its import limitations. The exclusion of CERs from specific project types will distort the CDM supply curve and increase the CER price unless the marginal abatement costs of the excluded project type are above the CER world market price. Similarly, exclusion of CERs from specific host countries will increase the price. Substantial differences are found in CER access to national carbon markets around the world.Policy relevanceCDM regulators could try to improve access of CERs to cap and trade schemes through improvements to additionality testing, standardizing baseline and monitoring methodologies and stakeholder consultation. However, regulators should be aware that standardization is no panacea, and controversies may resurface if standardized additionality determination (e.g. through benchmarks or positive lists) are applied for a certain period and found to be problematic. However, domestic policy concerns such as an unwillingness to send money abroad to buy credits, an inability to control market prices, and competitiveness impacts cannot be resolved by CDM reforms. If, despite such reforms of the CDM, blatant protectionism continues, a challenge before the World Trade Organisation (WTO) could be launched to stop discrimination of service exports from specific countries.     

Joint implementation and EU accession countries

The EU accession countries have a high potential for low cost greenhouse gas emission reduction. As they cannot join the “bubble” agreement for the first commitment period of the Kyoto Protocol, project-based Joint Implementation (JI) could be a powerful strategy to integrate them into the EU climate policy strategy. An important question is whether the acquis communautaire will be used to define the baseline for the calculation of emission reductions from JI projects. A problem is that the grace periods for several environmental sectors differ considerably among countries. The EU should help accession countries to establish a predictable legal framework for JI preventing in this way the current legal uncertainty regarding JI procedures.     

Should the use of standardized baselines in the CDM be mandatory?

There has been considerable debate on the merits of standardized baselines (SBLs) in the clean development mechanism (CDM), and how such baselines could reduce transaction costs for CDM projects. It has not been considered whether the voluntary versus mandatory use of SBLs by CDM project developers can affect the environmental integrity of the CDM. An example is given in which SBLs are applied to a homogeneous output industry in order to illustrate how the voluntary use of SBLs could lead – even with relatively stringent benchmarks – to over-crediting of emission reduction credits.     

A CER discounting scheme could save climate change regime after 2012

We can generate a net global GHG emission reduction from developing countries (in an UNFCCC term, non-Annex 1 Parties) without imposing targets on them, if we discount CERs generated from CDM projects. The CER discounting scheme means that a part or all of CDM credits, i.e., CERs, made by developing countries through unilateral CDM projects will be retired rather than sold to developed countries to increase their emissions. It is not feasible to impose certain forms of target (whether sectoral or intensity targets) on non-Annex 1 whose emission trend is hard to predict and whose industrial structure is undergoing a rapid change.

Instead of imposing targets (a command and control approach), we should apply market instruments in generating a net global emission reduction from non-Annex 1. Since April 2005 when the first unilateral CDM was approved by the CDM Executive Board, CDM has been functioning as a market mechanism to provide incentives for developing countries to initiate their own emission reduction projects. As CDM is the only market mechanism engaging developing countries in the Kyoto Protocol, we should try to re-design CDM so that it can generate net global emission reductions by introducing the idea of discounting CERs. But in order to produce meaningful GHG emission reductions by discounting CERs, the project scope of CDM has to be expanded by relaxing project additionality criteria while maintaining strict technical additionality criteria. Agreeing on the CERs Discounting Scheme will have a better political chance than agreeing on imposing emission reduction targets on developing countries.     

Accounting methods for carbon credits: impacts on the minimum area of forestry projects under the Clean Development Mechanism

Abstract

The Ninth Conference of the Parties (COP-9) decided to adopt an accounting system based on expiring carbon credits to address the problem of non-permanent carbon storage in forests established under the Clean Development Mechanism (CDM). This article reviews and discusses carbon accounting methods that were under consideration before COP-9 and presents a model which calculates the minimum area that forest plantation projects should reach to be able to compensate CDM transaction costs with the revenues from carbon credits. The model compares different accounting methods under various sets of parameters on project management, transaction costs, and carbon prices. Model results show that under current carbon price and average transaction costs, projects with an area of less than 500 ha are excluded from the CDM, whatever accounting method is used. Temporary crediting appears to be the most favorable approach to account for non-permanent carbon removal in forests and also for the feasibility of smaller projects. However, lower prices for credits with finite lifetimes may prevent the establishment of CDM forestry projects. Also, plantation projects with low risk of unexpected carbon loss and sufficient capacity for insuring or buffering the risk of carbon re-emission would benefit from equivalence-adjusted average carbon storage accounting rather than from temporary crediting.     

清洁发展机制（CDM）造林再造林项目碳汇成本研究——以CDM广西珠江流域治理再造林项目为例

以清洁发展机制（CDM）广西珠江流域治理再造林项目为例,对项目及其5种造林模式临时核证减排量（temporary certified emission reduction,缩写为tCER）和长期核证减排量（long-term certified emission reduction,缩写为lCER）成本的动态变化进行了初步研究。结果表明：从项目期初到期末,整个项目及5种造林模式人工林的tCER成本均逐渐降低,其中项目成本由第一承诺期末的40.33 ￥/t CO₂降至最后承诺期末的13.34 ￥/t CO₂;lCER成本先降低后升高,在第一承诺期末均降至最小值,项目成本由第一承诺期末的40.33 ￥/t CO₂增加至最后承诺期末的105.27 ￥/t CO₂;各造林模式tCER和lCER成本均以枫香+杉木、枫香+马尾松较高,马尾松+荷木、马尾松+栎类较低,桉树最低;贴现率对项目tCER和lCER、桉树tCER、枫香+杉木lCER成本影响均较大,而对马尾松+栎类tCER和lCER成本影响均较小;对桉树一个轮伐期内的tCER成本进行了敏感性分析,单位面积碳贮量的变化对其影响较大;考虑木材收益时,项目期末tCER净现值为13.11 ￥/t CO₂,从中反映了该CDM项目实施是可行的。     

The contribution of forest carbon credit projects to addressing the climate change challenge

This article addresses the question of how forestry projects, given the recently improved standards for the accounting of carbon sequestration, can benefit from existing and emerging carbon markets in the world. For a long time, forestry projects have been set up for the purpose of generating carbon credits. They were surrounded by uncertainties about the permanence of carbon sequestration in trees, potential replacement of deforestation due to projects (leakage), and how and what to measure as sequestered carbon. Through experience with Joint Implementation (JI) and Clean Development Mechanism (CDM) forestry projects, albeit limited, and with forestry projects in voluntary carbon markets, considerable improvements have been made with accounting of carbon sequestration in forests, resulting in a more solid basis for carbon credit trading. The scope of selling these credits exists both in compliance markets, although currently with strong limitations, and in voluntary markets for offsetting emissions with carbon credits. Improved carbon accounting methods for forestry investments can also enhance the scope for forestry in the Nationally Determined Contributions (NDCs) that countries must prepare under the Paris Agreement.

POLICY RELEVANCE

This article identifies how forestry projects can contribute to climate change mitigation. Forestry projects have addressed a number of challenges, like reforestation, afforestation on degraded lands, and long-term sustainable forest management. An interesting new option for forestry carbon projects could be the NDCs under the Paris Agreement in December 2015. Initially, under CDM and JI, the number of forestry projects was far below that for renewable energy projects. With the adoption of the Paris Agreement, both developed and developing countries have agreed on NDCs for country-specific measures on climate change mitigation, and increased the need for investing in new measures. Over the years, considerable experience has been built up with forestry projects that fix CO₂ over a long-term period. Accounting rules are nowadays at a sufficient level for the large potential of forestry projects to deliver a reliable, additional contribution towards reducing or halting emissions from deforestation and forest degradation activities worldwide.     

Can the EU emission trading scheme support CDM forestry?

Abstract

The European Commission is mandated to consider the inclusion of credits from land-use projects under the clean development mechanism (CDM) and joint implementation (JI), beginning with the second period of the European Union's emission trading scheme (ETS) in its report due in July 2006. Temporary credits from afforestation and reforestation under the CDM are seen by many as posing a technical problem for their use under the ETS. This article summarizes three feasible, efficient and environmentally sound alternatives for achieving the integration of such temporary credits in the European emissions trading market starting in 2008. The first proposal integrates tCERs and lCERs (temporary credits) into the EU ETS by allowing for their direct use for compliance purposes. The second proposal builds on the idea of swapping temporary credits for EU allowances (EUAs) by Member States. The third proposal would not require a political decision at the EU level. Instead supportive Member States or private carbon fund operators would agree to swap temporary credits for the CERs or ERUs they hold in their accounts. All three solutions would be linked to a risk-mitigation strategy based on levying a fee or fixing an exchange rate, which would allow governments to hedge the risk of losing temporary credits.     

Determinants of technology transfer through the CDM: a within-country analysis for China

Technology transfer (TT) is not mandatory for Clean Development Mechanism (CDM) projects, yet proponents of CDM argue that TT in CDM can bring new technologies to developing countries and thus not only reduce emissions but also foster development. We review the quantitative literature on determinants of TT in CDM and estimate determinants for CDM projects in China. China is by far the largest host country of CDM projects and it is therefore crucial to understand the factors that drive TT there. To gain better interpretation, we focus on heterogeneity within a single country and results can thus be linked to specific policies of the country. Our probit estimations confirm previous international cross-country studies, indicating that larger projects and more advanced technologies are more likely to involve TT. In addition, we find evidence that agglomeration effects are more pronounced at the province level rather than larger regions. We also find a positive effect of foreign direct investment (FDI) on TT, and academic research and development (R&D) is complementary to TT.

Policy relevance

Technology transfer (TT) is a goal of Chinese CDM legislation, but it is not a prerequisite for project approval. Our estimations show the project specific, technological and region-specific features that encourage more TT among CDM projects. Some variables analysed such as R&D spending and FDI (both are found to have positive effects on TT) can be, to some extent, influenced by the policy-makers. Moreover, we find some evidence for the presence of negative agglomeration effects on the provincial level: the likelihood of TT is decreasing in the number of previous projects operating in the same technology and province. This finding needs to be interpreted with great caution. It may suggest the existence of a learning externality, which could serve as a justification for policy intervention. Any policy intervention requires however careful analysis of potential positive or negative externalities resulting from the agglomeration of CDM projects and a comparison of possible benefits with the costs of TT.     

Estimating the CDM market under the Marrakech Accords

Abstract

The agreement on implementation of the Kyoto Protocol achieved at COP7 in Marrakech has important implications for investment in greenhouse gas emission reduction projects in developing countries through the Clean Development Mechanism (CDM). The required actual emission reductions for participating Annex B countries overall will be relatively small, as the United States do not intend to ratify the protocol and significant amounts of carbon sequestered in domestic sinks can be credited. In addition, the potential supply of surplus emission permits (hot air) from Russia and other economies in transition may be as high as total demand in the first commitment period. Thus, even under restraint of hot air sellers, CDM demand will be limited, and a low demand, low price carbon market scenario appears likely.

The magnitude of the CDM will be influenced by a host of factors both on the demand and the supply-side. We analyse these using a quantitative model of the global carbon market, based on marginal abatement cost curves. Implementation and transaction costs, as well as baseline and additionality rules affect the CDM's share in the carbon market. Demand for the CDM is sensitive to changes in business-as-usual emissions growth in participating Annex B countries, and also to crediting for additional sinks. Permit supply from Russia and other economies in transition is possibly the most crucial factor in the carbon market.