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.     

Transaction costs of the Kyoto Mechanisms

Transaction costs will reduce the attractiveness of the Kyoto Mechanisms compared to domestic abatement options. Especially the project-based mechanisms Clean Development Mechanism (CDM) and Joint Implementation (JI) are likely to entail considerable costs of baseline development, verification and certification. The Activities Implemented Jointly (AIJ) pilot phase and the Prototype Carbon Fund (PCF) programme give indications about the level of these costs. Under current estimates of world market prices for greenhouse gas emission permits, projects with annual emission reductions of less than 50,000 t CO₂ equivalent are unlikely to be viable; for micro projects transaction costs can reach several hundred € per t CO₂ equivalent. Thus, the Marrakech Accord rule to have special rules for small scale CDM projects makes sense, even if the thresholds chosen advantage certain project types; projects below 1000 t CO₂ equivalent per year should get further exemptions. An alternative solution with no risk for the environmental credibility of the projects would be to subsidise baseline setting and charge lower, subsidised fees for small projects for the different steps of the CDM/second track JI project cycle.     

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.     

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.     

Does the current Clean Development Mechanism (CDM) deliver its sustainable development claim? An analysis of officially registered CDM projects

This article presents an analytical framework for analyzing Clean Development Mechanism (CDM) projects in terms of their contribution to employment generation, equal distribution of CDM returns, and improvement of local air quality. It assesses 16 officially registered CDM projects with regard to whether they fulfill the two objectives required by the Kyoto Protocol: greenhouse gas emission reductions and contribution to sustainable development in the host country. While a large part (72%) of the total portfolio’s expected Certified Emission Reductions (CERs) are likely to represent real and measurable emission reductions, less than 1% are likely to contribute significantly to sustainable development in the host country. According to our analysis, there are currently no UNFCCC registered CDM projects that are likely to fulfill the Kyoto Protocol’s twofold objective of simultaneously delivering greenhouse gas (GHG) emission reduction and contributing to sustainable development.     

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.     

Assessing the additionality of CDM projects: practical experiences and lessons learned

The Clean Development Mechanism (CDM) under the Kyoto Protocol allows industrialized countries to use credits from greenhouse gas (GHG) abatement projects in developing countries. A key requirement of the CDM is that the emission reductions be real, measurable and additional. This article evaluates how the additionality of CDM projects has been assessed in practice. The analysis is mainly based on a systematic evaluation of 93 registered CDM projects and comes to the conclusion that the current tools for demonstrating additionality are in need of substantial improvement. In particular, the application of the barrier analysis is highly subjective and difficult to validate in an objective and transparent manner. Key assumptions regarding additionality are often not substantiated with credible, documented evidence. In a considerable number of cases it is questionable whether the emission reductions are actually additional. Based on these findings, practical recommendations for improving the assessment of additionality are provided.     

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.     

Perverse incentives under the CDM: an evaluation of HFC-23 destruction projects

The clean development mechanism (CDM) under the Kyoto Protocol allows industrialized countries to use credits from greenhouse gas (GHG) abatement projects in developing countries. A key requirement of the CDM is that the emission reductions be real, measurable and additional. This article uses data from registered projects to evaluate the extent to which these objectives are met by projects that reduce hydrofluorocarbon-23 (HFC-23) emissions in the production of hydrochlorofluorocarbon-22 (HCFC-22). The data show that HCFC-22 plants produced significantly less HFC-23 during periods when no emission credits could be claimed compared with periods when HFC-23 destruction could be credited under the CDM. Moreover, the total amount of HCFC-22 produced appears to be determined mainly by CDM rules. This suggests that the claimed emission reductions may partly not be real and that the CDM provides perverse incentives to generate more HFC-23. The accelerated phase-out of HCFCs under the Montreal Protocol on Substances that Deplete the Ozone Layer could worsen this situation. To address these issues an ambitious emission benchmark for the baseline HFC-23 emissions is proposed.     

Future restrictions for sinks in the CDM How about a cap on supply?

Abstract

The first commitment period of the Kyoto Protocol is expected to result in only a small role for the Clean Development Mechanism (CDM), including afforestation and reforestation projects. Wide ranging concerns regarding sinks in the CDM have been reflected in the Marrakech Accords capping the total amount of emission offsets from sinks projects to be used by Annex I countries. Decisions about the second commitment period and beyond are likely to be of far greater importance for these projects.

This paper contributes to the discussion on how caps on sinks under the CDM could be used to obtain overall improved outcomes for developing countries. We examine two distinctive ways in which quantitative caps on sinks in the CDM can be implemented: one, restricting the use of sinks CERs to meet targets, as under the Marrakech Accords (a cap on demand); and two, restricting supply of sink CERs using a quota system. We argue in favour of a supply side cap, if Parties are to preserve the idea of limiting sinks in the CDM. Limiting the supply of credits could lead to better financial outcomes for developing countries as a whole, make higher-cost projects viable which may have better sustainability impacts, and provide an alternative to deal with equity concerns between developing 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.     

Searching for baselines constructing joint implementation project emission reductions

Joint implementation of emission reductions by countries is an important component of the Kyoto Protocol. The calculation of emission reductions from projects requires the definition of baselines that describe what would have happened in the absence of the JI projects. Baselines do not occur and are described as counterfactual. This paper applies a sociological perspective to analyse the arguments used to support different baselines by the actors involved in climate change policy. It concludes that environmental arguments should be given prominence in how baselines are defined to ensure that the environmental objectives of the Framework Convention on Climate Change are preserved.     

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.     

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.     

A two-track CDM: improved incentives for sustainable development and offset production

The Clean Development Mechanism (CDM) has been criticized in the literature for encouraging a focus on offset production (OP) at the expense of achieving or encouraging sustainable development (SD). It is argued that one explanation for this is that there is no commonly agreed definition of SD and, moreover, the priority of CDM project developers is often to produce cost-effective OP. Many of the proposals to address these drawbacks are not politically feasible. It is argued that the CDM should be split into a two-track mechanism, with one track for offset production and the other for offset production with an emphasis on sustainable development benefits. This would enable the political deadlock to be broken, allow the inclusion of SD benefits in the price mechanism itself, and allow both SD and OP objectives to be simultaneously achieved.

Policy relevance

The CDM has been criticized for failing to achieve its sustainable development objective, for verification problems regarding the mitigation effects of projects’ emissions, for being complex and bureaucratic, and for the very limited participation by the least developed countries. Given the adoption of a second period of the Kyoto Protocol and the discussion of new market mechanisms in the context of negotiating a new global climate agreement to be adopted in 2015, it is time to explore the ways in which the CDM might be reformed. A two-track version of the CDM is proposed, with one track focused on credit (offset) production and the other track focused on sustainable development. This system could improve the incentive for achieving sustainable development, reduce the uncertainty regarding whether real emissions reductions have been achieved, and be attractive to both developing and industrialized countries.     

Forest certification eligibility as a screen for CDM sinks projects

Abstract

Parties negotiating the Kyoto Protocol recently agreed that Clean Development Mechanism (CDM) investments can include carbon sequestration projects in developing countries. However, guidelines for achieving the socio-economic and environmental objectives of the CDM, and other concerns with sinks projects, have yet to be elaborated. Independently of the Kyoto process, international efforts have advanced to define and certify sustainably managed forests through processes, such as that of the Forest Stewardship Council (FSC). In this paper, the FSC-US principles and criteria for sustainable forest management are evaluated in light of current concerns for guiding afforestation and reforestation projects in the CDM. It is found that the FSC criteria would help to meet some of the objectives of the Kyoto Protocol, including provisions to reduce the risk of premature carbon loss, and features that could somewhat lessen leakage of emissions outside the project area. Existing FSC monitoring and verification procedures provide some, but insufficient, overlap with expected requirements for measuring carbon stock changes. FSC principles and criteria articulate stringent guidelines for meeting environmental and social goals that reflect years of negotiations between environmental, timber, human rights and labor interests.     

Additionality reconsidered: lax criteria may not benefit developing countries

Abstract

International negotiation on the additionality issue of the CDM (Clean Development Mechanism) seems to be proceeding without sufficient information or understanding. Especially apparent is a lack of recognition that the non-additional CERs (certified emission reductions) generated by relaxing the additionality criteria may lead to economic losses for developing countries. This article quantitatively reconfirms the effects of non-additional CERs on the international community, while clarifying that the generation of non-additional CERs in excess of a certain number will eventually lead to negative consequences for developing countries, even if these countries were able to acquire all the non-additional CERs. Furthermore, the Discussion section demonstrates that future system design would significantly affect the benefits of developing countries as well as the overall environmental integrity of the Kyoto mechanisms.     

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.     

How to attribute market leakage to CDM projects

Abstract

Economic studies suggest that market leakage rates of greenhouse gas abatement can reach the two-digit percentage range. Although the Marrakesh Accords require Clean Development Mechanism (CDM) projects to account for leakage, most projects neglect market leakage. Insufficient leakage accounting is facilitated by a lack of applicable methods regarding the quantification and attribution of project-related leakage effects. This article proposes a method for attributing CDM-related market leakage effects to individual projects. To this purpose, alternative attribution methods are analysed. We find that project-specific approaches fail to take account of market leakage effects. Consequently, we propose to estimate aggregate market leakage effects and attribute them proportionally to individual projects. We suggest that predetermined commodity-specific leakage factors are applied by project developers to any emission reductions that are associated with a project's leakage-relevant demand or supply changes. This approach is conservative, equitable, incentive-compatible and applicable at manageable costs.     

The investment climate for climate investment: Joint Implementation in transition countries

Transition countries are expected to become important players in the emerging market for greenhouse gas emission reductions, as they can cut emissions at a relatively low cost. However, the attractiveness of the region as a supplier of emission reductions will not only depend on its cost advantage. It will also depend on the business climate offered to carbon investors—factors like a well-functioning legal and regulatory system, economic and political stability and the capacity to process emission reduction projects efficiently. This paper looks at the carbon investment climate in the transition countries eligible for Joint Implementation (JI)—Russia, Ukraine, Croatia and the EU accession countries. It concludes that JI investors will face a clear trade-off between the scope for cheap JI on the one hand, and the quality of the business environment and JI institutions on the other. The countries with the highest potential for cheap emission reductions also tend to be the countries with the most difficult business climate and the least institutional capacity for JI. The most attractive JI locations may be median countries with a reasonable JI potential and an acceptable business climate, such as Bulgaria, Romania and the Slovak Republic.