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Creating Emissions Rights

In implementing the Kyoto Protocol, the United Nations has designated two arrangements (or flexibility mechanisms) through which countries can offset emissions within their borders by investing in projects elsewhere.   These are the Clean Development Mechanism (CDM) and Joint Implementation (JI), and they differ chiefly in what obligations the target country has under the Kyoto Protocol.

Clean Development Mechanism

CDM governs arrangements between countries with obligations to reduce emissions under the Protocol (so-called Annex I countries) and countries without obligations.  Under CDM, projects can be developed in countries without obligations to reduce or avoid greenhouse gas (GHG) obligations, generating credits (Certified Emissions Reductions) which can be sold to Annex I countries and used toward meeting Kyoto obligations.

The mechanism stimulates sustainable development and emission reductions, while giving industrialized countries some flexibility in how they meet their emission reduction limitation targets.

Since its inception is 2006, more than 1,000 projects have already been registered under CDM.  The UNFCCC estimates that by the end of the first commitment period of the Kyoto Protocol in 2012, CER’s equaling more than 2.7 Bt of CO2 equivalent.

Joint Implementation

Joint Implementation (or JI) is a flexibility mechanism whereby a country with emissions limitation obligations under Kyoto can generate credits by investing in projects in other countries with obligations.  This differs from the CDM chiefly in that, under JI,  emissions reducing projects are financed by Annex I countries and take place in other Annex I countries.  Whereas the objective of CDM projects is to reduce baseline emissions within (typically developing) countries while fostering green development and technology transfer, JI focuses on using trade between capital and emissions reductions within an already-industrialized milieu, hopefully encouraging the cleanest technological practices.

Bumps in the Road

The flexibility mechanisms might be described as having yielded mixed success.  One point of controversy for the CDM in particular  is additionality, or the financing of projects for emissions reductions which would have taken place anyway.  A well-designed CDM project blueprint (or methodology) should be able to verify that the proposed project is actually responsible for reducing GHG emissions against an all-else-being-equal baseline, and that ecconomic conditions in the host country or region would not allow that project to go forward without the additional financing provided under CDM.  This has, perhaps not surprsisingly, been difficult to establish in many actual circumstances, and the problem - or perception thereof- may contribute the types of criticism which liken credit brokering to "selling of indulgences".

A complaints sometimes levelled by project designers lies in the perception of bottlenecking  at the approval level.  Under CDM, independent auditors, called Designated Operational Entities, have been appointed to validate the soundness of project methodology and, following apporval, to certify performance.

 With the rush to register before the 2008-2012 reductions period under Kyoto, a large project pipeline developed as thousands of projects were filtered through a limited number of DOE's.  Yet another problem has been in the distribution of approved projects, with nearly a quarter being in China, while areas such as sub-Saharan Africa have been virtually left out of the CDM process.  In negotiating the successors to the Kyoto mechanisms, the UN is taking the DOE and the distributional issues into account.

Probably the best lesson to take away from  working out the world's first flexible emissions trading mechanisms is that the guiding bodies  are learning from the mistakes.  With the expiration of the Kyoto Protocol after 2012, much work is going into instituting successors to CDM and JI with an eye towards continuing what has worked and fixing what went wrong.

Energy Edge Partner Karl Schultz has worked in the climate mitigation and adaptation finance sector for more than a decade.  If you have questions concerning flexible mechanisms for creating emissions rights, please feel free to contact  him  today.



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