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Greenhouse Gas Emissions Trading International Rules for Greenhouse Gas Emissions Trading Defining the principles, modalities, rules and guidelines for verification, reporting and accountability UNITED NATIONS CONFERENCE ON TRADE AND DEVELOPMENT International Rules for Greenhouse Gas Emissions Trading Defining the principles, modalities, rules and guidelines for verification, reporting and accountability Tom Tietenberg, Michael Grubb, Axel Michaelowa, Byron Swift and ZhongXiang Zhang Note Symbols of United Nations documents are composed of capital letters combined with figures. Mention of such a symbol indicates a reference to a United Nations document. The designation employed and the presentation of the material in this publication do not imply the expression of any opinion whatsoever on the part of the Secretariat of the United Nations concerning the legal status of any country, territory, city or area, or of its authorities, or concerning the delimitation of its frontiers or boundaries. Material in this publication may be freely quoted or reprinted, but acknowledgement is requested, together with a reference to the document number. A copy of the publication containing the quotation or reprint should be sent to the UNCTAD secretariat. The views expressed in this publication are those of the authors and do not necessarily reflect the views of the UNCTAD secretariat. All references to dollars ($) are to United States dollars. UNCTAD/GDS/GFSB/Misc.6 Contents Page Overview ...................................................................................................................................5 Chapter I Introduction ..............................................................................................................................19 A. Emissions trading: the concept.........................................................................................19 B. Review of the relevant provisions on emissions trading in the Kyoto Protocol ...............19 Chapter II Review of lessons from other emissions trading systems ........................................................25 A. Overview ...........................................................................................................................25 B. Emissions cap and allowance trading systems.................................................................26 C. Credit trading programmes..............................................................................................28 D. Historical perspectives on design features.......................................................................31 Chapter III Rudiments of an article 17 trading system ...............................................................................43 A. Emissions trading models .................................................................................................43 B. The trading baseline .........................................................................................................45 C. The tradeable commodity .................................................................................................46 D. Determining compliance ..................................................................................................46 E. Eligibility for trading........................................................................................................47 F. Banking and borrowing ....................................................................................................47 G. Expanding the set of Annex B Parties and Annex A gases...............................................49 Chapter IV Designing the administrative system........................................................................................51 A. General principles ............................................................................................................51 B. The role of administrative structures and procedures......................................................52 C. Components of a facilitating institutional structure.........................................................52 Chapter V Monitoring................................................................................................................................55 A. Emissions monitoring .......................................................................................................55 B. Allowance monitoring.......................................................................................................58 C. An international monitoring authority .............................................................................59 D. Precedents ........................................................................................................................60 E. Roles of different actors....................................................................................................62 F. Monitoring article 12 emissions .......................................................................................64 3 Chapter VI Certification, verification and notification ...............................................................................65 A. The role of certification and verification..........................................................................65 B. The certification/verification authority.............................................................................66 C. Certifying created entitlements.........................................................................................66 D. Burden of proof ................................................................................................................67 E. Additionality: the baseline issue.......................................................................................67 F. Trades among Annex B Parties: the notification requirement .........................................72 G. Certification and programme evolution.......................................................................... 72 Chapter VII Reporting..................................................................................................................................75 A. Transparency: the cornerstone.........................................................................................75 B. Reporting and monitoring costs........................................................................................75 C. Kyoto Protocol requirements............................................................................................75 D. Strengthening requirements .............................................................................................76 E. Reporting on a national level............................................................................................76 F. Reporting on the international level .................................................................................77 G. Adequacy of publicly available data ................................................................................77 Chapter VIII Compliance and enforcement..................................................................................................79 A. Background.......................................................................................................................79 B. Compliance mechanisms and tools...................................................................................83 C. International enforcement and sanctions .........................................................................85 Chapter IX Accountability and risk in international emissions trading......................................................89 A. Accountability: general issues..........................................................................................89 B. Accountability for article 12 allowances..........................................................................92 C. Special accountability considerations for banked or borrowed allowances....................92 D. The provision of emissions trading as a supplemental means .........................................93 E. Competitiveness and private trading ................................................................................96 Chapter X Conclusions and recommendations..........................................................................................97 References .............................................................................................................................107 Further Readings..................................................................................................................115 4 Overview OVERVIEW The Kyoto Protocol to the United Nations Framework Convention on Climate Change authorizes four cooperative implementation mechanisms - bubbles, emissions trading, joint implementation and the clean development mechanism (CDM). The provision on emissions trading, the focus of this report, allows trading of «assigned amounts» among the so-called Annex B Parties, while leaving the drafting of implementation details to subsequent conferences of the Parties. Three distinct trading possibilities emerge from this authorization: trading among countries with domestic emissions trading systems, trading among countries without domestic trading systems, and trading among countries with and without domestic emission trading systems. The case for a tradeable entitlements system is based on the advantages that it would offer over other politically feasible alternatives. In the short term, it offers the possibility
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