1. Introduction The main objective of this project is to analyze possibilities and constraints in developing collaboration between four countries of the Northern Asian region, i.e. between Russia, Japan, China, and Korea in implementing the UN Framework Convention on Climate Change (UNFCCC). In chapter 2, we briefly summarize international negotiation processes of UNFCCC and Kyoto Protocol, which show the typical patterns of multilateral negotiation. At the most recent activity of COP 7, most of disputable issues among Annex I countries and Non-Annex I countries were more or less settled down. Further expectations and resolutions for UNFCCC of global participation are described in this chapter. In chapter 3, we briefly describe the existing regional environmental collaborations in this region in terms of the initiatives of specific collaborations. In addition, we also explore the possible collaboration in this region in the field of energy, such as natural gas pipeline project in this region. In chapter 4, we describe the evolution of major positions of Japan, Russia, China and Korea regarding co-operative efforts in implementation of the FCCC, including the GHG emission profiles and vulnerability and impact of climate change. Particularly, regarding application of such international policy instruments as joint implementation, emission trading, clean development mechanisms, as well regarding co-operation in financial and technology transfers in energy sector contributing to combating global warming are also examined. In chapter 5, we aim to assess Russia's domestic potential and situations and progresses in economic reforming. Especially, we focus on the economic development of this country with possible developments in its energy sector. In Chapter 6, we analyze possible international implications of the specific domestic institutional framework both for bilateral arrangements between countries of Northern Asia region, and for design of multilateral mechanisms. For example, the relationship of Japan with Russia will affect the international climate change regime, which is in turn inevitably related to the Russia's role in international emission trading, and possible bilateral collaboration between Russia and Japan in this area In chapter 7, we analyze the various cases of collaborations in this region. In this chapter, we analyze what CDM projects imply to China and Korea in terms of financial flows in their international activities. In the last chapter, we summarize the major findings and discussions in this report. 1 2. UNFCCC and the Kyoto Mechanisms :Toward Implementation Stage of Kyoto 2.1. Role of Bonn and Marrakech 2.1.1. Implication of Bonn and Marrakech After intensive negotiations from Berlin to Kyoto, the COP succeeded in adopting the Kyoto Protocol at its 3rd Session in December 1997. However, the innovative instruments, called Kyoto mechanisms, were not well understood at that time. The Buenos Aires Plan of Action adopted at COP 4 in 1998 decided that the rules of the Kyoto regime to be adopted at the COP 6. However, the negotiators could not compromise each other in The Hague at COP 6 in 2000 and decided to postpone the negotiations at the resumed session in Bonn in the following year. After this failure, the US President Bush stated to reject the Kyoto Protocol in a very strong manner. As a result, many people in the world were afraid that the Kyoto Protocol would not enter into force forever. At the Bonn Conference (COP 6 bis), the Ministers were successful in adopting the so called Bonn Agreements, which is the core elements of the achievements of the Buenos Aires Plan of Action. The Bonn Agreements made a package of decisions for highly political issues among the rules of Kyoto regime. The agreements retrieve the momentum of international negotiations to go with Kyoto. Supported by this momentum, the COP 7, held in Marrakech a couple of months after Bonn, finally adopted a set of rules—the Marrakech Accords—of the Kyoto regime. The Bonn Agreements and the Marrakech Accords completed the process of the Buenos Aires Plan of Action, in other words, they are the milestone or turning point from “scheme design” to “implementation of measures” stages. For the private sectors, which anticipate new carbon constrained era in the new future and wish to take measures in advance strategically, the Marrakech Accords removed or shrank the biggest risks, i.e., international regulatory risk and risk associated with non-entry into force of the Protocol. The Bonn Agreements and the Marrakech Accords consists of four elements, namely, the developing countries’ items, Kyoto mechanisms, compliance mechanisms, and sinks. As the Kyoto Protocol is characterized by its quantified commitments without specifying the measures (such as carbon tax) to meet such targets, how to monitor emissions and calculate units (credits and allowances) are very important to keep the scheme operationable. The Article 5, 7 and 8 items are technical but essential in this sense. 2 2.2. How Kyoto Mechanisms Work? 2.2.1. Compliance Check Here let us briefly observe how to check an Annex I country’s compliance with its quantified commitment. The check will be done in comparing the two numbers, i.e., GHG emissions monitored and the GHG units the country has at the end of the commitment period (strictly speaking, at the end of the additional period). The GHG emissions are monitored and reported to the UNFCCC Secretariat in due course annually using the IPCC 1996 revised guidelines and good practice guidance reports. Such report of GHG emissions are to be reviewed. Each Annex I country is going to establish it national registry for the accounting of GHG units they have. In the registry, the country has its holding account(s) and a retirement account. The country may permit the legal entities to have their accounts in the registry as well. At the end of the additional period (grace-period), the government transfers the units identical to the emissions in the commitment period to its retirement account for compliance check. In addition to the initial allocation to the country (equivalent to the quantified target times five), the country and its legal entities can acquire/transfer the units from/to other country(’s company). This process is done as the electrical transfer of units from one account to another. Sink credits (RMUs) can be added to the accounts. 2.2.2. How Units Transfer? There are four kinds of GHG units, namely AAU, RMU, ERU and CER. The AAU (assigned amount unit) is the unit of initial allocation, the RMU (removable unit) is the sink credit in the Annex I country with net carbon absorption, the ERU (emission reduction unit) is the JI credit converted from AAU or ERU, and the CER (certified emission unit) is the CDM credit generated through implementing a CDM project. Once the credits (RMUs, ERUs, and CERs) are generated through the sink activities or JI/CDM projects, they are transferred through the mechanism of emissions trading as shown in Figure 1. In other words, the units are traded in the GHG emissions market once they are generated. The prices of the units would not be the same reflecting the minor difference in their characters such as bankability. In addition, we may expect that the derivatives of these units will be developed in the market and traded to meet the needs to hedge risks associated with price change and others. Those derivative trading are not traced as the transactions of “real” units. 3 JIJI ProjectProject AnneAnnexx II initiainitiall allocatallocatiioonn ++ SiSinknk ERU AAU Base year GHGs×Annex B ERU AAU ×5years Host country converts RMURMU Additional absorption AAU or RMU to ERUs Each Party issues to ↓ Its holding a/c To the participants’ a/c ERU ↓ ERU Distribution to firms… CDMCDM ProjectProject AAUAAU RMURMU CECERR CER Generating CERs CER Emissions Trading ↓ RMRMUU CDM Registry CERCER Pending a/c AAUAAU ↓ ERUERU To the participants’ a/c Figure 2-1. Generation and Transfer of Units through the Kyoto Mechanisms 2.2.3. Other Subjects a. Sinks Rules were set for the use of credits from sinks activities in forestry and agriculture. Pending decisions on more detailed guidelines for monitoring and reporting (on the basis of IPCC recommendations) make reporting requirements for sinks limited. The Russian Federation has been granted credits for forest management up to a maximum of 33 MtC/yr. Initially, this was nearly 18 MtC/yr. b. Transferability of units Emission credits from sinks projects under Article 3.3 and Article 3.4 will be labeled as removal units (RMUs). The RMUs cannot be banked for use in the second commitment period. Assigned amount units (AAUs), credits from Joint Implementation (JI) (ERUs) and Clean Development Mechanism (CDM) (CERs) projects and/or RMUs can be used for complying with the Kyoto targets. Exchange of AAUs, ERUs, CERs and RMUs between Annex I Parties is allowed and unrestricted. AAUs may be carried over without restrictions into the second commitment period. However, ERUs and CERs can each be banked only up to a limit of 2.5 per cent of the initial AAUs, however, this limitation can be avoided through retiring the units from such units. 4 c. Participation Turkey will soon be removed from the Annex II list and accede to Annex I of the Convention. Kazakhstan has reconfirmed its wish to join Annex B of the Kyoto Protocol; a target is still to be negotiated. 2.3. What were Left after Marrakech? 2.3.1. Near-Term Issue—CDM The rules of the Kyoto regime were decided in Marrakech; however, some technical details are remained for future work. The modalities and procedures for CDM is one of the most urgent items left. Some technical aspects of the sink CDM projects are left to be decided at the COP 9.