General Distribution OCDE/GD(96)173 JOINT IMPLEMENTATION, TRANSACTION COSTS, AND CLIMATE CHANGE DANIEL J. DUDEK Senior Economist, Environmental Defense Fund, New York, NY, USA JONATHAN BAERT WIENER Associate Professor, Duke University, Durham, NC, USA ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT Paris 45093 Document complet disponible sur OLIS dans son format d'origine Complete document available on OLIS in its original format This series is designed to make available, to a wide readership, selected technical reports prepared by the Environment Policy Committee and the Environment Directorate. Additional copies of this document (on a limited basis) can be forwarded on request. This document is also available in French under the title “Application Conjointe, coûts de transaction et changement climatique. Copyright OECD, 1996. Applications for permission to reproduce or translate all or part of this material should be made to: Head of Publications Service, OECD, 2 rue André-Pascal, 75775 Paris Cedex 16, France. 2 FOREWORD BY THE OECD SECRETARIAT The concept of Joint Implementation (JI), and how it might be applied to the problem of abating global greenhouse gas emissions, is under active debate by the Conference of the Parties, the body charged with implementing the United Nations Framework Convention on Climate Change. Within this forum, several OECD countries have promoted the rapid implementation of JI, while others have recommended that a more cautious approach be taken, pending formal international agreement on the modalities of JI. Against this background, the first Conference of the Parties, which took place in 1995, decided that JI should be established only in a “pilot phase” up to the year 2000. This paper does not address the question of whether or not JI should eventually be implemented, or in what particular form. It merely reflects on the premise that, if a JI system were eventually to be agreed at the international level, governments might wish to reduce the transaction costs associated with operating that system. Obviously, such reflections will depend to some extent on the original design of the JI system, so some of these design questions have had to be raised in the attached paper. However, they are discussed here for expositional purposes only, and should specifically not be interpreted as an endorsement of any particular implementation option by OECD Member countries. More generally, the paper is published as a working paper under the responsibility of the Secretary-General, and does not necessarily reflect the views of any individual Member country. 3 TABLE OF CONTENTS FOREWORD BY THE OECD SECRETARIAT ...................................................................................... 3 EXECUTIVE SUMMARY....................................................................................................................... 6 I. INTRODUCTION: JOINT IMPLEMENTATION TRANSACTIONS................................................. 7 Elements of JI transactions.................................................................................................................... 8 Global gains from JI.............................................................................................................................10 Cost-effectiveness ............................................................................................................................10 Resource flows.................................................................................................................................11 Reservations about JI ...........................................................................................................................12 Structure of the paper ...........................................................................................................................14 II. GENERAL THEORY OF TRANSACTION COSTS ..........................................................................15 Types of transaction costs ....................................................................................................................15 Role of transaction costs in markets .....................................................................................................16 Role in markets generally.................................................................................................................16 Role in environmental externalities ..................................................................................................17 Temporal issues ...............................................................................................................................18 Transaction cost in the climate change context .....................................................................................18 Role in climate change as an externality ...........................................................................................18 Role in Joint Implementation as a market-based mechanism.............................................................19 III. INSTITUTIONS DESIGNED TO MANAGE TRANSACTION COSTS ...........................................22 Currency in markets .............................................................................................................................22 Banking ...............................................................................................................................................23 Ownership registries and exchanges .....................................................................................................23 Monitoring, inspection and certification services..................................................................................24 Insurance services ................................................................................................................................25 IV. TRANSACTION COSTS AND ENVIRONMENTAL POLICIES.....................................................26 Traditional command regulations .........................................................................................................26 Voluntary reduction programs..............................................................................................................26 Natural resource commodity markets ...................................................................................................27 Water rights transfers .......................................................................................................................27 Water banks .....................................................................................................................................28 Joint implementation in water resources management.......................................................................29 Environmental commodity markets......................................................................................................30 The unique problems of regulatory commodities ..............................................................................30 Emissions trading -- bilateral transactions with case-by-case review .................................................30 Sulphur dioxide allowance trading....................................................................................................31 4 Regional Clean Air Incentives Market (RECLAIM) .........................................................................33 Summary of policy experiences............................................................................................................35 V. EXPERIENCE WITH JOINT IMPLEMENTATION-TYPE PROJECTS ............................................36 Coal to Gas Conversion (CTG) Project, Poland....................................................................................36 High Efficiency Lighting Project, Mexico ............................................................................................37 The Reduced Impact Logging Project, Malaysia...................................................................................37 The Bynov Heating Plant Project in the City of Decin, The Czech Republic ........................................38 The Biomass Cogeneration Project, India............................................................................................39 AES Project, Guatemala.......................................................................................................................39 Mbaracayu Conservation Project, Paraguay..........................................................................................40 VI. SCENARIOS FOR JOINT IMPLEMENTATION: CRITERIA AND INSTITUTIONS ....................41 Information systems.............................................................................................................................41 Clearinghouse ..................................................................................................................................41 Credit banks.....................................................................................................................................42 Brokers ............................................................................................................................................43 Identity of investor and host.................................................................................................................43 Approval process .................................................................................................................................44