Annex I Expert Group Workshop on Joint Implementation and International Emissions Trading under the Kyoto Protocol Workshop report ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT INTERNATIONAL ENERGY AGENCY PARIS, 19 NOVEMBER 1999 1 FOREWORD The Annex I Expert Group on the UNFCCC aims to provide useful and timely input to the climate change negotiations. As part of its work, it oversees the development of analytical papers and organises of workshops. The Annex I Parties or countries referred to in this document refer to those listed in Annex I to the UNFCCC (as amended at the 3rd Conference of the Parties in December 1997): Australia, Austria, Belarus, Belgium, Bulgaria, Canada, Croatia, Czech Republic, Denmark, the European Community, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Italy, Japan, Latvia, Liechtenstein, Lithuania, Luxembourg, Monaco, Netherlands, New Zealand, Norway, Poland, Portugal, Romania, Russian Federation, Slovakia, Slovenia, Spain, Sweden, Switzerland, Turkey, Ukraine, United Kingdom of Great Britain and Northern Ireland, and United States of America. Where this document refers to “countries” or “governments” it is also intended to include “regional economic organisations”, if appropriate. ACKNOWLEDGEMENTS This workshop report was prepared by Stéphane Willems (OECD) with input from Jane Ellis (OECD), Richard Baron and Martina Bosi (IEA). The authors would like to thank the workshop’s Chair, facilitators and speakers for their input as well as Jan Corfee-Morlot (OECD) and Jonathan Pershing (IEA) for their comments and suggestions. The authors are responsible for any errors or omissions in this report. Special thanks are due to Aleksi Hokkanen as well as to Lyndia Levasseur and Carolyn Sturgeon for their input to organisation of the workshop. Questions or comments should be sent to: Stéphane Willems Administrator Environment Directorate Organisation for Economic Co-operation and Development 2 rue André Pascal 75016 Paris, FRANCE Tel: (33 1) 4524 9697 Fax: (33 1) 4524 7876 E-mail: [email protected] OECD and IEA information papers for the Annex I Expert Group on the UNFCCC can be downloaded from: http://www.oecd.org/env/cc 2 EXECUTIVE SUMMARY The Annex I Expert Group Workshop on Joint Implementation and International Emissions Trading, held on 13-14 September 1999, laid out some of the technical options surrounding the development of international rules and guidelines for both Joint Implementation (JI) and International Emissions Trading (IET) under the Kyoto Protocol. The workshop addressed four groups of issues: • participation of countries with economies in transition in JI and IET; • market power, trade and competitiveness; • monitoring, reporting and verification; and • eligibility, liability and responses to non-compliance. In the panel session on Countries with economies in transition, participants recognised the particular difficulties that these countries face in preparing for the implementation of the Kyoto mechanisms. The difficulties most frequently cited include uncertainty about future economic growth, changes in legal and institutional frameworks (often brought about by working to obtain EU membership) and lack of institutional capacity. Yet the experience of many countries with JI-type projects during the pilot phase “activities implemented jointly” is recognised as a useful starting point. In the session on trade and competitiveness issues, participants noted that there was little evidence that a dominant player could exert market power in particular if legal entities participate in the market. On the link between the Protocol and the World Trade Organization (WTO), legal experts thought that there was a low risk of the Kyoto Protocol being challenged as WTO-inconsistent, although there is no jurisprudence on this issue. In particular, Assigned Amount Units (AAUs), which would be traded under the Protocol, may not be subject to WTO ruling, since they may be considered as neither a “product” nor a “service”. Specific compliance rules could therefore be established within the Kyoto Protocol if Parties wish to regulate the trade of AAUs. However, Parties will need to be sensitive to WTO and competitiveness concerns when implementing domestic rules for the Kyoto mechanisms as well as domestic policies and measures. In the session on monitoring, reporting and verification, participants noted the importance of complying with guidelines under the Protocol’s Article 5 (national inventory systems) and Article 7 (reporting) when participating in the Kyoto mechanisms. However they disagreed whether additional rules for Joint Implementation were needed, in particular to assess and/or verify the additionality of projects. Two broad options regarding national registries for tracking international transactions by Parties and entities were also discussed. One option would require the development of minimum international rules for inter-linking national registries. The other option would not require international rules at the outset, as international trading among entities and/or governments could be initiated through bilateral agreements between Parties. In the session on eligibility, liability and responses to non-compliance, participants noted the interdependence of liability rules with any decisions on the compliance regime under the Kyoto Protocol. They also noted the effect of different liability rules on the participation of legal entities. Last, the role of domestic compliance regimes (including national registries) was considered as key in preventing non- compliance through emissions trading. 3 1 INTRODUCTION The objective of the Annex I Expert Group’s work on the Kyoto mechanisms is to contribute to developing an international implementation framework under the Kyoto Protocol. Analytical work is being carried out to improve understanding of - and develop practical options for - implementation requirements for the Kyoto mechanisms. To contribute to this work, the Annex I Expert Group held a workshop in Paris, France, on 13-14 September, 1999. This workshop focused on Joint Implementation and International Emissions Trading. Both mechanisms provide an opportunity for Annex I Parties to trade among themselves portions of their assigned amounts, as defined by the Kyoto Protocol. The workshop aimed to: − explore linkages, common issues and differences between Joint Implementation and International Emissions Trading. − promote a clearer understanding of specific technical issues that underpin the implementation of these mechanisms, including issues related to: market and trade; monitoring, reporting and verification; and eligibility, liability and responses to non-compliance; and to − place a special emphasis on the challenges faced by the Annex I countries with economies in transition in implementing the Kyoto mechanisms. The workshop started with a panel session on the participation of countries with economies in transition in JI and IET, in order to increase understanding of the specific circumstances of these countries. This session was followed by three working group sessions: − Working group 1 on market and trade issues outlined issues related to market power as well as competitiveness, including the link between the Protocol and the World Trade Organisation; − Working group 2 on monitoring, reporting and verification discussed minimum requirements needed at the international level for monitoring, reporting and verification as they pertain to JI and EIT; and − Working group 3 on eligibility, liability and responses to non-compliance focused mainly on a discussion of liability issues raised by International Emissions Trading. There were approximately 140 participants in the workshop, including 100 delegates from Annex I country governments and approximately 40 experts from business and industry, environmental non-government organisations, research institutes and other intergovernmental organisations. 4 2 PARTICIPATION OF COUNTRIES WITH ECONOMIES IN TRANSITION Facilitator: Serena Adler (Ministry of Waters, Forests & Environmental Protection, Romania) Rapporteur: Jane Ellis (OECD) 2.1 Questions and presentations This panel session was asked to address the following questions: − What are the relative advantages and disadvantages between JI and IET for countries with economies in transition? − What are the main institutional needs (and capabilities) to prepare a project e.g. to collect data, to monitor national emissions and/or project emissions, enforcement etc.? − What is necessary in countries with economies in transition to meet these needs? Are there examples of progress in this area? − What is the size and nature of the market in countries with economies in transition (market potential and project opportunities)? Four discussants introduced the main issues: Lubomir Nondek (DHV, Czech republic) focused his presentation on the different strategies needed to successfully implement JI and IET. He highlighted the potentially heavy human resource needs for host countries to participate in JI (e.g. administrative processes, technical experts). He also identified the challenges posed by participation in IET, such as uncertain GHG projections, a need for an accurate emissions inventory and the lack of a mechanism to allocate emission rights/revenues. He also outlined the particular difficulties that these issues posed to economies in transition, which are already undergoing significant, and sometimes unpredictable, changes in economic growth, legal framework