CES Working Paper 01/98 TRADING SPACES - JOINT IMPLEMENTATION AFTER THE KYOTO PROTOCOL Authors: Tim Jackson, Katie Begg, and Stuart Parkinson ISSN: 1464-8083 Trading Spaces - Jackson, Begg and Parkinson Trading Spaces - Joint Implementation after the Kyoto Protocol Tim Jackson, Katie Begg, and Stuart Parkinson ISSN: 1464-8083 Published by: Centre for Environmental Strategy, University of Surrey, Guildford (Surrey) GU2 7XH, United Kingdom http://www.surrey.ac.uk/CES Publication date: 1998 © Centre for Environmental Strategy, 2007 The views expressed in this document are those of the authors and not of the Centre for Environmental Strategy. Reasonable efforts have been made to publish reliable data and information, but the authors and the publishers cannot assume responsibility for the validity of all materials. This publication and its contents may be reproduced as long as the reference source is cited. CES Working Paper 01/98 page 2 of 22 Trading Spaces - Jackson, Begg and Parkinson Table of Content: Abstract__________________________________________________________ 4 1 Introduction __________________________________________________ 5 2 Flexibility instruments in the language of the Convention______________ 6 3 Classification of JI/trading arrangements __________________________ 8 4 JI/trading mechanisms in the Kyoto Protocol ______________________ 13 4.1 “Joint fulfilment” ________________________________________________13 4.2 Transfer of emission reduction units_________________________________14 4.3 The clean development mechanism__________________________________17 4.4 Banking of emissions reduction credits_______________________________18 4.5 Representation in JI/trading space.__________________________________18 5 Discussion___________________________________________________ 20 References ______________________________________________________ 22 CES Working Paper 01/98 page 3 of 22 Trading Spaces - Jackson, Begg and Parkinson Abstract Flexibility instruments such as joint implementation and emissions trading have played an important part in climate change policy negotiations since before the signing of the Framework Convention on Climate Change. They are likely to remain an important feature of future negotiations. This paper examines the characteristics of the various flexibility mechanisms introduced by the Kyoto Protocol. Although the language in which they are couched differs significantly from earlier language on flexibility, the authors point out that many of the proposed mechanisms are broadly similar to mechanisms which have already been mooted. They suggest that contentious issues will not be resolved by linguistic changes, and are best addressed by an open recognition of the multiple objectives under which flexibility instruments operate. Keywords Flexibility instruments, joint implementation, emissions trading, climate change, Kyoto Protocol. Acknowledgements The work described in this paper has been supported by DGXII under the Human Dimensions component of the Environment and Climate Programme 1994-1998 (Contract No: ENV4-CT96-0210); by the Engineering and Physical Sciences Research Council; and by the Royal Academy of Engineering. The authors are grateful for constructive comment on various aspects of this paper from Peter Bailey, Michael Chadwick, Jean-Charles Hourcade, Catrinus Jepma, and the participants two peer review meetings of the EC funded project, one in Brussels in May and one in Surrey in June 1998. CES Working Paper 01/98 page 4 of 22 Trading Spaces - Jackson, Begg and Parkinson 1 Introduction Concepts of “joint implementation” and “emissions trading” have entered the language of several international conventions concerned with environmental policy. Joint implementation (JI), for example, has been discussed in the context of the Montreal Protocol (Barrett 1993, Markandya 1992), the Second Sulphur Protocol (Klaasen 1994, Jackson and Bailey 1997), and the United Nations Framework Convention on Climate Change (Jepma 1995, Jackson 1995). The basic idea of such instruments is to provide flexibility in meeting specific environmental goals. Rather than insisting that strict environmental targets are met within national boundaries, flexibility instruments allow one country to achieve some of its commitments by investing in emissions reduction (for example) an another country. In principle, it is argued, this should allow for greater cost-efficiency in meeting global targets, since abatement action can be taken first, where it is least costly to do so. In this paper, we describe the development of these concepts within the United Nations Framework Convention on Climate Change (FCCC). The objective of the FCCC is “the stabilisation of greenhouse gas concentrations in the atmosphere at a level that would prevent dangerous anthropogenic interference with the climate system”. It is generally agreed that this means reducing emissions of greenhouse gases from anthropogenic sources and the thrust of the Kyoto Protocol negotiated at the 3rd Conference of the Parties in December 1997 was to provide a framework for achieving such reductions. Flexibility instruments have been a key issue within the negotiations that led up to the Kyoto Protocol, and are likely to continue to be important within the Convention. In this paper, we discuss the impact which opposing views about flexibility have had on the development of the instruments, illustrate the complexity which underlies this situation, and discuss appropriate strategies for resolving the conflicts which have arisen. CES Working Paper 01/98 page 5 of 22 Trading Spaces - Jackson, Begg and Parkinson 2 Flexibility instruments in the language of the Convention Given the prominence of JI in the period between the signing of the FCCC and the 3rd Conference of the Parties in Kyoto, it is surprising, at first sight, to find that the Kyoto Protocol contains no explicit reference to the terms “joint implementation” or “activities implemented jointly”. There are, however, numerous references to the transfer or trade of emission reduction credits. By a strange contrast, the FCCC contained no explicit reference to emissions trading at all, but couched any consideration of flexibility issues entirely in the language of joint implementation. These apparently trivial linguistic anomalies reveal important social and institutional lessons about the process of devising international environmental policy for the mitigation of climate change. The concept of emissions trading was first proposed as a general mechanism for pollution policy by Tietenberg (1985); and introduced specifically in the context of greenhouse gas emission reductions in Negotiating Targets (Grubb 1989), published some three years before the signing of the FCCC. Between the publication of that influential report and the Rio Conference, considerable effort was made to incorporate the concept of emissions trading into the Framework Convention. Those efforts were obstructed by a sharp division of views on emissions trading. Advocates argued that emissions trading would allow for improved cost-effectiveness and flexibility in reducing greenhouse gas emissions. In support of the argument from cost-effectiveness they pointed out that the costs of reducing emissions vary widely between countries, and that the least expensive route to emissions reductions would be to implement first those options which are least expensive, irrespective of geographical location. Opponents to emissions trading argued (variously) that such arrangements would reduce the incentive for donor countries to take domestic action, compromise the sovereignty of host nations, their ability to harness indigenous resources and develop their own markets, increase the transaction costs of achieving emissions reductions, and ultimately undermine the objectives of the Convention. An additional obstacle to global emissions trading was the highly political issue of devising an initial allocation of permits. In the event, the failure to reach agreement on these issues led to the omission of any language in the Convention explicitly referring to emissions trading. Instead, the terminology of joint implementation was introduced as “enabling language” to allow for the future development of CES Working Paper 01/98 page 6 of 22 Trading Spaces - Jackson, Begg and Parkinson trading type mechanisms. Almost immediately however, it became apparent that the change in terminology had not eliminated the underlying conflict of views (Jackson 1995 eg). In fact, at one point the term “joint implementation” became so problematical that the attempt to introduce a “pilot phase” - in which bilateral investments could be made (without credit) for the purpose of testing the concept - only survived by changing the terminology yet again, to refer to these investments as “activities implemented jointly” (AIJ). The existence of conflicting views on JI/AIJ prior to Kyoto may have been one reason for excluding explicit reference to it in drawing up the Protocol. There were already enough inflammatory elements in the negotiations. Arguably, the problematic nature of the JI terminology may even have drawn some flak away from the emissions trading terminology, and allowed the latter to re-enter the institutional language. From a historical perspective, JI and emissions trading were quite clearly references to very similar kinds of mechanisms. In the intervening five years however, the two terms had increasingly come to be seen as separate mechanisms, although the distinguishing line