Baptiste Raymond and Anaïs Delbosc also describe the benefits of project-based mechanisms, which are being adopted around the world as complements to emissions tra- ding schemes. Although everyone agrees on the benefits of either a cap-and-trade or a mandatory tax, their practical implementation in the short term, as well as the coverage of all sectors at once, would be difficult if not impos- sible. Project-based mechanisms can help, making these instruments more effective by extending a price signal for carbon and by indirectly linking different carbon markets. On the international scale, the implemen- tation of emissions abatement measures comes in general with discussions on the competitiveness of the economic players or national economies affected. These discus- sions have been exacerbated by the econo- mic crisis: if financing emissions reductions efforts halfway around the world becomes more difficult to justify, financing investments at home begins to look more attractive. Therein lies the attraction of the domestic off- set project mechanisms which are being created in Europe, the US and Japan. Our survey of project mechanisms would Climat Sphere The newsletter on the economics of climate change not be complete without mentioning the agricultural and forestry sectors, for which, in the medium term, project-based mecha- nisms seem to be more effective. This is the subject of the final article by Mariana Deheza and Valentin Bellassen. Three lessons can be drawn from this survey of projects. First, projects make it possible to identify new sources of emissions reductions. Second, the perfect project-based mecha- nism does not exist; we have to learn how to live with imperfect mechanisms and improve them as time goes on. Finally, project-based mechanisms improve the effectiveness of existing tools by broadening the scope of the price signal sent to the players under a carbon constraint. They can link two mechanisms and supplement either a cap-and-trade system or taxes. This latter point is important to remem- ber, with the discussion on the French level about the climate-energy contribution, on the European level about the proposed introduc- tion of a carbon tax, and also on the interna- tional level regarding both the plans for federal a cap-and-trade system in the US and the upcoming Copenhagen conference. ● Benoît Leguet [email protected]Tel. : +33 1 58 50 98 18 Regardless of the outcome of the Copenhagen negotiations, one thing is certain: the post-Kyoto world will include project-based mechanisms. Project-based mechanisms, the best known of which is the Clean Development Mechanism (CDM), are frequently criticized for being difficult to implement, letting host countries off the hook because they are voluntary, and even for being bad for the environment. Criticisms can lead to improvements in such mechanisms. However, they must be balanced by conside- rations of the context, and their benefits. This kind of critical and necessary analysis has been offered by two project-based mechanism specialists, Noriko Fujiwara, of the Center for European Policy Studies (CEPS), and Maria-Bernadete Sarmiento Gutierrez, of the Brazilian Institute for Applied Economic Research (IPEA). They describe the potential evolution from project mechanisms to "pro- grammatic" mechanisms, the purpose of which is to accredit programs of activities that reduce emissions, up to and including secto- ral emissions reduction commitments. We would like to take this opportunity to thank them for agreeing to answer our questions. Project mechanisms: Ancient history? The role of projects in the future international climate agreement Beginning of negotiations on the Kyoto Protocol project mechanisms Kyoto Protocol Marrakesh agreements on Kyoto projects First recorded CDM project 1989 1995 1997 2001 2004 2007 2009 2012 Copenhagen Conference: expected reform of project mechanisms Initial voluntary project mechanisms Projects Directive linking the EU ETS to Kyoto project mechanisms Implementation of domestic offset projects in New Zealand Implementation of domestic offset projects in France, Germany and Spain Development of project mechanisms in the US and Australia Introduction of the "programmatic" CDM N°15 • 3 rd quarter 2009 Including developing countries in the future international agreement through project-based mechanisms Insights from Noriko Fujiwara and Maria-Bernadete Sarmiento Gutierrez A bull market for domestic offset projects Benoît Leguet Projects: a complement to the ETS Baptiste Raymond and Anaïs Delbosc Project mechanisms in figures Antoine Samzun and Raphaël Trotignon Conciliating national caps and incentives for projects Valentin Bellassen and Mariana Deheza Content E ditorial Source: Mission Climat of Caisse des Dépôts. The earliest projects, which were implemented on a voluntary basis, date back to 1989. Nevertheless, project mechanisms were codified by the United Nations only in 2001 in Marrakesh. Since then, an increasing number of countries have been using them as a supplement to their national emissions reduction policies.
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Baptiste Raymond and Anaïs Delbosc
also describe the benefits of project-based
mechanisms, which are being adopted around
the world as complements to emissions tra-
ding schemes. Although everyone agrees on
the benefits of either a cap-and-trade or a
mandatory tax, their practical implementation
in the short term, as well as the coverage of all
sectors at once, would be difficult if not impos-
sible. Project-based mechanisms can help,
making these instruments more effective by
extending a price signal for carbon and by
indirectly linking different carbon markets.
On the international scale, the implemen-
tation of emissions abatement measures
comes in general with discussions on the
competitiveness of the economic players or
national economies affected. These discus-
sions have been exacerbated by the econo-
mic crisis: if financing emissions reductions
efforts halfway around the world becomes
more difficult to justify, financing investments
at home begins to look more attractive.
Therein lies the attraction of the domestic off-
set project mechanisms which are being
created in Europe, the US and Japan.
Our survey of project mechanisms would
ClimatSphereThe newslet ter on the economics of c l imate change
The role of projects in the futureinternational climate agreement
Beginning of negotiations on the Kyoto Protocol project mechanisms
Kyoto Protocol Marrakesh agreements on Kyoto projects
First recorded CDM project
1989 1995 1997 2001 2004 2007 2009 2012
Copenhagen Conference: expected reform of project mechanisms
Initial voluntary project mechanisms
Projects Directive linking the EU ETS to Kyoto project mechanismsImplementation of domestic offset projects in New Zealand
Implementation of domestic offset projects in France, Germany and Spain
Development of project mechanisms in the US and Australia
Introduction of the "programmatic" CDM
N°15 • 3rd quarter 2009
Including developing countries inthe future international agreementthrough project-based mechanisms
Insights from Noriko Fujiwara andMaria-Bernadete Sarmiento Gutierrez
A bull market for domestic offset projects
Benoît Leguet
Projects: a complement to the ETS
Baptiste Raymond and Anaïs Delbosc
Project mechanisms in figures
Antoine Samzun
and Raphaël Trotignon
Conciliating national caps andincentives for projects
Valentin Bellassen and Mariana Deheza
Content
E ditorial
Source: Mission Climat of Caisse des Dépôts.
The earliest projects, which were implemented on a voluntary basis, date back to 1989. Nevertheless, projectmechanisms were codified by the United Nations only in 2001 in Marrakesh. Since then, an increasing number of countries have been using them as a supplement to their national emissions reduction policies.
2
I nterview
Including developing countriesin the future international agreement through project-based mechanismsInsights from Noriko Fujiwara, Head of Climate Changeat the Centre for European Policy Studies (CEPS), and Maria-Bernadete Sarmiento Gutierrez, SeniorResearcher at the Institute of Applied Economic Research (IPEA) in Rio de Janeiro.
Could the cap-and-trade systemsdeveloped in industrialized countries(EU, USA, Australia, Japan…) beextended to the major emerging countries?
Noriko Fujiwara (N.F.) : Yes, as far as a
cap-and-trade system appeal to them as a
viable mitigation option. An international
framework could be created to reward
national mitigation actions by developing
countries in exchange for financial and
technical assistance. The governments
would then find an opportunity to benefit
from early additional domestic measures
such as a cap-and-trade system. Another
approach would be voluntary adoption of
binding sectoral targets supported by a
sectoral trading system.
Maria-Bernadete Sarmiento Gutierrez
(M-B.S.G.): The principle of “common but
differentiated responsibilities” has to be
adapted. Any effective international climate
change agreement will have to include
major emerging countries, so as to avoid
cross-border carbon leakages. There are no
major conceptual and logistical impedi-
ments to extending existing cap-and-trade
systems. The major one is of a political
nature: governments from emerging coun-
tries, by and large, refuse to take responsi-
bility for a net contribution to reduce GHG
gases on the basis of the historical respon-
sibility criterion.
How do you expect the KyotoProtocol’s project-based mechanismsto evolve in such a post-2012 frame-work?
M-B.S.G.: So far, the roles the Clean
Development Mechanism (CDM) and Joint
Implementation (JI) have played in finan-
cing sustainable development have been
limited by high transaction costs, policy
uncertainty, technology risk, etc. To be
more effective, these project mechanisms
will have to be streamlined through pro-
grammatic, sectoral, and/or policy-based
approaches, which will complement each
other. Reforms will be needed to provide
new methodologies for energy efficiency
projects, new ways of evaluating projects
with long pay-back periods, or to foster
strategic transfers of new technology.
N.F.: The main challenge is how to
transform the CDM from pure offsetting to
crediting. One approach could be sectoral
crediting based on no-lose targets.
Baselines could be gradually tightened
and translated into absolute caps for a
cap-and-trade system. An emerging
country could thus voluntarily adopt bin-
ding sectoral targets, operate sectoral JI,
and introduce a mandatory sectoral tra-
ding system. Least developed countries
should however remain eligible to the
CDM.
Are global sectoral agreementsrealistic for including major emergingcountries?
“The views expressed are attributable only to theauthors in a personal capacity and not to any institution with which they are associated”.
Emissions trends in developing countries: the contribution of the CDM
By 2012, the KyotoProtocol’s project-basedmechanisms are likely to generate significant emissions abatement indeveloping countries. Indeed in 2012, about 3 % of their emissions should beavoided. Renegotiating therules of project mechanismsand completing them withother mitigation instrumentsis necessary to further limitemissions growth in developing countries.
28
Estimated GHG emissions without CDM +116% Estimated GHG
emissions with CDM: +110%
26
Gre
enho
use
gas
emis
sion
s in
non
-Ann
ex I
coun
trie
s (G
tCO
2e/y
)
24
22
20
18
16
14
12
1990 1995 2000 2005 2008 201210
Source: estimates of Mission Climat of Caisse des Dépôts, from UNEP Risoe and World Resources Institute data.
P olicies and measures
A bull market for domesticoffset projects
Joint Implementation Created by the Kyoto Protocol, Joint
Implementation (JI) was the first mecha-
nism for "domestic offset projects", rewar-
ding emissions reductions in the countries
subject to a Kyoto commitment with carbon
credits. Four years after the JI was laun-
ched in late 2005, more than 200 projects
are in development with potential emissions
reductions of approximately 350 MtCO2 by
2012. The majority of these projects is loca-
ted in Russia and Ukraine and employs a
variety of technologies: flaring methane
with recovery of heat or electricity in the
power generation sector, incineration of
industrial greenhouse gases, power gene-
ration from renewable energy sources and
improvements in energy efficiency. The cre-
dits generated can be traded on the
European market, which de facto finances
most of these emissions reductions.
JI in Europe, the source of"domestic offset projects"
Joint Implementation projects in Europe
are ineligible for allowances if they reduce –
directly or indirectly – emissions that are
already covered by the European Union
Emissions Trading Scheme for CO2 (EU
ETS). In spite of this limitation, almost all of
the new Member States and several older
Member States have established proce-
dures to accept JI projects. In France, the
system of “domestic offset projects” took
shape in late 2007. The objective was to
promote the emergence of fifteen projects,
the majority of which have a strong territo-
rial basis. For example, a project developed
by alfalfa dehydration industry in
Champagne-Ardenne is introducing the
wood-energy generation model at the local
level. The project implemented by the
Urban Community of Lille will supply urban
transit buses with biogas produced from
the processing of municipal waste.
In these times of tight budgets, other
European countries are looking with inter-
est at these projects which are co-financed
by the market. In Germany, the Rhineland
Energy Agency in Nordrhein-Westfalen has
created a regional energy efficiency pro-
gram, a portion of the financing for which is
provided by the sale of JI credits. In Spain,
a regulatory framework has been created.
Even the Netherlands, which have been
historically cool to the idea of JI projects,
have displayed interest. A study submitted
to the Minister of the Environment in mid-
2009 concludes that these mechanisms are
advantageous means of financing emis-
sions reductions in the construction, trans-
portation and agriculture sectors.
A strategic advantage The United States has gotten the mes-
Domestic offset projects under development in France
3
The fifteen domestic offset projects under development in France are projected to reduce emissions bythe equivalent of more than 5 MtCO2 by 2012. The incineration of industrial gases represents more thanhalf of the reduction by volume, although the number of these projects is limited. The majority of theprojects take place in the power generation sector.
Source: CDC-Climat, July 2009.
To date, the project mechanism par excellence hasbeen the Clean Development Mechanism (CDM), whichfinances emissions reductions in developing countries.The economic crisis has brought forward “domesticoffset” projects which finance investments in thedeveloped countries. This article focuses on theadvantages of this mechanism.
Type Number of projectsEmissions reductions projected
for the period 2008-2012 (in tCO2e)
Energy efficiency 3 600,000
Renewable heat generation 6 1,400,000
Fuel replacement 1 80,000
Cooling 1 16,000
Transportation 1 46,500
HFC 1 1,000,000
N2O 2 > 2,000,000
Total 15 > 5,000,000
E missions Trading Schemes
Projects: a complementto the ETS In emissions trading schemes, the use of credits originating from project mechanisms allows theissuers to reduce their compliance costs without compromising the overall environmental objective. This article surveys the principal existing and proposed emissions trading markets.
Emitters who are subject to the require-
ments of a carbon market must return car-
bon assets that match the level of their
greenhouse gas emissions. Emissions –
and emissions reductions – have the same
impact on the climate regardless of where
they originate. Hence the idea of issuing
credits originating from emissions reduc-
tion projects outside an individual market,
in other industrial sectors or geographic
areas. The cost of compliance can then be
minimized by juggling carbon assets,
depending on their relative prices, without
threatening the overall environmental
objective.
Limited importation of credits In general, there are limitations on the
CDM: Clean Development MechanismJI: Joint implementationAAU: Assigned Amount Unit, a State’s Kyoto assetsEU ETS: European Union
Emissions Trading Scheme
0%
20%
40%
60%
80%
100%
CERs issued by type of project
2006 2007 2008 … 2012
Renewable energies
Energy efficiency
Replacement among fossil fuels
Reduction of CH4 in the energy sector
Processes (agriculture, cement) and transportation
Reduction of HFC or N2O
Forestation/Reforestation
States that have established (or plan to) an ETS that allows credits originating from projectsMain States hosting CDM projects (90% of the potential supply of CDM credits)Secondary States hosting CDM projects (additional 9% of the potential supply of CDM credits)States hosting JI or domestic offset projects
Updated cumulative value of carbon assetssince 2004
(Total 156.6 billion €)
EU ETS116.1 billion €; 74%
CDM18.5 billion €; 12%
JI - 0.8 billion €; 1%
Voluntary market0.4 billion €; 0%
AAU 0 billion €; 0%
Cumulative value of carbon transactions since 2004
(Total 9,956 MtCO2)
EU ETS6,578 Mt; 66%
CDM - 1,786 Mt; 18%
Secondary CDM1,347 Mt; 14%
JI - 106 Mt; 1%
Voluntary market 120 Mt; 1%
AAU - 18 Mt; 0%
Source: World Bank, 2009
Source: Mission Climat of Caisse des Dépôts.
US MARKETS10% of worldwide emissions
Maximum 1,000 Mt/year of international credits (CER+ERU)
and 1,000 Mt/year of domestic credits, after 2012
EU ETS4% of worldwide emissions
Minimum 1,500 Mtover the period 2008-2020
(i.e. 115 Mt/year; 82 Mt already imported in 2008)
AUSTRALIAN AND
NEW ZEALAND MARKETSless than 1% of
worldwide emissions
On the order of 20 Mt/year, after 2012
Source: UNEP-Risoe, June 2009 and estimates by the Mission Climat of Caisse des Dépôts.
6
restation (see Climate Sphere n° 11 & 14).
To materialize this opportunity, countries
engaging in the REDD framework will be
confronted to the same quandary currently
faced by forestry projects in Annex I coun-
tries: how to transfer a national incentive to
the local level, where it actually results in a
change of practices?
Accounting rules under debate The complex accounting rules of forest
The Mission Climat of Caisse des Dépôts is a research centre on climate change economics.It is part of CDC Climat, the department of Caisse des Dépôts in charge of carbon finance activities.Director of publication: Benoît Leguet, Tel.: +33 1 58 50 98 18Caisse des Dépôts – 16 rue Berthollet – 94113 Arcueil Cedex – ISSN : 1952-7659
Source: Mission Climat of Caisse des Dépôts, from the French National GHG Inventory (2007).
Under article 3.3, the balance between reforestation and deforestation activities leaves France with a smallnet sink. The uncertainty in the forest inventory combined with an unpredicted increase in deforestation couldstill tip the boat before 2012: in this case the deficit would be compensated by the surplus resulting fromarticle 3.4. This latter accounts on a voluntary basis for net emissions from forest management. France willreceive an additional maximum of 3.2 millions of carbon credits, far below the actual 80 million sink.Improving the sequestration of carbon through forest management projects will therefore not increase theamount of credits perceived.
Carbon balanceReforestation/Deforestation
Net sink(2,406 ktCO2eq)
Emissions (Deforestation)
Removals (Afforestation/Reforestation)
Emissions (Decomposition/Harvesting)
Removals (Growth)
Net sink(72,614 ktCO2eq)
Carbon balanceForest management
Article 3.3 Article 3.4
3.2 Mt ceiling
F orestry Projects
Conciliating national caps and incentives for projectsSome of the obstacles that have hindered the developmentof forest mitigation projects could be overcome in Copenhagen. One of the most challenging issues is to devise sectoral accounting rules that translate a national cap into project-level incentives.