Joint Implementation: A Promising Yet Overlooked Tool

1. La mise en œuvre conjointe : un outil méconnu mais prometteur Université de Montréal, 28 avril 2006 Colloque organisé par le CEDRIE Helena Olivas – Directrice, changements climatiques Philip Raphals –Directeur général

2. Outline • Joint Implementation • what it is • how it works • JI and “hot air” • Canada’s position on JI • Should Canada participate in JI?

3. Joint Implementation • One of the three flexibility mechanisms under art. 6 of Kyoto Protocol • CDM • Emission Trading (ET) • JI • Like CDM, based on projects that reduce GHG • Unlike CDM • occurs between two Annex I countries, both of which have reduction obligations • credits are transferred but not created • hence more like ET

4. AAU ERU for emission reducing projects RMU ERU for LULUCF projects How does it work? • JI results in conversion of Assigned Amount Units (AAUs) to Emission Reduction Units (ERUs) • ERUs are transferred to foreign and local project partners • partners can sell them to any company or government

5. What is an AAU? • An AAU is a Party’s entitlement to emit a tonne of CO2e • Each year, each Party is issued AAUs equal to its 1990 emissions multiplied by the percentage agreed to (Canada = 94%) • By the end of the compliance period, each Party must have retired AAUs (or equivalent) equal to its actual emissions • CERs (CDM), ERUs (JI) and RRUs (sinks) are equivalent to AAUs

6. Canada Party account Legal entity A CER AAU ERU Legal entity B Retirement a/c Compliance assessment Units in retirement account Emissions 2008 to 2012 Retirement RMU >= < Units in retirement accounts not transferable

7. Converting AAUs to ERUs • In a JI project: • host country AAUs are converted to ERUs, • 1 AAU for each tonne of reduction • ERUs are transferred to local and foreign (Annex I) partner • Since host country has lost an AAU, it must • reduce its emissions by one more tonne (or acquire equivalent credit) • Reduction from JI project integrated into national inventory • no harm to host country • Hence, JI is a zero-sum game • credits are transferred • not created

8. AAU ERU Russia Germany Party account Party account ERU Legal entity A Legal entity A JI project (conversionof AAUsto ERUs) Legal entity B Legal entity B Retirement a/c Retirement a/c Cancellation a/c Cancellation a/c Verification by host Party (track 1) or independent procedure (track 2) ERU issuance

9. Additionality and JI • Since no credits are created, failure to achieve additionality • does not harm the environment • global emissions the same with or without additionality • but it does harm the host country (financially) • the host country must still make additional reductions (or purchase additional credits) to replace the AAUs converted to ERUs • fundamental difference from CDM • CERs are new credits • if project is not additional, global emissions will increase

10. Once an ERU is created … • ERUs divided per agreement between project partners • can sell them to host country, foreign partner’s country, or any other entity with an account • companies and other subnational entities have their own accounts within national account • Ultimately, they are purchased by a Party and counted towards its reduction obligation (or voluntarily retired)

11. Two tracks • JI has two tracks • if host country meets Kyoto reporting and reviewing requirements Track 1 • if not  Track 2 • third party verification • approval from Joint Implementation Supervisory Committee (JISC)

12. JI Track 1 • Host country bears responsibility • Designated focal point approves projects • National guidelines for: • Approving projects • Monitoring • Verification • make information on projects publicly available • International guidelines regarding information to be made public • to be reviewed by JISC and recommended to COP/MOP

13. JI Track 2 – International oversight • More rigorous than track 1 • Project requirements established by JISC • needs third-party verification through an Accredited Independent Entity (AIE) • more transaction costs • greater confidence

14. Demystifying “hot air” • “Hot air”: excess AAUs resulting from economic collapse of Countries with Economies in Transition (ex-USSR) • Current emissions far below 1990 levels (without reduction effort)  excess AAUs • Excess AAUs officially recognized • otherwise, Russia would not have ratified • But many countries unwilling to buy these AAUs • Hot air AAUs worthless if no one will buy them

15. JI and “hot air” • JI projects in Economies in Transition • if projects not additional, • no harm to host country, since it has excess AAUs • buying non-additional JI from EIT = buying hot air • if projects are additional, ERUs perfectly valid • In EIT countries, JI is more like CDM • not zero-sum • additionality essential

16. JI and “hot air” • JI unfairly tainted by “hot air” issue • Parties can decline to purchase “hot air” • It is possible to participate in JI without buying “hot air” • either refuse to buy ERUs from EIT projects, or • (better) insist on demonstrated additionality • Track 2 (3rd party verification) for EIT projects • Green investment schemes (GIS): JI revenues invested in environmental protection

17. Canada’s position on JI • Chrétien/Martin administrations initially interested in JI • opposed to purchasing “hot air” • supported GIS • When Offset System proposed, Canada announced it would not participate in JI • Canada as host country • under JI, credits from Canadian reduction projects could be sold in other Annex I countries • with $15 price cap, better prices abroad • staying out of JI  no competitors for domestic credits • Harper administration: no interest in any flexibility mechanisms

18. Should Canada buy credits? • Even if it can’t fully meet Kyoto commitments … • Maximize domestic reductions • If insufficient, either • purchase art. 6 credits, or • be in non-compliance • Buying credits has same effect on global climate as domestic reductions • CDM: because of additionality • ET and JI: because zero-sum • contribute to economic efficiency • Refusing to purchase credits while failing to make significant domestic reductions  • disrespect to international community • failure to meet legal commitments • unfair to Parties that do comply • consequences?

19. Should Canada participate in JI? • Participation in JI would create opportunities for Canadian companies • access to European (and other) carbon markets • invite foreign investment in emissions reduction technologies (Canada as host country) • If Canada does not participate in JI, Canada « owns » all domestic reductions • without offset system or JI, no incentive for companies to voluntarily reduce emissions • domestic reductions in partnership with foreign partners  good for Canadian economy  good for global climate

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21. Merci !